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:: December 2011 Letter ::

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Dear Fellow Northern Border Watchers,

There is no better holiday gift for a monthly columnist than the sudden arrival of a year-end theme. Sometimes, something happens in December that brilliantly frames the entire year and gives it a coherence that it certainly didnít seem to possess.

This year, it happened. The Conference Board of Canada, a non-profit academic group, released a report on Canadian aerospace. I havenít read the report (www.conferenceboard.ca/documents.aspx?did=4577; it costs $1300 for non-Canadians) but the Canadian press ably reported its key findings. This may be a very good report for all I know, but one conclusion was spectacularly wrong. In fact, the exact opposite conclusion admirably sums up the biggest theme of 2011. ďThe Canadian industry is facing growing and fierce competition as new players enter the market. For example, China and India are building their own aircraft, with the strong financial and regulatory support of the their national governments,Ē said the report.

I guess I missed any Indian aircraft launch announcement in 2011, but letís put that howler aside and focus on the big, opposite theme: In 2011 all the emerging producer hype crumbled like a house of cards, while legacy players reasserted their dominance.

Nowhere is this truer than for Canadian aerospace. Look at Bombardierís civil transport numbers. Theyíre catastrophic, and emerging players have exactly nothing to do with that. Bombardier has 50 CRJs on backlog. Longtime competitor Embraer has 250 E-Jets on backlog. Embraer also announced plans to re-engine the E-Jet series, with the promise of hundreds of new orders for new versions in 2012. Bombardierís prop situation is worse. The backlog is now 29 Dash 8s. Legacy competitor ATRís backlog is 270. Theyíve been building ATRs for as long as the Dash 8 has been around, and there were no emerging producer prop orders this year. The Dash 8 is a great plane, and thereís nothing bad about the CRJ either. Yet Bombardierís competitiveness against its longtime rivals has effectively collapsed.

The CSeries bears some blame for this, by diverting product development and sales resources. But here again, the CSeries is being destroyed by legacy players, not by emerging producers. The two legacy jetmakers have new generation products that have been on the market less than one-third as long as the CSeries, and they spent 2011 lining up around 2,500 A320Neo/737 MAX orders and imminent orders, compared with 133 CSeries orders racked up since 2008. Of those 133, 40 orders are for Republic, which has since ordered 40 A319Neos, so the real CSeries total is 93. The CSeries is a potentially great plane. But in terms of marketing and sales, itís like Bombardier brought a crŤme brŻlťe torch to a flamethrower fight. One big barrier to jetliner market entry is that only the largest firms have the financial firepower to offer OEM financing, residual value guarantees, and heavy up-front discounts. All of these are needed to gouge out a presence in this industry. Bombardier may not have that firepower.

Some of Canadaís aerospace problems have nothing to do with competitiveness at all. Canadaís second biggest aero firm, Pratt & Whitney Canada, is a superb company thatís been hurt by heavy exposure to the bottom half of the business jet market, which is today a wasteland. It also plays a big role in the hyper-hyped Very Light Jet market, where actual numbers have been lower than even Teal Groupís lowest-in-class forecasts. And there are Canadian aero firms like CAE that are doing just great, against anybody. In either case, emerging players are irrelevant.

The irony of Conference Board report is that with the CSeries, Canada was hoping to join the jetliner big leagues. Bombardier, in short, is an emerging producer in a new market, and itís being vanquished by the legacy guys, the exact opposite of the reportís assertion. This trend was clear as early as Juneís Paris show. Bloombergís Andrea Rothman and Susanna Ray summed up Le Bourget succinctly: Airbus-Boeing Duopoly Resists Narrowbody Upstarts In Paris (www.businessweek.com/news/2011-06-23/airbus-boeing-duopoly-resists-narrow-body-upstarts-in-paris.html).

Canadaís new jetliner isnít the only one thatís floundering. Irkutís MS-21, a Putin Government priority, has joined the list of every other Putin Government priority, such as representative democracy. Mitsubishiís MRJ looks stalled. The oft-mooted vision of Embraer as an emerging large jetliner producer was shelved by the E-Jet re-engining decision. Embraer, like Bombardier, walked up to the big jet cliff. Unlike Bombardier, they walked away.

There were some orders for COMACís C919, but all were Chinese customers, following the pattern of the ARJ21, which spent 2011 falling apart. While always an appalling design, Chinaís ARJ21 couldnít even live up to its miserable goals. It may finally arrive next year, or not. In November, the only export airline customer, Lao Airlines, cancelled. The C919 might do better, but it is being developed with the same practices and methods. As the saying goes, insanity is doing the same thing over and over again and expecting different results. Also at Paris this year, when Bombardier and COMAC signed a second cooperative agreement it looked like two drunks holding each other up. There are still no Chinese CSeries orders, and COMAC shows no signs of breaking into the world jet market.

The Conference Board of Canada may have reached a colossally wrong conclusion, but thatís understandable. Many industries are under siege from emerging competition; Canadian aerospace is under siege, so why not assume newcomers are to blame? But this mistake is not a harmless one. Blaming the wrong factors means neglecting the real issues. Something has gone wrong at Bombardierís commercial side (its business jet side is doing fine), and it needs attention. Scapegoating new producers accomplishes nothing. Note too the reportís line about ďstrong financial and regulatory support of their national governmentsĒ (presumably with that notional India plane). Accusations like these can lead to bad government policies, such as trade barriers or domestic producer subsidies.

So, thanks to the report, I have a theme for the year. As December concludes, the last big event of the year, Japanís purchase of 42 F-35s, validates that theme and adds an exclamation point. Remember all that hysteria 20 years ago about Japan as the big new emerging aerospace player? They were going to leverage their co-developed indigenous fighter, the F-2, and go on to other national jets, displacing Western aero companies the way Toyota displaced GM. Today, Japan is heading in the other direction, returning to off-the-shelf fighter imports. Barriers to entry in the aerospace industry remain firmly in place, even for first-rate manufacturing countries like Japan.

Teal updates this month include aircraft that are all legacy planes that have been around for decades: F/A-18, AH-64, CH-47, Su-27/30/T-50, Tucano, OH-58, Dassaultís Falcon series, the AW109/119/169, the B-2, E-8, and E-3. Have a great holiday, and a great 2012.

Yours, ĎTil Air Canada Buys Indiaís New National Plane,
Richard Aboulafia
 

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