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seahawk
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 9:46 am

JonesNL wrote:
MIflyer12 wrote:
I don't know what you think, lightsaber, but I think they're smoking weed in Toulouse.

Airbus said it had asked suppliers to “protect” a production rate of 47 A320-family jets a month, up from 40, meaning it wants suppliers to be ready to support that rate when needed.

It indicated the earliest such a switch could take place would be July 2021, adding no decision had been taken.


https://www.reuters.com/article/us-airb ... 772RS?il=0

Debt levels, financing constraints from weakened lease firms, the accumulated inventory to date... I'm not a believer. I'll be happy to revisit this at any date in 2021 and eat crow if warranted.


That makes zero sense, are they expecting deliveries to Asia? Or to they believe in an miracle that an vaccine will be widely available in Q1? Maybe they are in talk with the EU to have an salvage program for old planes?

It just defies all logic...


It is a play to get government money to protect the overly complicated production setup. If you go below 40, you could question the lines in France.
 
Flying-Tiger
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 10:06 am

seahawk wrote:
JonesNL wrote:
MIflyer12 wrote:
I don't know what you think, lightsaber, but I think they're smoking weed in Toulouse.

Airbus said it had asked suppliers to “protect” a production rate of 47 A320-family jets a month, up from 40, meaning it wants suppliers to be ready to support that rate when needed.

It indicated the earliest such a switch could take place would be July 2021, adding no decision had been taken.


https://www.reuters.com/article/us-airb ... 772RS?il=0

Debt levels, financing constraints from weakened lease firms, the accumulated inventory to date... I'm not a believer. I'll be happy to revisit this at any date in 2021 and eat crow if warranted.


That makes zero sense, are they expecting deliveries to Asia? Or to they believe in an miracle that an vaccine will be widely available in Q1? Maybe they are in talk with the EU to have an salvage program for old planes?

It just defies all logic...


It is a play to get government money to protect the overly complicated production setup. If you go below 40, you could question the lines in France.


Or they have figured out - togehter with core suppliers - that it is in their best interest to move back from 40 to 47 planes / month to protect the supply chain as a whole, and accept a higher level of planes to be stored until taken up. This is most likely not a lonely decision taken but one together with some of the big Tier 1s.

At the same time they are shirinking, since some weeks Airbus and subsidaries are offering severance packages, have reduced the planned intake of new trainees from next year onwards (e.g. in Germany the apprenticeship year starts on August 1st, thus any decision taken now will only come into financal effect from mid-next year when the apprentices in the third year are either taken over and let got, and are not fully replaced from September 1st 2021).
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Capricorn
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 10:07 am

This only makes sense if Airbus has either A) a new customer, who wants to make use of fire sale prices B) or a customer, who wants to speed up deliveries in return for a hefty discount. While most airlines certainly don't want any new planes right now governmental owned airlines in some part of the world might have deep enough pockets and not care about the short term market prospects, as their primary goal is not making money. Otherwise this is indeed quite baffling to me.
 
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lightsaber
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 12:50 pm

yonahleung wrote:
MIflyer12 wrote:
I don't know what you think, lightsaber, but I think they're smoking weed in Toulouse.

Airbus said it had asked suppliers to “protect” a production rate of 47 A320-family jets a month, up from 40, meaning it wants suppliers to be ready to support that rate when needed.

It indicated the earliest such a switch could take place would be July 2021, adding no decision had been taken.


https://www.reuters.com/article/us-airb ... 772RS?il=0

Debt levels, financing constraints from weakened lease firms, the accumulated inventory to date... I'm not a believer. I'll be happy to revisit this at any date in 2021 and eat crow if warranted.


They probably have plans to ramp this all the way up to 63 to kill Boeing. This is probably the best moment to try to srive Boeing away from civil aviation and turn a duopoly into a monopoly.

Boeing save enough MAX orders that they couldn't kill it off.

Asia has a minor recession, but aviation is hard hit.

Considering how quickly airlines are burning through cash, I just cannot see supporting rate 47. I see delays/deferals on the A32x from: Indigo, GoAir, Delta, EasyJet, Wizz, JetBlue (but less), Spirit, Vietjet, AirAsia (financial viability in question), and pretty much everything outside of China.

I also look at white tail buildup. I look at the used market.

I get by nature we engineers are optimistic enough. So I never debate estimates 25% higher than mine.

But as someone in R&D, I always lean forward on the need for new sales as that pays for my chosen career path. I'm a Pratt fan, so I'll personally find reasons in favor of those airframes. But seeing a need for rate 47 A320 means neglecting Boeing doing something right.

Despite the bad press and threads here, I won't right off the 737. In particular not the new gear on the -10 and I hope for a 737-9ER.

So I join the camp in asking what mind altering stuff is available in Toulouse. For there will be a surplus of 1,500 narrowbodies at rate 40, by my math, at end December 2021.

As the only expansion I'm reading about us Allegiant and that is due to the precarious drop in used A320CEO pricing...

This could destroy Airbus. This makes absolutely no sense. Not with so many US vendors.

Unfortunately, there must be bankruptcies in the supply chain. Consolidation on a scale not seen since the early 1990s. CFM/GE, Raytheon Technologies (Pratt, Honeywell, Collins), Meggitt, Woodward, Moog, SAFRAN, and BAE will all produce (some after bankruptcy/consolidation). e.g., Spirit.

Lightsaber

PS (late edit):
My mind is blown. We have a healthy freighter conversion market because the stock is so cheap. I personally thought A321P2F wouldn't see demand beyond a few airframes per year until 2025; I anticipated pax A321CEOs just holding onto too much value until then.

New always competes with used. In the 1990s, Boeing complained publicly about how many orders they lost to used aircraft. It won't just be the US3+WN+Allegiant buying used. I get how AirAsia, Indigo, GoAir, Indigo partners (Frontier, Wizz), and EasyJet will be held to A320NEO contracts. This will force a flood of new(ish) A320CEOs on the market.

And I am one predicting almost binary fuel pricing (fracking cannot pick up again below $100/bbl).
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VictorKilo
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 12:59 pm

Maybe "protecting for 47 planes/month" is the pretext that AIrbus is using to provide financial assistance to its supply base to make sure that they can continue to supply Airbus in a few years if/when demand returns?
 
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lightsaber
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 1:24 pm

VictorKilo,
You are probably correct. Small vendors are in dire straights:
https://www.msn.com/en-us/money/compani ... r-BB1aeS0I

It still is insane. Boeing will still deliver. Southwest, RyanAir, and SpiceJet are unlikely to convert. Boeing will low bid fir orders.

I get Airbus has a huge backlog to force deliveries, but at some point customers must refuse to survive.

There is playing chicken at rate 40 (430 aircraft per year) and the insanity of rate 47 (I estimate about 510/year). Another 80 more aircraft than the market is ready for will create issues.

Lightsaber
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MIflyer12
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 1:44 pm

seahawk wrote:
It is a play to get government money to protect the overly complicated production setup. If you go below 40, you could question the lines in France.


I guess if they can get State funds to do it, rather than spending their own money. I smell another 15-year WTO case in 3, 2, 1...
 
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Revelation
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 4:20 pm

Interesting analysis piece at:

https://uk.reuters.com/article/idUKL8N2HE4S5

It points out that before now the plan of record was to go to 45 in Apr 2021 now it's 47 in 'second half' 2021.

Seems to suggest (as members here do) the rate 40 is designed to put pressure on unions and governments for concessions while still protecting its own interests as much as possible.

It also points out demand is no where close to needing rate 40 to end 2021 never mind rate 47.

Insiders said Airbus aims to give suppliers a clear path forwards. Many are unhappy about being asked to take a risk on higher parts production without proof of demand, but Airbus is squeezing them to do more by using flexible contract clauses.

The move to put the supply chain under starters’ orders is also seen as a coded warning to airlines that have delayed taking deliveries during the crisis: Airbus will soon be back in business and ready to supply many jets you have ordered.

That means it is time for airlines to pay deposits - bringing in cash - and secure their place in the queue. Any that do not may lose their place and face price hikes for inflation.

Critics say such tactics are part of a months-old game of bluff and risk further souring relations strained by the crisis.

Seems the game of chicken is on, but it's not A vs B, it's A vs its suppliers and its customers:
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mxaxai
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 4:39 pm

Revelation wrote:
Insiders said Airbus aims to give suppliers a clear path forwards. Many are unhappy about being asked to take a risk on higher parts production without proof of demand, but Airbus is squeezing them to do more by using flexible contract clauses.

Seems the game of chicken is on, but it's not A vs B, it's A vs its suppliers and its customers:

I don't agree with this being "Airbus vs its suppliers". For numerous suppliers, Airbus is the only customer, or at least a large chunk of their work. If A stops buying parts, those suppliers could easily go out of business or lay off specialized employees. Airbus is "too big to fail" but the suppliers are not. Sure, some suppliers are large and diverse and those might be unhappy to produce parts for Airbus based on speculative orders while other customers have to wait. Ultimately, though, if Airbus orders parts they have an obligation to accept the delivery.

There is definitely pressure on the unions and governments as well as the airlines but in my view, Airbus and their suppliers are all in the same boat (though perhaps not all in the same cabin).

Boeing is fundamentally in the same situation, though the MAX grounding has led to a much longer stretch with no/reduced deliveries and more time to adjust. So I agree that it's not A vs B.
 
iamlucky13
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 9:55 pm

Revelation wrote:
Interesting analysis piece at:

https://uk.reuters.com/article/idUKL8N2HE4S5

Insiders said Airbus aims to give suppliers a clear path forwards. Many are unhappy about being asked to take a risk on higher parts production without proof of demand, but [b]Airbus is squeezing them to do more by using flexible contract clauses.


This part of the article deserves attention. It suggests that Airbus is not planning to increase rate for the sake of suppliers, and in fact, a rate increase could be bad for suppliers if it is not sustained. They'll be negatively affected by trying to maintain flexibility for that rate if the rate doesn't materialize when planned.
 
Jetport
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Re: The case for more aircraft production cuts/playing chicken

Fri Oct 23, 2020 10:59 pm

Revelation wrote:
Interesting analysis piece at:

https://uk.reuters.com/article/idUKL8N2HE4S5

It points out that before now the plan of record was to go to 45 in Apr 2021 now it's 47 in 'second half' 2021.

Seems to suggest (as members here do) the rate 40 is designed to put pressure on unions and governments for concessions while still protecting its own interests as much as possible.

It also points out demand is no where close to needing rate 40 to end 2021 never mind rate 47.

Insiders said Airbus aims to give suppliers a clear path forwards. Many are unhappy about being asked to take a risk on higher parts production without proof of demand, but Airbus is squeezing them to do more by using flexible contract clauses.

The move to put the supply chain under starters’ orders is also seen as a coded warning to airlines that have delayed taking deliveries during the crisis: Airbus will soon be back in business and ready to supply many jets you have ordered.

That means it is time for airlines to pay deposits - bringing in cash - and secure their place in the queue. Any that do not may lose their place and face price hikes for inflation.

Critics say such tactics are part of a months-old game of bluff and risk further souring relations strained by the crisis.

Seems the game of chicken is on, but it's not A vs B, it's A vs its suppliers and its customers:


After reading this Reuters UK article, it is increasing clear Airbus is delusional. They are still brow beating customers to take planes they don't need and can't pay for.
Like others on ANET, I cannot possibly come up with a scenario that would support an A32X rate of 47/month less than a year from now, and I am an optimist for a relatively quick air travel recovery.
 
Sokes
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Re: The case for more aircraft production cuts/playing chicken

Sun Oct 25, 2020 12:23 pm

I dislike the ordering several years in advance practice.
One Indian airline had ordered a lot very cheap. They received the planes in times of high demand. They sold the planes and leased them back. The profit they used to subsidize tickets to grow market share.

Since ordering planes seems to be a gamble, airlines can't complain if the gamble goes wrong.
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Revelation
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Re: The case for more aircraft production cuts/playing chicken

Sun Oct 25, 2020 2:36 pm

Sokes wrote:
I dislike the ordering several years in advance practice.
One Indian airline had ordered a lot very cheap. They received the planes in times of high demand. They sold the planes and leased them back. The profit they used to subsidize tickets to grow market share.

Since ordering planes seems to be a gamble, airlines can't complain if the gamble goes wrong.

The reality is that there are a lot of long lead time parts in an aircraft. Things like landing gears or jet engine cases or wing spars need to be ordered 1.5-2 years in advance. Then add in normal queuing effects and it's a few more years. I don't see how this will change.
Wake up to find out that you are the eyes of the world
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Wake now, discover that you are the song that the morning brings
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frmrCapCadet
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Re: The case for more aircraft production cuts/playing chicken

Sun Oct 25, 2020 4:31 pm

The airline industry faces a number of market failures. Any number of the problems we discuss, why airline executives are criticized so much, the number of bankruptcies, the constant need or evidence for government involvment. The almost insane need to order aircraft 5-8 years into the future. Oddly enough I have not been able to find a good book on civil aviation macro-economics (nor for that matter on automobile distribution and dealerships). There is one aviation book, available in a Seattle library, but it can only be read in the library.
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lightsaber
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Re: The case for more aircraft production cuts/playing chicken

Sun Oct 25, 2020 8:09 pm

Revelation wrote:
Sokes wrote:
I dislike the ordering several years in advance practice.
One Indian airline had ordered a lot very cheap. They received the planes in times of high demand. They sold the planes and leased them back. The profit they used to subsidize tickets to grow market share.

Since ordering planes seems to be a gamble, airlines can't complain if the gamble goes wrong.

The reality is that there are a lot of long lead time parts in an aircraft. Things like landing gears or jet engine cases or wing spars need to be ordered 1.5-2 years in advance. Then add in normal queuing effects and it's a few more years. I don't see how this will change.

For discounts, airframers and engine makes must promise 3+ years at a certain rate. The longer out the promised production, the more the discount. For example, for the A350 engine (Txwb), I know of one vendor who ordered $24 million of machine tools. These tools make components gor about 40% less than the old tooling. The vendor actually wouldn't pay for the tooling. For them it made more sense to keep the old machines and charge more per part while making half the profit. So RR paid for the tooling and rents back to the vendor with rent tied to Txwb part production on a rent to own scheme. Without a large backlog if orders, automation in aviation would be poor.

If an aircraft has less than 18 months backlog, it is time to shut down the line. This means for some long lead items, if there is less than 42 months of production, there is talk of halting production.

Long lead times allow investing in automation. Automation requires buying the tooling, programing the software for a few months, and testing for a few weeks. For radical production changes (e.g., 3D printing) that requires re-qualifying the component including vibe testing, performance and life testing. That takes volume.

For example, to develop the CMC PiP for the LEAP would require:
$150 million in testing
$250 million to build the factory (more with higher volume)
A test campaign that is $200 to $300 million

All for a 2.5% to 2.8% reduction in fuel burn. To pay for $700 million or so takes economics of scale.

The whole reason we are discussing production chicken is no one wants to lose that scale.

For example, CFM could have sold more engines in 2014-2016 if they could have ramped production. They demanded volume discounts and vendors demanded another year at peak production (with the NEO wasn't going to happen). So no ramp as the obsolete generation couldn't sell out far enough.

Embraer: In trouble as E1-175 customers are losing contracts to fly. They must low ball which means no buying. The E2 needs scale to get PiPs and better MRO terms.

A220: sold on volume discounts. Airbus is dramatically cutting cists, but vendors demanded volume. There is some volume, but not for a great business case. But their could be.

A320NEO: Everything was based on volume, including the automated Hamburg production line which will eventually be copied everywhere. Without volume, engines go out at a loss. To achieve volume discounts, vendors were promised long stable production.

MAX: Much of the MAX business case was on production automation to sell at very competitive pricing.

A330NEO: to compete with 787 needs volume to automate more

787: Ramped up some automation, 3D printing, and other to cut millions in costs. Airbus can do the same. To save a million in production costs 100 million in R&D and tooling. That takes a backlog. Boeing needs volume as this is their cash flow.

A350: Needs production volume as last I looked, these were going out close to break even. There must be volume to invest billions to save billions to bring this plane to its planned profits.

I could keep going, but what matters is too many production lines see they need volume and the production is far too high.

This means all those A320CEOs and 737NG are not worth what the leasing companies expected. Oh well, they make less profit (but enough, in particular in this low interest rate environment).

I've posted before this link if 5 year old Aircraft values:

https://leehamnews.com/2020/08/25/hotr- ... -aircraft/

A321CEO from $37.5 to $30 million
738 $31.5 to $26.5 million
A320 $ 29.5 to $24.5
73G $26 to $21 million

This price drop hasn't cleared the market (huge number of sellers. e.g., Allegiant is considering buying and is "inundated" will A320CEO offers:
https://www.ch-aviation.com/portal/news ... 320-offers

(Better sources out there, search Allegiant Airways inundated, I just hit monthly article limits).

To justify production we need to be back to sale leaseback. As described, that is years away.

Lightsaber
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Sokes
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 2:32 am

lightsaber wrote:
...
The longer out the promised production, the more the discount.
...
If an aircraft has less than 18 months backlog, it is time to shut down the line. This means for some long lead items, if there is less than 42 months of production, there is talk of halting production.

Long lead times allow investing in automation.
...
For radical production changes (e.g., 3D printing) that requires re-qualifying the component including vibe testing, performance and life testing. That takes volume.
...
For example, to develop the CMC PiP for the LEAP would require:
...
All for a 2.5% to 2.8% reduction in fuel burn. To pay for $700 million or so takes economics of scale.
...
The whole reason we are discussing production chicken is no one wants to lose that scale.
...
A330NEO: to compete with 787 needs volume to automate more
...
Lightsaber

Interesting examples about the tooling and potential LEAP CMCs.

However I don't understand why one would think of discontinuing production with only three months backlog. Certification is done, tooling is in place...
I don't see where is the problem.

Revelation mentioned that landing gear has to be ordered 1,5 years in advance. I assume tooling to expand production is too expensive? Or do they have labour shortage?

I conclude:
If there are orders many years in advance suppliers are willing to invest in new/ better tooling, new buildings and train more labour.
New tooling leads to decreased cost. Other investments are more for supply security.

And then there are PIPs that are costly to develop and which demand high volume to spread the cost.
But since CMC is such a new technology I expect engine makers to absorb some of the cost. It increases their experience with this new technology. This will help them in future. It's a type of investment. Also we are at the beginning of the CMC learning curve. That means high cost/ unit. As an engine maker I wouldn't expect it to be profitable for some years.

Who takes the risk, suppliers, OEMs, airlines or lessors?
Taking risk and allowing airlines pathetic low equity is the business model of lessors.
If airlines order years in advance, they take the risk. In exchange they get a better price.

I mentioned before that I consider government help during Corona appropriate. However if Airbus requests suppliers to be ready to ramp up production in the second half of 21 that's different. By then a vaccine should be available.

Airlines ordered early to get a good price. In exchange they accepted the risk.
Last edited by Sokes on Mon Oct 26, 2020 2:41 am, edited 1 time in total.
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Sokes
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 2:37 am

frmrCapCadet wrote:
The airline industry faces a number of market failures.
...
The almost insane need to order aircraft 5-8 years into the future. Oddly enough I have not been able to find a good book on civil aviation macro-economics (nor for that matter on automobile distribution and dealerships).

I'm not sure what you mean with civil aviation macroeconomics. Can you expand?
Why can't the world be a little bit more autistic?
 
frmrCapCadet
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 1:39 pm

Sokes - Lightsaber's discussion was a matter of macro economics, what is the big picture of building planes and engines - why have only two frame builders survived, and three engine builders. But there is in addition all of those expensive airports charging airlines too much, and an air traffic control system which is out of date, and don't even speak of keeping pilots and other employees happy and not striking. After that there is the matter of different countries charging, allowing, not allowing airlines to operate in their territory or airports. Hovering above all of this are stockholders and their expectations. How does the industry relate to government at various levels, with other very large companies who may also be customers. Pricing varies, think London/New York City versus smaller cities connecting to them, flings connecting moderately small cities, all the way down to the very smallest amount of demand of isolated cities.

I stay on this site mostly because there is a lot of information answering these sorts of questions. It would take a good writer who developed a lot of connections with all parts of the aviation world, and probably a publisher who would subsidize the 5 years it would take to do the book. And maybe some PhD level economists and historians to ensure some accuracy.
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lightsaber
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 2:29 pm

Sokes wrote:
lightsaber wrote:
...
The longer out the promised production, the more the discount.
...
If an aircraft has less than 18 months backlog, it is time to shut down the line. This means for some long lead items, if there is less than 42 months of production, there is talk of halting production.

Long lead times allow investing in automation.
...
For radical production changes (e.g., 3D printing) that requires re-qualifying the component including vibe testing, performance and life testing. That takes volume.
...
For example, to develop the CMC PiP for the LEAP would require:
...
All for a 2.5% to 2.8% reduction in fuel burn. To pay for $700 million or so takes economics of scale.
...
The whole reason we are discussing production chicken is no one wants to lose that scale.
...
A330NEO: to compete with 787 needs volume to automate more
...
Lightsaber

Interesting examples about the tooling and potential LEAP CMCs.

However I don't understand why one would think of discontinuing production with only three months backlog. Certification is done, tooling is in place...
I don't see where is the problem.

Revelation mentioned that landing gear has to be ordered 1,5 years in advance. I assume tooling to expand production is too expensive? Or do they have labour shortage?

I conclude:
If there are orders many years in advance suppliers are willing to invest in new/ better tooling, new buildings and train more labour.
New tooling leads to decreased cost. Other investments are more for supply security.

And then there are PIPs that are costly to develop and which demand high volume to spread the cost.
But since CMC is such a new technology I expect engine makers to absorb some of the cost. It increases their experience with this new technology. This will help them in future. It's a type of investment. Also we are at the beginning of the CMC learning curve. That means high cost/ unit. As an engine maker I wouldn't expect it to be profitable for some years.

Who takes the risk, suppliers, OEMs, airlines or lessors?
Taking risk and allowing airlines pathetic low equity is the business model of lessors.
If airlines order years in advance, they take the risk. In exchange they get a better price.

I mentioned before that I consider government help during Corona appropriate. However if Airbus requests suppliers to be ready to ramp up production in the second half of 21 that's different. By then a vaccine should be available.

Airlines ordered early to get a good price. In exchange they accepted the risk.

The margins for below 1st tier suppliers is getting so low that either the OEMs or 1st tier suppliers are buying the tooling as 2nd tier and lower vendors do not have the cash. I walked into a second tier vendor to see a dozen RR owned machines sitting idle. Suddenly that vendors risk mitigation strategy was brilliant. Next to those RR owned machines were an equal number if CFM owned machines sitting mostly idle. That vendor kept 8 old machines that were far less efficient. They knew they would have to run regular Saturday overtime to meet commitments. Instead, only 4 are running.. They are very glad to have the $30 million+ not spent to survive this downturn.

Landing gear is ordered 2 years in advance, as are engine casings, engine rotors, engine shafts, and avionics. For avionics, it is so chips can be made when the fabs are slow. They might be made the week after order ir 18 months later. If you want priority, pay twice as much (the bids are too low). For gear it is paying for the specialty alloy and waiting 6 months for delivery. Then that alloy goes to the forging shop, heat treat shop (often in the forging vendor), back to forging, back to heat treat (might repeat a few more times), and in there some machining, out to the coating vendor, back for more machining, perhaps another heat treat, out for coatings that cannot take the heat treatment, the in for final work, assembly, and acceptance testing.

Rotors must be triple melted to get out cracks. Shafts must be remelted to get out cracks, forged, machined, at least 3 times in heat treatment, and coatings. Half the material upgrades the last 20 years were coatings that give the 36 year corrosion life every airline wants.

The only way to speed up is pay a premium to cut in line in front if the golf clubs at heat treat who is paying 2x as much for oven time.
. Anything can be sped up with money. CFM wanted a rush if engines in 2015 and 2016. They also wanted a price reduction.

Most parts, such as landing gear and engines, go out at a loss. Now CFM has such volume they would have been at a profit per LEAP if volume had been maintained. Vendors only break even the 1st overhaul and profit is the 2nd and 3rd overhaul (most aircraft are then scrapped).

Volume pays to certify for 3D printing. Since certification takes 2 years, machines must be bought, parts produced, tested for a year+, then production can start (usually more machines come in). But 3D printers of Aerospace quality have a 2+ year wait and 2 years is paying the expediting fee. Other machine tools are back ordered too as the vendors switched to 3D printing.

GE is only going to make CMCs at a profit (20%+ return on investment). Right now the yields are horrible (perhaps 40% per rumors I hear). All new parts will have that poor yield. That is why the parts are only going into the low volume 777x until the process is perfected. I expect the next batch to be the GEnX.

Risk was farmed out from the OEMs to vendors, airlines, and leasing companies.

At this time, airlines and Leasing companies must push back. They took on more risk than they can afford (extreame example AirAsiaX). Indigo will transfer their realized risk by returning 120 A320CEO early.

Until that huge returned lot of young 737NG and A320CEO find new homes, there will be less demand for new.

Overall, this increase to rate 47 for the A32xNEO is insane. Everything is setup to stabilize flow and thus minimize costs.

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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 2:39 pm

frmrCapCadet wrote:
Sokes - Lightsaber's discussion was a matter of macro economics, what is the big picture of building planes and engines - why have only two frame builders survived, and three engine builders. But there is in addition all of those expensive airports charging airlines too much, and an air traffic control system which is out of date, and don't even speak of keeping pilots and other employees happy and not striking. After that there is the matter of different countries charging, allowing, not allowing airlines to operate in their territory or airports. Hovering above all of this are stockholders and their expectations. How does the industry relate to government at various levels, with other very large companies who may also be customers. Pricing varies, think London/New York City versus smaller cities connecting to them, flings connecting moderately small cities, all the way down to the very smallest amount of demand of isolated cities.

I stay on this site mostly because there is a lot of information answering these sorts of questions. It would take a good writer who developed a lot of connections with all parts of the aviation world, and probably a publisher who would subsidize the 5 years it would take to do the book. And maybe some PhD level economists and historians to ensure some accuracy.

I would love to see a textbook on modern manufacturing economics with a few chapters on regulated industry impacts.

I replied as best as I could, but this is a study worthy of awarding 2 to 5 doctorates under some excellent professors. I think this book is a 5 to 7 year project. ;)

By then the manufacturing chicken will have full consequences.

The macro economics say "don't do it Airbus!"

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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 4:38 pm

lightsaber wrote:
Risk was farmed out from the OEMs to vendors, airlines, and leasing companies.

At this time, airlines and Leasing companies must push back. They took on more risk than they can afford (extreame example AirAsiaX). Indigo will transfer their realized risk by returning 120 A320CEO early.

Until that huge returned lot of young 737NG and A320CEO find new homes, there will be less demand for new.

Overall, this increase to rate 47 for the A32xNEO is insane. Everything is setup to stabilize flow and thus minimize costs.

Thanks as always for your very informative posts.

We have Airbus saying they are staying at rate 40 till mid 2021 then are 'protecting' for rate 47 after that.

It seems they have made some pretty precise projections on exactly what to do and when.

Yet the reporting suggests they are having to strong-arm customers into taking what is being produced and there's a limit to how much more the customers can accept.

Seems Airbus has convinced itself it can continue to farm out risk to others without damaging the ecosystem too much?

Either that or they have no other choice and it becomes a choice of damaging itself vs damaging its customers and supply chain.
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 4:53 pm

@frmrCapCadet:
Got it.

I like history. 10 influencing factors, many different actors... So whatever one believes to know are really only theories. But I enjoy toying around in my mind with all these factors.

What you suggest would indeed be an interesting book.
I wonder if an expert is needed with an overview of all fields or if it should be more like a joint effort, maybe with different people writing different chapters.

Goethe:
"The master craftsman knows to set himself limits."

Funny I quote this. My interests are very widespread. However my brother is like this, and he is far more successful than myself.
And of course: Science is like that.

But then the best books I know have one, rarely two authors and cover more field than strict science would allow.
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 4:59 pm

Revelation wrote:
lightsaber wrote:
Risk was farmed out from the OEMs to vendors, airlines, and leasing companies.

At this time, airlines and Leasing companies must push back. They took on more risk than they can afford (extreame example AirAsiaX). Indigo will transfer their realized risk by returning 120 A320CEO early.

Until that huge returned lot of young 737NG and A320CEO find new homes, there will be less demand for new.

Overall, this increase to rate 47 for the A32xNEO is insane. Everything is setup to stabilize flow and thus minimize costs.

Thanks as always for your very informative posts.

We have Airbus saying they are staying at rate 40 till mid 2021 then are 'protecting' for rate 47 after that.

It seems they have made some pretty precise projections on exactly what to do and when.

Yet the reporting suggests they are having to strong-arm customers into taking what is being produced and there's a limit to how much more the customers can accept.

Seems Airbus has convinced itself it can continue to farm out risk to others without damaging the ecosystem too much?

Either that or they have no other choice and it becomes a choice of damaging itself vs damaging its customers and supply chain.

I always enjoy your well thought out posts. I agree Airbus thinks they can push out the risk. But then I see the aircraft piling up...

This link isn't very informative, but suggests this winter European airline bankruptcies will happen:
https://centreforaviation.com/analysis/ ... ies-541102

Considering how extreamly well the A320 has done in Europe (one can assume Airbus will cater well to the home market), that means more returned aircraft.

I look at it this way, who isn't trying to delay? What airline has positive cash flow?

SouthWest says they have too many aircraft and 20% too many employees:
https://www.bing.com/amp/s/gulfnews.com ... 3442025879

I still think the A320NEO must be cut. I get it, I'm an engineer and we are pessimistic. I accept I can be off by a few hundred. But by over 1,600?!? To need rate 47 means amusement parks, hotels, and cruise ships are back to normal; sadly, that won't happen for 30 months. :cry2:

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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 5:12 pm

I've seen discussion about long lead items and how hard it is to ramp production back up when the OEM is ready to increase production. What I expect is that, specifically as a result of the current slowdown, the OEM will have have a backlog of previously ordered long lead items when they begin to ramp up their final assembly.

I work for a finishing/coating house. We see parts our customers/OEM suppliers (Tier 1 & 2) have made and need NDT/NDI and coatings (not long lead items). After the MAX was grounded in 3/2019, we were told by customers that Boeing instructed them to continue to produce parts at the rate of 52 planes per month, tho' Boeing was cutting to 42 builds per month. They were going to get the plane ungrounded soon, and the backlog of parts that would accumulate would be used to smooth the anticipated future increase to 57 builds per month. After Boeing finally stopped building planes 1/2020, our customers finally stopped sending parts for finishing after completing the parts currently in process.

Boeing continuing to take parts at a rate 10 planes higher than their own build rate led to accumulation of parts to build 100 planes (10/month times 10 months). When they began to build MAX again in 5/2020, they built 31 in May & June, then 14 per month after that. Not until September did they exceed a total of 100 cumulative planes. Our customers began making more parts in August, and by the middle of September, we finally saw MAX parts begin to show up for finishing again.

To apply that to the long lead items, I am sure the OEMs have obligations they have to pay for, even though they can't use the items right now. They will have a supply of these items on hand when they begin to ramp up production again, while the suppliers of these items will also be ramping up their own production.
 
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 5:47 pm

@lightsaber:
When I read your post I couldn't help but thinking of the credo of monetarism:
"Cheap money makes stupid investments. "

At least with widebodies I believe a correction had to come anyway.
Was 6 months waiting time for a speciality alloy normal before interest rates went extreme low ?(After 2001 or after 2008, depending how one sees the three year or so of normal interest rates in between.)

Such long waiting times may be the consequence of common sense in the business community. The seller market over many years was just too good to be true.

It was beyond imagination when Indian or Indonesian(?) airlines ordered far more narrowbodies at a time than their fleet consisted of.

But then there are still lot of old narrowbodies that can be retired. Or maybe Airbus assumes that airlines are not keen to receive MAXs?
From memory: wasn't the NEO sold out for many years at a rate of 60/ month? 642 were delivered 2019.
The amount of widebodies that leave the fleets also suggests that narrowbodies may take over some of the former capacity.
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 5:56 pm

dagKentWA wrote:
I've seen discussion about long lead items and how hard it is to ramp production back up when the OEM is ready to increase production. What I expect is that, specifically as a result of the current slowdown, the OEM will have have a backlog of previously ordered long lead items when they begin to ramp up their final assembly.

I work for a finishing/coating house. We see parts our customers/OEM suppliers (Tier 1 & 2) have made and need NDT/NDI and coatings (not long lead items). After the MAX was grounded in 3/2019, we were told by customers that Boeing instructed them to continue to produce parts at the rate of 52 planes per month, tho' Boeing was cutting to 42 builds per month. They were going to get the plane ungrounded soon, and the backlog of parts that would accumulate would be used to smooth the anticipated future increase to 57 builds per month. After Boeing finally stopped building planes 1/2020, our customers finally stopped sending parts for finishing after completing the parts currently in process.

Boeing continuing to take parts at a rate 10 planes higher than their own build rate led to accumulation of parts to build 100 planes (10/month times 10 months). When they began to build MAX again in 5/2020, they built 31 in May & June, then 14 per month after that. Not until September did they exceed a total of 100 cumulative planes. Our customers began making more parts in August, and by the middle of September, we finally saw MAX parts begin to show up for finishing again.

To apply that to the long lead items, I am sure the OEMs have obligations they have to pay for, even though they can't use the items right now. They will have a supply of these items on hand when they begin to ramp up production again, while the suppliers of these items will also be ramping up their own production.

Actually, airlines or Leasing companies pay for the long lead items (partially). Now, other airlines finance, but Delta pushed out their items:

https://seekingalpha.com/article/437996 ... -to-airbus

So to complicate this, Boeing and Airbus have parts on hand owned by airlines, the leasing companies, or bridge financing companies.

Boeing can ramp, but some of those parts are allocated to a shipset which is in dispute.

But overall, Boeing paid for enough itself, the MAX will ramp quickly. Boeing needs to convert thise parts, up to including engines to cash.

Which is why the Airbus ramp up makes no sense to me. The shear quantity of surplus aircraft is mind boggling and growing.

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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 7:36 pm

lightsaber wrote:
dagKentWA wrote:
I've seen discussion about long lead items and how hard it is to ramp production back up when the OEM is ready to increase production. What I expect is that, specifically as a result of the current slowdown, the OEM will have have a backlog of previously ordered long lead items when they begin to ramp up their final assembly.

I work for a finishing/coating house. We see parts our customers/OEM suppliers (Tier 1 & 2) have made and need NDT/NDI and coatings (not long lead items). After the MAX was grounded in 3/2019, we were told by customers that Boeing instructed them to continue to produce parts at the rate of 52 planes per month, tho' Boeing was cutting to 42 builds per month. They were going to get the plane ungrounded soon, and the backlog of parts that would accumulate would be used to smooth the anticipated future increase to 57 builds per month. After Boeing finally stopped building planes 1/2020, our customers finally stopped sending parts for finishing after completing the parts currently in process.

Boeing continuing to take parts at a rate 10 planes higher than their own build rate led to accumulation of parts to build 100 planes (10/month times 10 months). When they began to build MAX again in 5/2020, they built 31 in May & June, then 14 per month after that. Not until September did they exceed a total of 100 cumulative planes. Our customers began making more parts in August, and by the middle of September, we finally saw MAX parts begin to show up for finishing again.

To apply that to the long lead items, I am sure the OEMs have obligations they have to pay for, even though they can't use the items right now. They will have a supply of these items on hand when they begin to ramp up production again, while the suppliers of these items will also be ramping up their own production.

Actually, airlines or Leasing companies pay for the long lead items (partially). Now, other airlines finance, but Delta pushed out their items:

https://seekingalpha.com/article/437996 ... -to-airbus

So to complicate this, Boeing and Airbus have parts on hand owned by airlines, the leasing companies, or bridge financing companies.

Boeing can ramp, but some of those parts are allocated to a shipset which is in dispute.

But overall, Boeing paid for enough itself, the MAX will ramp quickly. Boeing needs to convert thise parts, up to including engines to cash.

Which is why the Airbus ramp up makes no sense to me. The shear quantity of surplus aircraft is mind boggling and growing.

Lightsaber


Excepting for MAX old builds (built pre-production stoppage) - how many SA and WB aircraft since Covid started that have not been delivered? Is there a comprehensive up to date list anywhere?
 
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Re: The case for more aircraft production cuts/playing chicken

Mon Oct 26, 2020 9:16 pm

morrisond wrote:
lightsaber wrote:
dagKentWA wrote:
I've seen discussion about long lead items and how hard it is to ramp production back up when the OEM is ready to increase production. What I expect is that, specifically as a result of the current slowdown, the OEM will have have a backlog of previously ordered long lead items when they begin to ramp up their final assembly.

I work for a finishing/coating house. We see parts our customers/OEM suppliers (Tier 1 & 2) have made and need NDT/NDI and coatings (not long lead items). After the MAX was grounded in 3/2019, we were told by customers that Boeing instructed them to continue to produce parts at the rate of 52 planes per month, tho' Boeing was cutting to 42 builds per month. They were going to get the plane ungrounded soon, and the backlog of parts that would accumulate would be used to smooth the anticipated future increase to 57 builds per month. After Boeing finally stopped building planes 1/2020, our customers finally stopped sending parts for finishing after completing the parts currently in process.

Boeing continuing to take parts at a rate 10 planes higher than their own build rate led to accumulation of parts to build 100 planes (10/month times 10 months). When they began to build MAX again in 5/2020, they built 31 in May & June, then 14 per month after that. Not until September did they exceed a total of 100 cumulative planes. Our customers began making more parts in August, and by the middle of September, we finally saw MAX parts begin to show up for finishing again.

To apply that to the long lead items, I am sure the OEMs have obligations they have to pay for, even though they can't use the items right now. They will have a supply of these items on hand when they begin to ramp up production again, while the suppliers of these items will also be ramping up their own production.

Actually, airlines or Leasing companies pay for the long lead items (partially). Now, other airlines finance, but Delta pushed out their items:

https://seekingalpha.com/article/437996 ... -to-airbus

So to complicate this, Boeing and Airbus have parts on hand owned by airlines, the leasing companies, or bridge financing companies.

Boeing can ramp, but some of those parts are allocated to a shipset which is in dispute.

But overall, Boeing paid for enough itself, the MAX will ramp quickly. Boeing needs to convert thise parts, up to including engines to cash.

Which is why the Airbus ramp up makes no sense to me. The shear quantity of surplus aircraft is mind boggling and growing.

Lightsaber


Excepting for MAX old builds (built pre-production stoppage) - how many SA and WB aircraft since Covid started that have not been delivered? Is there a comprehensive up to date list anywhere?

I did an analysis early in this thread. We should just wait for the quarterly reports. Boeing has over 400 MAX ready (some white tails):
https://www.nasdaq.com/articles/abnorma ... -10-23?amp

Plus another 385 delivered that after modifications will fly again.


A story on Airbus suing airlines to accept delivery (one of many):
https://www.frequentbusinesstraveler.co ... ered-jets/

Airbus deliveries are high, but many to Leasing companies who cannot place them:
https://www.fool.com/investing/2020/10/ ... eliveries/

There are 1300 leased aircraft being returned (I posted link before):
https://www.ainonline.com/aviation-news ... raft-lease

From: https://aviationweek.com/ad-week/suppli ... -19-crisis


“If 2023 really is the year we’d get back to 2019 levels, that means for the next couple of years, no aircraft are needed for growth,” Epstein said during an Aviation Week webinar in June. “With 60% of new aircraft deliveries traditionally going to meet industry growth, now all that is needed is the roughly 40% for replacement.”

“We’re looking at a couple of years’ worth of needing zero production,” Pastushan said.


Nothing new (I posted before in lease/values thread):
viewtopic.php?t=1449067

We need to remember growth is 60% of demand. So running at rate 40 and planning for rate 47 when the mother of all lease returns is happening, does not make sense to me.

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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:18 am

Then Airbus is crazy to push production at those levels. It will mean many years of big losses - vs scaling to the right size now (who knows what that is - but I'm guessing its somewhere around 20-25 per month like we were guessing before) so that their product comes into supply constraint sooner rather later so they regain pricing power. Running at 47 per month will mean big losses with the concessions they will have to give to entice customers to take deliveries.

I suspect there big problem right now is inability to downsize due to employment contract issues - running multiple FAL's at 30-35% capacity is really not a good idea financially. Boeing made the right decision to go to 1 FAL on the 787.

You would never want to do it - but I suspect Airbus and Boeing could shutter their lines for the next 2 years and the Airline industry would breath a sign of relief. They don't need the frames.
 
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 10:42 am

morrisond wrote:
Running at 47 per month will mean big losses with the concessions they will have to give to entice customers to take deliveries.


Not sure if Airbus [and Boeing] need to give concessions. Airlines and leasing companies entered contracts and assumed a certain risk to materialize on a given date. It´s up to them to manage this risk now, if they want to or not. You can´t yell at the manufacturer when he´s delivering late and demand concessions, and at the same time demand concessions when you´re business is just not as you want to have it. You can ask for it [or you have clauses in your contract], but if the other side says "No" you either default on the delivery with all consequences, or you take delivery.

I think we can all rest assured that boeth Airbus and Boeing will try whatever they can do to manage the delay / cancel requirements coming along, but they are a) having a large number of supplier obligations on their own and b) are in the market to survive, too. And I´m pretty sure both will try to assist with financing options whenever possible or necessary, protecting their customer base.
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:20 pm

Flying-Tiger wrote:
morrisond wrote:
Running at 47 per month will mean big losses with the concessions they will have to give to entice customers to take deliveries.


Not sure if Airbus [and Boeing] need to give concessions. Airlines and leasing companies entered contracts and assumed a certain risk to materialize on a given date. It´s up to them to manage this risk now, if they want to or not. You can´t yell at the manufacturer when he´s delivering late and demand concessions, and at the same time demand concessions when you´re business is just not as you want to have it. You can ask for it [or you have clauses in your contract], but if the other side says "No" you either default on the delivery with all consequences, or you take delivery.

I think we can all rest assured that boeth Airbus and Boeing will try whatever they can do to manage the delay / cancel requirements coming along, but they are a) having a large number of supplier obligations on their own and b) are in the market to survive, too. And I´m pretty sure both will try to assist with financing options whenever possible or necessary, protecting their customer base.

Airlines and Leasing companies took on more risk than they realized. It won't help Airbus to bankrupt customers.

Indigo will take NEO, but will be returning CEOs in greater number to Leasing companies.

What happens when the leasing companies' funds are tied up buying NEOs. That means that the sale/leaseback market freezes up an the reasonable finance clause is triggered.

Airbus has a huge backlog, but it would be wiser to push out delivery.

I wonder if this is a bluff to get airlines and leasing companies to negotiate? Rate 40 is too high.

I'm going to be very curious as to the white tail buildup. We already have numerous Airbus customers effectively bankrupt: Avianca, Interjet, and AirAsia/X. Easyjet is being pressured to cancel their order. Indigo partners will survive, but not at a high delivery rate. Indigo airlines needs a few years to recover.

I have no doubt to the legality of Airbus claims. But all orders 2+ years out may be differed. By forcing early delivery, Airbus us killing 2022/2023 demand.

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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:28 pm

JetBlue's 8-K today on aircraft deferments, emphasis mine:

“Earlier this month, we reached a second negotiated agreement with Airbus to defer additional aircraft and associated capital expenditure over the next few years. Since the beginning of the crisis we have reduced aircraft and non-aircraft CAPEX by approximately $2 billion dollars between 2020 and 2022.

The B6 order book is all Airbus, so there you go.
 
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:35 pm

morrisond wrote:
You would never want to do it - but I suspect Airbus and Boeing could shutter their lines for the next 2 years and the Airline industry would breath a sign of relief. They don't need the frames.

Unfortunately, the reality is the world is so over-supplied that somehow, 2+ years of production must be removed from the market. Many will be scrapped, in my estimate about a year of production. Now the question is how to remove another year.

I also believe fares trends show aircraft were being over-produced by about 20% for narrowbodies, about 30% for widebodies. The MAX debacle masked this, but no more.

So dropping to rate 47 is the long term trend without accounting for prior over-production.

To others:
I am in the opinion that an airline should have 3 fleets, each about a third of their fleet:
1. High utilization, over 10 hours a day on a narrowbody. These should be new (NEO/MAX).
2. Moderate utilization, in the 7 to 10 hour per day group. These can be new or used depending on purchase price.
3. Low utilization, fly only when passengers pay a premium. As these fly less than 7 hours per day, they must be cheap. Either use older aircraft or buy 10+ year old (normally, with today's price drops, 6 year old aircraft will qualify).

The issue is that there are 1300 aircraft being returned to leasors (I posted link above). For category 2&3 above, they will find ready homes.

Even new leases are down 20% (see link to aircraft lease/values thread above).

This is a train wreck already and Airbus wants to accelerate?!? CAPA is predicting this winter us when European airlines file bankruptcy (see above link).

Either the airframers negotiate reasonably or negotiations happen in bankruptcy court. The plan to go back to rate 47 is unviable.

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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:40 pm

Flying-Tiger wrote:
morrisond wrote:
Running at 47 per month will mean big losses with the concessions they will have to give to entice customers to take deliveries.


Not sure if Airbus [and Boeing] need to give concessions. Airlines and leasing companies entered contracts and assumed a certain risk to materialize on a given date. It´s up to them to manage this risk now, if they want to or not. You can´t yell at the manufacturer when he´s delivering late and demand concessions, and at the same time demand concessions when you´re business is just not as you want to have it. You can ask for it [or you have clauses in your contract], but if the other side says "No" you either default on the delivery with all consequences, or you take delivery.

The phrase “you can’t get blood from a stone” comes to mind. It is a very difficult, and unprecedented, situation. If an airline can’t afford an aircraft or really afford the penalties for cancelling then you are not really going to be getting that money no matter how firm you stand, and you might just piss a few people off in the process. It is a delicate balance for the OEMs: they must extract as much money as they can get to for survival, but also need to minimize damage to customer relations. Airbus/Boeing don’t want to come out of this pandemic with all their customers resentful towards how they were treated during these times...that is a great way to drive formerly rock solid customers straight to the open arms of the competitor.

Arrogance is how Boeing lost many customers in the late 90s/early 00s. Airbus has to be careful the same arrogance (‘we got the NEO which is great while Boeing has a grounded Max’) doesn’t hurt them now.

Some relations will be damaged no matter what (I doubt Airbus and AirAsia/Tony Fernandes will ever be as close they once were for example, especially as they were in the John Leahy era) but you have to be careful how you navigate through the tough times.
 
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:47 pm

Polot wrote:
If an airline can’t afford an aircraft or really afford the penalties for cancelling then you are not really going to be getting that money no matter how firm you stand, and you might just piss a few people off in the process.


I'm not worried so much about resentment - resentment fades. These are business relationships, not in-laws. For U.S. carriers - or those carriers using U.S. courts - the bigger worry is carrier bankruptcy filings. Chapter 11 gives a carrier unilateral right to cancel (and to terminate leases). Chapter 7 liquidation would further flood the market with the carrier's used frames.
 
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 1:50 pm

Polot wrote:
The phrase “you can’t get blood from a stone” comes to mind. It is a very difficult, and unprecedented, situation. If an airline can’t afford an aircraft or really afford the penalties for cancelling then you are not really going to be getting that money no matter how firm you stand, and you might just piss a few people off in the process. It is a delicate balance for the OEMs: they must extract as much money as they can get to for survival, but also need to minimize damage to customer relations. Airbus/Boeing don’t want to come out of this pandemic with all their customers resentful towards how they were treated during these times...that is a great way to drive formerly rock solid customers straight to the open arms of the competitor.

Some relations will be damaged no matter what (I doubt Airbus and AirAsia/Tony Fernandes will ever be as close they once were for example, especially as they were in the John Leahy era) but you have to be careful how you navigate through the tough times.


That´s one part. The second is that no airline will have an interest to have one of the two big OEMs drop out of the market, or have [competing] products drop out of the market. Short term that might be a gain, long-term... we already see what the 737max debacle has brought to Boeing. "Risk adverse" might be a friendly way of describing it. At the end of the day: if they don´t pay the OEMs for what they have ordered, how shall they expect them being able to innovate and drive down costs even further? Or make sure that the upcoming, much stricter regulations, can actually be met?

It is very much down to a symbiotic relationship, the grand question is at what [production level] this needs to be at the moment to sustain the overall eco system down the Tier 2 & 3 suppliers. One should not forget that a large number of airlines has recieved bail-outs in one way or the other, giving them liquidity for some time. And the expectation of the govenments certainly is, that some of this liquidity trickles down. To the OEMs, too.
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 2:10 pm

Flying-Tiger wrote:
That´s one part. The second is that no airline will have an interest to have one of the two big OEMs drop out of the market, or have [competing] products drop out of the market. Short term that might be a gain, long-term... we already see what the 737max debacle has brought to Boeing. "Risk adverse" might be a friendly way of describing it. At the end of the day: if they don´t pay the OEMs for what they have ordered, how shall they expect them being able to innovate and drive down costs even further? Or make sure that the upcoming, much stricter regulations, can actually be met?

I think you're not factoring in the power gradient very well. Airbus and Boeing are truly too big to fail. Airlines really are not. All three of the US3 took a trip through bankruptcy in the 00s, Airbus and Boeing did not. I doubt someone like AAX is worried about Airbus's future innovation trajectory, I think they're hoping to make it through to the post-covid era without being bankrupt and/or liquidated.
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 2:23 pm

Meanwhile we read in our ANA thread that they have announced they will retire 28 more frames early, on top of the 7 they already planned to retire:

Tabito wrote:
Additional retirement in FY2020
777-300ER : 13
777-300 : 2
777-200ER/200 : 7
767-300ER/300 : 5
737-700 : 1
Total 28

Also ANA like CX have negotiated deferment of 777x in this case till 2023 whereas CX is 2025-ish.

So, not much need to produce more aircraft if the deserts are filling up with large numbers of relatively young aircraft.
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 3:04 pm

MIflyer12 wrote:
Polot wrote:
If an airline can’t afford an aircraft or really afford the penalties for cancelling then you are not really going to be getting that money no matter how firm you stand, and you might just piss a few people off in the process.


I'm not worried so much about resentment - resentment fades. These are business relationships, not in-laws. For U.S. carriers - or those carriers using U.S. courts - the bigger worry is carrier bankruptcy filings. Chapter 11 gives a carrier unilateral right to cancel (and to terminate leases). Chapter 7 liquidation would further flood the market with the carrier's used frames.


Sadly, I think this winter (December 21-March 19 2021) will see many more airline bankruptcies in a variety of chapter flavors. While I think AerCap and ALC are too big to fail, I speculate at least one mid-size Leasing company will be effectively bankrupt. Small Leasing companies often go bankrupt, so I consider that a given.

Lightsaber

PS Leasing companies vs. airlines has started. Saudia is missing paying rent and moving parts around outside of contract, 50 aircraft in contention.

30 are A320NEO that could soon need a new home:

https://www.nasdaq.com/articles/saudia- ... -10-27?amp
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 7:17 pm

The commercial aircraft industry is a circular conveyor belt, which for years has been in an exponential, spiral climb, with in hindsight, ridiculous deals being inked. We've seen stalls previously, but now it's reversed.

The parties involved are wider than airlines, lessors and OEM's.

There is a massive business providing relatively (compared to financing finished aircraft) short-term pre-shipment finance, which relies on customers taking delivery, so they can finance new orders. Most of these find their finance locked in, with pressure from their bankers to exit.

Post-shipment financiers are seeking additional comfort for existing finance, including bulk reductions and / or termination instead of rollovers, partly out of liquidity need, and partly because their bankers are insisting.

Completed aircraft, where significant milestone payments have already been made by customers themselves, or indirectly by their financiers. No-one wants to risk losing those payments, so for now they will be settled and delivered, though a portion may be financed and / or forgiven by the OEM.

Completed aircraft towards end of tranche, where accruing retrospective credits can exceed the value of the delivered aircraft. Customers will move heaven and earth not to lose those, because....

Retrospective credits can be set-off by OEM's to meet milestone payments. OEM's will set-off credits against milestone payments on aircraft far down the delivery chain, as customers are more likely to find the dollars themselves to settle aircraft in which they already have a high financial commitment (those closest to delivery).

The OEM's themselves, have high direct and indirect involvement in financing delivered and still to be delivered aircraft. Previously, the exposure was managed by bundling packages of NB and WB, higher / lower risk customer mixes to on-sell, so the OEM's could finance new sales. Very soft demand at present.

There are highly structured capital market deals, using tax effective funding at the leading edge, robust in a growing, revolving market, but which if they have to be reversed, could create potentially massive, largely uncharted problems.

Conditional orders 'subject to finance on terms acceptable to the customer', often considered as almost unconditional because the OEM would act as lender of last resort, must be looking insecure when OEM credit lines have no capacity

At the moment, the majority of those involved are working constructively to stabilise the market. Sooner or later, one or more will lose their nerve (or those who finance them will lose theirs).

We are truly in uncharted territory.
 
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Re: The case for more aircraft production cuts/playing chicken

Tue Oct 27, 2020 9:53 pm

Jetport wrote:
Revelation wrote:
Interesting analysis piece at:

https://uk.reuters.com/article/idUKL8N2HE4S5

It points out that before now the plan of record was to go to 45 in Apr 2021 now it's 47 in 'second half' 2021.

Seems to suggest (as members here do) the rate 40 is designed to put pressure on unions and governments for concessions while still protecting its own interests as much as possible.

It also points out demand is no where close to needing rate 40 to end 2021 never mind rate 47.

Insiders said Airbus aims to give suppliers a clear path forwards. Many are unhappy about being asked to take a risk on higher parts production without proof of demand, but Airbus is squeezing them to do more by using flexible contract clauses.

The move to put the supply chain under starters’ orders is also seen as a coded warning to airlines that have delayed taking deliveries during the crisis: Airbus will soon be back in business and ready to supply many jets you have ordered.

That means it is time for airlines to pay deposits - bringing in cash - and secure their place in the queue. Any that do not may lose their place and face price hikes for inflation.

Critics say such tactics are part of a months-old game of bluff and risk further souring relations strained by the crisis.

Seems the game of chicken is on, but it's not A vs B, it's A vs its suppliers and its customers:


After reading this Reuters UK article, it is increasing clear Airbus is delusional. They are still brow beating customers to take planes they don't need and can't pay for.
Like others on ANET, I cannot possibly come up with a scenario that would support an A32X rate of 47/month less than a year from now, and I am an optimist for a relatively quick air travel recovery.


Isn't it a matter of Airbus not willing to be caught off guard in case the trafic would resume quicker than expected? I could see the hypothetical rate 47/month beyond mid-2021 just as an update of their "back to business plan". I cannot image that they don't plan for an optimistic scenario even though it has a very low probability to materialize.

There is also the Boeing factor which not only has hundreds of Max ready to be delivered but also has accumulated hundreds of cancellations for the Max not to mention deferrals. As a result, Boeing surely has plenty of empty production slots in the short term even with the reduced production rate. They could potentially accept massive orders (if that would happen) and Airbus needs to be ready to fight for them.

EDIT- Also if the supply chain would start clocking at 47/month from July 2021 onwards, when would Airbus start delivering at that rate? 6 months later?
 
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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 12:34 am

smartplane wrote:
Conditional orders 'subject to finance on terms acceptable to the customer', often considered as almost unconditional because the OEM would act as lender of last resort, must be looking insecure when OEM credit lines have no capacity

At the moment, the majority of those involved are working constructively to stabilise the market. Sooner or later, one or more will lose their nerve (or those who finance them will lose theirs).

We are truly in uncharted territory.

I always enjoy your insight into capital markets for aircraft.

We are in a bizarre world. This is indeed uncharted territory. When Delta is having to scrape the barrel for financing, we know the world is upside down.

We are also at the point where too many airlines must horde their cash or declare bankruptcy. Too many lack enough assets to borrow more.

Unfortunately, it will be like dominos. I'm not going to play the macabre game of predicting who is next. What I will predict is their will be aftershocks in aircraft financing and with production.

I wish I wasn't so bearish.

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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 2:56 pm

I saw an interesting tweet which may add to the discussion:

"There could be as many as 6,500 mainline passenger jets in storage at year-end 2020" Rob Morris, Ascend by @cirium webinar

Ref: https://twitter.com/MaxK_J/status/1321381244073091076

Ascend maintains fleet tracking databases so this is more than a spitball projection, and so it's kind of terrifying.

Think of how many entire airlines you could operate with 6,500 mainline jets.
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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 3:43 pm

tomcat wrote:
Jetport wrote:
Revelation wrote:
Interesting analysis piece at:

https://uk.reuters.com/article/idUKL8N2HE4S5

It points out that before now the plan of record was to go to 45 in Apr 2021 now it's 47 in 'second half' 2021.

Seems to suggest (as members here do) the rate 40 is designed to put pressure on unions and governments for concessions while still protecting its own interests as much as possible.

It also points out demand is no where close to needing rate 40 to end 2021 never mind rate 47.


Seems the game of chicken is on, but it's not A vs B, it's A vs its suppliers and its customers:


After reading this Reuters UK article, it is increasing clear Airbus is delusional. They are still brow beating customers to take planes they don't need and can't pay for.
Like others on ANET, I cannot possibly come up with a scenario that would support an A32X rate of 47/month less than a year from now, and I am an optimist for a relatively quick air travel recovery.


Isn't it a matter of Airbus not willing to be caught off guard in case the trafic would resume quicker than expected? I could see the hypothetical rate 47/month beyond mid-2021 just as an update of their "back to business plan". I cannot image that they don't plan for an optimistic scenario even though it has a very low probability to materialize.

There is also the Boeing factor which not only has hundreds of Max ready to be delivered but also has accumulated hundreds of cancellations for the Max not to mention deferrals. As a result, Boeing surely has plenty of empty production slots in the short term even with the reduced production rate. They could potentially accept massive orders (if that would happen) and Airbus needs to be ready to fight for them.

EDIT- Also if the supply chain would start clocking at 47/month from July 2021 onwards, when would Airbus start delivering at that rate? 6 months later?

The problem is, air travel will not immediately spring back to even Mar/Apr 2020 levels, air travel will return at a gradual pace. And with the abundance of cheap planes lying around, there will be close to no demand for any new frames. Therefore there will not be a situation where Airbus would be caught out by any sudden increase in traffic.

The segment that will see a sudden increase in use and demand for stored/unused frames will be freighters. They will be most needed for international vaccine logistics once the vaccines are approved for use.
 
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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 5:16 pm

Revelation wrote:
I saw an interesting tweet which may add to the discussion:

"There could be as many as 6,500 mainline passenger jets in storage at year-end 2020" Rob Morris, Ascend by @cirium webinar

Ref: https://twitter.com/MaxK_J/status/1321381244073091076

Ascend maintains fleet tracking databases so this is more than a spitball projection, and so it's kind of terrifying.

Think of how many entire airlines you could operate with 6,500 mainline jets.


This Cirium page has some interesting data available even for non-registered users. It's just that we don't seem to get access to the latest updates when not registered but it's nevertheless interesting information.

https://www.cirium.com/thoughtcloud/covid-19-navigating-the-flight-plan-to-recovery-daily-update/
 
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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 8:31 pm

Looks like the safest place to invest in civil aviation nowadays is long term parking space…
"When I find out I was wrong, I change my mind. What do you do?" -attributed to John Maynard Keynes
 
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Re: The case for more aircraft production cuts/playing chicken

Wed Oct 28, 2020 9:07 pm

Revelation wrote:
I saw an interesting tweet which may add to the discussion:

"There could be as many as 6,500 mainline passenger jets in storage at year-end 2020" Rob Morris, Ascend by @cirium webinar

Ref: https://twitter.com/MaxK_J/status/1321381244073091076

Ascend maintains fleet tracking databases so this is more than a spitball projection, and so it's kind of terrifying.

Think of how many entire airlines you could operate with 6,500 mainline jets.

To put in perspective, the Boeing CMO has 25,900 aircraft in service year end 2019.

So a quarter of the global traffic could be carried on those parked jets.

It will take time after growth restarts to need more than 10% of those jets. It will take two years, as in 2021 and 2022, until aircraft are needed, in my opinion.

I'm still dumbfounded by rate 47 planning.

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Re: The case for more aircraft production cuts/playing chicken

Thu Oct 29, 2020 11:14 am

Faury defends production rate of 47. One can wish Reuters had more to say on this.

Faury defended plans to ask suppliers to support a hike in monthly output of the A320neo family to 47 from 40 in third-quarter 2021 if demand permits. Such medium-haul jets are expected to lead the industry out of its worst crisis.

Confirming a Reuters report, Faury said those plans already reflected the more tepid recovery because they had been delayed by three months from a previous, unannounced plan.

But suppliers worry in case Airbus is unable to meet the new goal, leaving them with bills for investing in new capacity.

“Suppliers will draw their own conclusions,” said one source involved in efforts to boost the fragile sector.


https://www.reuters.com/article/us-airb ... SKBN27E0MM
 
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Re: The case for more aircraft production cuts/playing chicken

Thu Oct 29, 2020 11:31 am

MIflyer12 wrote:
Faury defends production rate of 47. One can wish Reuters had more to say on this.

Faury defended plans to ask suppliers to support a hike in monthly output of the A320neo family to 47 from 40 in third-quarter 2021 if demand permits. Such medium-haul jets are expected to lead the industry out of its worst crisis.

Confirming a Reuters report, Faury said those plans already reflected the more tepid recovery because they had been delayed by three months from a previous, unannounced plan.

But suppliers worry in case Airbus is unable to meet the new goal, leaving them with bills for investing in new capacity.

“Suppliers will draw their own conclusions,” said one source involved in efforts to boost the fragile sector.


https://www.reuters.com/article/us-airb ... SKBN27E0MM

From that link:
Airbus AIR.PA said on Thursday it expected to stop burning cash in the fourth quarter, giving investors the first glimpse of a path out of the coronavirus crisis after speeding up deliveries to cash-strapped airlines.

This is propping up Airbus at the expense if airline cash. Since we are heading into low season anyway, this creates issues. This actually brings up another issue of rate 47, the ramp is occurring just when airlines have a seasonal surplus of aircraft.

The Allegiant conference call (transcript is not out yet) alluded that they might take over AirAsia leases.

https://edge.media-server.com/mmc/p/jbjkcw9o

To others:
I cannot think of one airline asking for the increase. I understand Airbus can impose contracts. Until the surplus of aircraft available is reduced, leasing companies and airlines trying to dispose of aircraft are in a world of hurt.

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Re: The case for more aircraft production cuts/playing chicken

Thu Oct 29, 2020 2:53 pm

Seems the arm twisting is going fairly well, Airbus is down to "only" 135 undelivered aircraft:

Airbus has reduced to about 135 the number of aircraft it has been unable to deliver as a result of the air transport crisis.

The airframer insists it has managed, over the third quarter, to achieve convergence between production and deliveries.

Airbus recorded €1.2 billion ($1.4 billion) in charges over the three-month period to 30 September for its broad company restructuring, including a €981 million impact on its commercial aircraft division.

Chief executive Guillaume Faury says this provision illustrates that the airframer’s discussions with social partners have “advanced well”.

Ref: https://www.flightglobal.com/air-transp ... 60.article

Why is he talking about "social partners" in this context?
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