This week, the biannual Dubai Air Show has again captured the headlines of both commercial aerospace and business media. In this Supply Chain Matters blog commentary, we contrast both similarities and differences that have occurred over a short two years concerning commercial aircraft demand, along with their implications for the industry’s respective supply networks.

This particular event has meaning in that it is hosted in the Mideast region that is home to three of the globe’s fastest growing global travel airlines. Together, they have collectively fueled bulk of new wide-body commercial aircraft order volumes for the past five or so years.

At the last event held in 2017, the overall headline reflected both Airbus and Boeing touting large numbers of new customer orders for their innovative, more fuel-efficient aircraft. Both industry rivals departed with over 700 provisional orders valued at the time at $75 billion in list prices, and mostly for single-aisle aircraft. In 2017, there was an initial industry concern that overall demand for large multi-aisle aircraft was in a slowdown.

Supply Chain Matters first highlighted this concern in a late 2016 blog commentary. At the time, Boeing communicated its belief that there has been a decreased interest among airline customers for wide-body aircraft orders. Business media on the other hand pointed to customers with a more wait-and-see perspective towards the newly announced Boeing 777x model aircraft as well as increased price competition from rival Airbus in the wide-body category, including the Airbus A350 and A330 neo.

The 2019 Dubai Air Show

This week’s event has featured the usual touted press releases on new aircraft orders, and once again, the majority are for new single aisle aircraft.  As we publish this commentary, the total order value was approaching upwards of $50 billion at list prices.

The event comes in the midst of the ongoing Boeing 737 MAX grounding crisis that will enter its tenth month in December. There are ongoing allegations and reports that Boeing may have mis-represented the degree of design changes made to the aircraft’s flight control and navigation systems and the now infamous MCAS system. There are two crash investigations, added allegations and pending lawsuits, each inferring that pilots were not adequately trained or prepared to fly this modified aircraft.

With this backdrop, Boeing and its associated stakeholders desperately needed evidence from airline customers that they would place new orders for the 737 MAX.

As the event winds down, Airbus remains the clear winner in terms of new orders for single-aisle aircraft. The most noteworthy announcement came from airline Air Arabia which jointly announced a firm order for a total of 120 various Airbus A320 neo family aircraft. Boeing did manage to announce some orders for the MAX, the most noteworthy being an Air Astana order for 30 737 MAX’s valued at $3.6 billion at list prices.

Further disclosed in a published report by The Wall Street Journal was that Boeing has indicated the aircraft maker has lost upwards of 200 737 MAX orders this year due to either airline bankruptcies or customer swapping for other aircraft.

 

Wide Body Aircraft

Prior to the opening of this week’s Dubai event, The Wall Street Journal published two reports, one being titled Airlines Turn Away From Big Jets, the other, Emirates Bends to Winds of Trade. (Paid subscriptions required to view)

The essence of these reports was that the globe’s largest airline, Emirates Airline, along Etihad Airways and Qatar Airways have each had to adjust course from an operating model for routing global travel thru respective Mideast mega-hubs. These three airlines alone reportedly account for 10 percent of existing wide-body aircraft orders from both Airbus and Boeing.

Ongoing geopolitical tensions across the Mideast and elsewhere compounded by reduced travel between the U.S. and China are impacting overall global air travel volumes. Regional airline competitors have further been successful in operating more fuel-efficient single-aisle aircraft directly to point to point routes, bypassing mega-hubs such as Dubai. Noted was that FlyDubai, the Emirates sister low-cost airline is one of the biggest existing buyers of the Boeing 737 MAX, to supplement its strategies.

With overall global transit passenger demand declining, more used wide-body aircraft are being reverted back to the leasing market seeking new customers, including air freight carriers. Any new wide-body order demand increasingly competes with the used aircraft market.

The presumed prelude to this week’s event was what a difference two years can make, and specifically the battle over the $37 billion in unofficial Emirates orders that the airline had previously had in-place.

Part of that answer came on Monday with the announcement that Airbus had secured a $16 billion order for 50 of the manufacturer’s A350-900 WXB aircraft with delivery to begin in May 2023.  However, that order is reported as a disappointment in that Airbus reportedly was expecting a $21 billion order.

Rival Etihad Airways announced on Monday that it would be taking 20 fewer wide-body aircraft from Boeing, limiting its fleet to 51 Boeing 787 Dreamliners, after a recent strategy overhaul.

Today, the other part of the Emirates strategy change came to light with the announcement that the airline elected to cut its prior order for the brand new, but now delayed Boeing 777X by 30 aircraft, to a total of 126, and instead swap for 30 Boeing 787-9 Dreamliner aircraft.

 

Industry Supply Network Implications  Boeing 737 production line

Beyond this week’s event, there are many supply chain network challenges that the industry will have to continue to come to grips with over the coming months and years. Keep in mind, that this is an industry that plans from assumptions of 10 to 20 year product demand forecasts.

Normally when manufacturer’s encounter a crisis related to a prior fast-selling product, efforts are made to make-up for the disruption to revenue and cash flow along with the needs for offsetting the added unplanned expenses. In the case of broad product offerings, organization’s would look to negotiating with customers in either ramping-up or accelerating other higher-margin product deliveries.

This year’s Dubai event reinforces that the option of accelerating deliveries for wide-body aircraft is increasingly off-the-table, namely because global airline strategies are being adjusted to declining global air travel demand. Boeing had already come to the grips with that reality by announcing a 2020 reduction in the 787 Dreamliner monthly production schedule.

That places the industry’s supply network priorities on the need to scale-up the monthly delivery rate of the more than 10,000 cumulative backlogged Airbus and Boeing orders for single-aisle aircraft. The other crisis is one of more timely and responsive aircraft design. Currently, both industry OEM’s have their set of unique challenges in managing scale-up and more timely aircraft design.

Airbus remains challenged in scaling up the combined five global production facilities dedicated to the A320 family. The Dubai event confirms that the first available delivery slot for a new A320 family order is the year 2024. The introduction of the A321 XR extended range model was extremely timely in filling airline needs for fuel efficient global point-to-point air travel.

Boeing has to somehow move on from the MAX crisis, which may well take another one of two years, just to execute the customer delivery logistics for the in excess of 300 produced aircraft sitting on storage runways, let alone trying to ramp-up the 737 monthly production rate. Compounding Boeing’s challenges are increasing reports of pre-mature pickle-fork component cracks appearing among the operating fleet of the 737NG model. That adds to Boeing’s ongoing product-design and branding crisis among loyal U.S. and global-based airlines. The manufacturer once gain needs a market alternative to the now announced Airbus A321XR, and it cannot be just a remake of the 737.

Therefore, our prediction is that the industry faces some critical decisions relative to business, supply network, political and stockholder priorities.

As we and others have continually noted, an industry that has amassed multiple-year, multi-billion-dollar order backlogs attracts investors seeking lucrative cash returns in the form or earnings, stock dividends and share buybacks. Boeing’s business model fits that mold.

Political priorities are reflected in the notions of protecting a very strategic industry for both direct and indirect jobs, domestic supplier networks and tax revenues.  Both OEM’s continue to demonstrate fierce head-to-head competition over which has a fostered a level playing field in terms of direct government subsidies or political influence. Both have been cited in terms of recent WTO rulings.

From our lens, the default final priority is that of suppliers who have been continually tapped to contribute added cost savings. To little surprise, the current wave of M&A activity involving Tier One commercial aircraft suppliers reflects maintaining leverage in long-term supplier agreements and cost savings negotiations. Once more, the global economy is wavering, signaling a whole lot of uncertainty related to economic growth or pending regional or global-wide recession.

In the coming months and years, it will take strong leadership to balance all of these priorities and industry forces, not to mention the political dimensions. Some speculate that Airbus and Boeing might default to just regional suppliers. That would be tragic.

 

Bob Ferrari

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