In this Supply Chain Matters commentary we focus on Airbus and its efforts to take advantage of Boeing’s ongoing corporate crisis involving the global grounding of that manufacturer’s Boeing’s 737 MAX aircraft, specifically the announced ramp-up of the competing Airbus A320/A321 family of aircraft.
In conjunction with its recent report of 2019 financial performance, Airbus announced plans to increase production of the manufacturer’s A320neo aircraft to upwards of 67 aircraft per month by the year 2023, after reaching an interim target of upwards of 63 aircraft per month in the year 2021. According to published reports, suppliers balked at accelerating this timetable.
Industry reports continue to reinforce that in-essence, Airbus has not materially benefited from the Boeing crisis, primarily because airline customer order backlog and subsequent production levels extend into an 8-10-year window, taxing the industry’s collective supply networks.
In 2019, the aircraft manufacturer delivered an all-time record of 880 commercial aircraft, a roughly 11 percent increase over 2018 delivery performance, but at the low-end of its annual delivery goal. That implied that Airbus has its own ongoing supply network challenges.
In his briefing with equity analysts, CEO Guillaume Faury indicated that the manufacturer has been challenged to deliver the airline customizable, longer-range and highly popular A321neo model which presents supply challenges. Further disclosed is that persistent aircraft engine delivery glitches and operational reliability issues continue to hold back current production levels of the popular single aisle aircraft family.
A further consideration for Airbus are ongoing geo-political tensions in global trade.
The United States recently imposed punitive tariffs on commercial aircraft produced in the Eurozone.
In conjunction with the 2021 production ramp-up, Airbus’s U.S. based Mobile Alabama production facility which is currently dedicated to A320 and smaller A220 aircraft family production for U.S. based airlines, has plans to increase production to seven aircraft per month by 2021. Airbus denies this production increase is a response to the new U.S. import tariffs.
Also, with the United Kingdom now officially out of the Eurozone, but still adhering to Eurozone free-trade movement agreements, the looming December 31 deadline for initiation of any new trade agreement presents a challenge for insuring just-in-time cross-border movement of aircraft and wing components produced in parts of Great Britain and Northern Ireland. A hard exit would likely jeopardize just-in-time movements not to mention the potential for added tariffs.
Short-Term- A No Win Situation
CEO Faury has admitted to analysts: “it might look like a paradox, but in the short term, we don’t benefit from the situation with our competitor.”
That is because this manufacture’s single aisle commercial aircraft supply network remains in full-out max capacity mode.
Some in the industry argue that if Airbus were to dramatically increase monthly production, the augmented resources and capacity could erode exiting margins, as well as risk resources being downsized if a global recession impacts commercial aircraft demand levels. Others argue that the manufacturer has the best of both worlds, a hobbled competitor and continued order inflows.
When the Boeing 737 MAX is eventually re-certified by global-wide air safety regulators, the prospects of Boeing initiating aggressive pricing of the aircraft seems challenging, given that company’s eroding cash flows.
A220 Aircraft Family – The Potential Opportunity
Supply Chain Matters remains of the belief that the A220 has the potential to be Airbus’s Ace in the hole card to leverage or exploit the 737 MAX market opportunity if the program can gain priority in ramp-up resources.
This 100-125 seat aircraft has garnered praises for state-of-the-art technology, significant fuel economy and widebody passenger comfort in a single-aisle aircraft.
Just recently, Nigeria’s airline start-up Green Africa Airways placed an MOU order to acquire a total of 50 A220 aircraft. According to a published report by the New York Times citing people familiar with the matter, what was significant to the announcement was that the airline had previously placed a commitment for as many as 100 737 MAX aircraft. Airline executives indicated they turned to Airbus amid the level of uncertainty as to when they could receive their 737 MAX aircraft.
In conjunction with its release of 2019 financial performance, Airbus, the Government of Québec and Bombardier announced a new agreement which outlines a revised ownership structure for the A220 program.
Readers might recall that in July 2018, Airbus assumed a 50 percent stake in in the C-Series program for virtually little cash in exchange for leveraging the global Airbus brand. At the time, The Wall Street Journal characterized the development what could be the biggest shake-up of the commercial jetliner business in 30 years.
With the newly announced agreement, Bombardier has transferred its remaining 25 percent shares to Airbus for a reported sum of $591 million including assumption of outstanding Bombardier program debt. The agreement brings the shareholdings in Airbus Canada, responsible for the A220, to 75 percent while 25 percent remains with the Government of Québec, which previously provided a badly needed capital infusion to the former Bombardier C-Series aircraft program. (now renamed the Airbus A220)
Since Airbus took ownership of the former C-Series in July 2018, total cumulative net orders of the aircraft now amount to 658 aircraft, a 63 percent increase. Not only is that a testimonial to the popularity of the aircraft among global carriers, it is a further indication that when the aircraft was backed by the reputation and resources of a global-wide manufacturer, airlines became much more interested in the option to deploy a modern technology-laden, more fuel efficient commercial jet to augment point-to-point air travel scheduling.
Production and Supply Network Opportunity
With this new amended agreement, Airbus has an opportunity to leverage two or possibly three North America based production sites, the U.S. site being Mobile Alabama, to boost A220 deliveries as well as order intake. Bombardier’s former production support facilities in Quebec are now transferred to Airbus which includes over 3300 jobs.
Boeing’s announced deal to acquire regional aircraft maker Embraer remains delayed by regulatory approvals, and with cash hemorrhaging continuing as a result of the added 737 MAX cash burn, there is likely little leverage to bring to market a competitive aircraft to the A220.
A further consideration is a recent report by Aviation Week, indicating a widely followed industry consultant indicating that the hundreds of completed but undelivered 737 MAX aircraft could take up to two years to be delivered to airline customers. With resumed production levels expected to take six months to fully consummate, coupled with the complex logistics of re-testing and delivering hundreds of grounded aircraft, the market opportunity window grows larger.
Once again, the opportunity for timely market response often resides directly with focused supply chain response.
We would value hearing directly from commercial aircraft readers regarding our supposition of opportunity.
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