The biggest news this week in the civilian aerospace industry was Airbus landing a deal from Indonesia based Lion Air for more than 200 new single aisle passenger jets. This order has a value of $24 billion at catalog price, but the industry typically discounts
for larger orders.
The headlines in business media focused on two primary story lines. The first which was part of The Financial Times reporting was that this deal was the biggest in Airbus history, announced amid much fanfare and ceremony, as well as the third major commitment for A320’s in as many weeks. The Wall Street Journal’s headline reflected that Lion Air had previously been equipping its fleet with Boeing aircraft and this deal represents a shrinking group of airlines that exclusively feature a Boeing fleet.
There is a supply chain connotation to these headlines, one that Supply Chain Matters has been focused on for some time. Capacity and delivery times within the industry are stretched, while airlines require timely delivery of more fuel efficient aircraft in order to gain a competitive edge. Long term industry forecasts and the realities of over-stretched global supply chains are becoming a reality to customer buying dynamics.
Articles in Bloomberg and FT came the closest to pointing these out.
Both point out that Lion Air, Indonesia’s largest airline has emerged as a key rival to Malaysia based AirAsia, Asia’s biggest discount airline. Lion is now establishing routes in direct competition. The region they both serve will account for 33 percent of global passengers by 2016 according to figures from the International Air Transport Association. Lion Air already has 700 planes on order, with plans to order another 300. AirAsia placed its order for 200 Airbus A320 Neo aircraft in 2011. Both airlines are in a race for market domination and customer attractiveness.
Lion Air’s current order calls for 60 current generation A320’s, 109 of the newer A320 Neo, and 65 A321 Neo’s. Our view is that the 60 ordered current generation aircraft are the hedge to insure Lion air has aircraft to meet its operating plans over the next five years. In its reporting FT cites analysts as validating that Lion Air’s order with Airbus was motivated by needs to expand at the quickest pace.
Bloomberg quotes Airbus CEO acknowledging that: “it’s getting tight for deliveries. I have only a handful of delivery slots for 2019. We are looking at whether we can increase that rate.” It hints that production rates for the A320 may be accelerated beyond 42 a month flowing this latest order, but concerns about the ability of the Airbus supply chain to sustain higher levels remains a question.
Both Airbus and Boeing have issued long-term aircraft delivery forecasts that imply an average industry supply chain delivery rate of 1400 to 1700 aircraft per year, and a near doubling of the total aerospace market fleet over the next 20 years. To date, the average annual delivery rate for Airbus during the past three years has been just shy of 500 aircraft while Boeing annual aircraft delivery rate for the past three years is an average of 473 aircraft. With large numbers of booked customer orders in backlog, supply chains that are stressed for capacity and resources, and customers seeking timely deliveries, the dynamics of this market are now showing. Orders are garnered not just on aircraft innovation and most attractive cost, but on most timely delivery.
The latest Lion Air order is the latest demonstration on the paradigm shift that places supply chain delivery and consistency in execution as a rather important determinant for selecting an aircraft supplier.