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:: January 2021 Letter ::

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Dear Fellow Market Disruption Observers,

One earnings call does not indicate the future. But Boeing’s fourth quarter call, on January 27th, implied a concerning level of complacency. CEO Dave Calhoun: “Broadly speaking and on balance across the portfolio, we like where our portfolio plays with the MAX at the lower end and the 87 at the higher end and very successful airplanes.” And, “We're going to take a little time, and we don't feel significantly disadvantaged with our portfolio versus their portfolio.” Calhoun alluded to new product development, but last year, Boeing Commercial cut development spending by over 25%. So, Airbus will take 60% of the market. See my latest Aviation Week column (tinyurl.com/atxsr66h) for more.

Airbus might be content with that 60%. Or, it might charge on, developing new products to go after the 787, or to exploit its strong middle market lead. But one question I often get concerns new market entrants. Will someone new come along, view Boeing as an easy kill, and take their place in the duopoly? My list below attempts to answer this question. Here are the possible newcomers, scored on a scale of 1 (no chance) to 5 (a strong chance).

China and/or Russia. I’ve dealt with this elsewhere (over and over), but state-owned companies have little hope in this industry. Score: 1 for Russia, 2 for China. But as I wrote in my June 2020 letter, there’s a strong likelihood that these producers increasingly capture their domestic markets, after the late 2020s. For Airbus and Boeing, losing China would be very damaging.

A Techno-Billionaire. Elon Musk and Jeff Bezos disrupted space; why can’t they disrupt commercial aviation? Well, frankly, jetliners don’t offer a Captain Kirk level of self-indulgence, and they certainly don’t have the messianic utopianism of space exploration. The ego factor also explains why Musk has already talked publicly about disrupting the fighter business. If it was clear that hybrid electric or hydrogen propulsion, or some other flamboyantly disruptive technology worked with jetliners, then maybe they’d be interested. But there is no such clarity right now. Still, you can’t rule it out, particularly for Musk. Score: 2.5.

A Defense Prime. It’s hard to believe, but just a few decades ago defense primes cheerfully pursued commercial work and programs. They were seldom market successes, but some were design successes (particularly Lockheed’s L-1011). Today, alas, defense companies are mostly pure-play – DoD and other agencies reimburse development costs, meaning no risk and guaranteed profits, unlike in the commercial world. Come to think of it, that’s the thinking that destroyed Douglas, and may be destroying Boeing Commercial, too. Some defense primes happily own business jet units (Textron, GD), but these aren’t assets they had to create from scratch, with all the long-term cost and risk of creating stuff from scratch. Score: 1.5.

Embraer. There are three established commercial aero primes in the world today, now that Mitsubishi and Bombardier are out. Embraer is quite small compared with Airbus and Boeing, and still re-adjusting after the Boeing JV dissolution, but it’s also a wild card. Even though they probably can’t enter Airbus and Boeing turf on their own (Score: 1.5, again, on their own), they offer a remarkable level of design, production, and support competence to a partner. In fact, it’s telling: the only small jetliner prime is unquestionably best at new aircraft development. Also, unlike China and Russia, they understand the importance of risk-sharing partnerships (RSPs), and can manage them, too.

A Defense Prime and Embraer. What if one of the more forward-looking defense primes (particularly Northrop Grumman) gets back in the jetliner game by aligning itself with Embraer? Defense cash, critical mass and supply chain leverage combined with Embraer jetliner expertise and support? Intriguing, but again, uncertain motivations for the defense prime. Score: 3.

A Mega-Supplier. As I wrote in my November 2018 letter, after UTC merged with Rockwell Collins (and others), “UTC just issued an RfP for a metal tube and wing.” Now that it’s part of Raytheon, the company is in the same size league as Airbus and Boeing, so why not be a jetliner prime? Well, two reasons. One, it now has a much greater percentage of military work, which, again, is a tempting direction on which to focus. Second, RTX, and other mega-suppliers, might not want to alienate their primary customers. According to Jefferies, 15.2% of RTX revenue is derived from the A320 program, making RTX the single most A320-dependent company out there. And the last thing GE would do is offend or compete with Boeing, and the last thing Safran would do is offend or compete with Airbus. Score: 1.5. It’s theoretically possible, but too many complications.

A Mega-Supplier and Embraer. What if RTX, GE, or someone, avoided annoying their prime customers by simply backing a new Embraer jet sotto voce? Remember, Bombardier’s CSeries probably wouldn’t have happened without strong support from Pratt & Whitney/UTC, which hoped to precipitate a wave of re-engining by Airbus and Boeing as a response (mission accomplished!). If this story were to be repeated today, Embraer isn’t saddled with Bombardier’s fundamental flaws.

So, imagine if RTX wanted to launch a large, 40,000 lbst incarnation of its Geared TurboFan, but Boeing didn’t want to do a new mid-market jet, and Airbus was content to keep the A321neo as-is. Behind the scenes, RTX could quietly enable Embraer to create a 220/250-seat jet, with a GTF and heavy Collins content. There wouldn’t be an Embraer/RTX JV, just an RSP, but with a bit of extra up-front cash. RTX could also recruit Spirit or GKN or the Japanese Heavies to help with larger structures and with more risk-sharing cash. The end result, a supplier-driven jet with an Embraer nameplate and product support, would help guarantee an Airbus and/or Boeing response, and RTX would be well positioned with these, too. Score: 4; quite intriguing, really.

If I’m right about Boeing, and their recent earnings call really does presage their future, and if Airbus gains ten points of market share, but gets complacent, then imagine the outcome. Innovation slows to a crawl. The jetliner industry’s glorious 65 year story of 1-2% annual improvements in fuel burn and emissions reduction slowly flatlines. If scenario this plays out, for the good of our industry and the traveling public, a new innovator needs to come along and rescue us.

Yours, ‘Til Paraguayan Aerospace (PAe) Surprises Us All,
Richard Aboulafia
 

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  ~  Last updated on January 08, 2006