Airframers Struggle To Define Sustainable Production Levels

Jens Flottau July 22, 2020

Airbus A350 production line — Airbus reduced A350 production to six from an average 9.5 aircraft per month.
Credit: Airbus

Flight Paths Forward: Future of Airbus, Embraer, Mitsubishi

If commercial aerospace industry production decisions were defined strictly by customer demand and no other considerations, the best move manufacturers could make at this stage of the COVID-19 pandemic would be simply to shut down temporarily and reopen when things get better. As the most recent monthly delivery figures for Boeing and Airbus show, hardly any customer is taking delivery of new aircraft and probably none want to. The few exceptions are providing a very limited stream of revenue to an industry on the brink.

Airbus’ production planning includes supplier and employee considerations
Embraer revamps for post-pandemic period after Boeing deal collapse
ATR, de Havilland hope to benefit early

That OEMs still are producing aircraft in spite of the overwhelming odds they are facing indicates the complexities of their business and the many other factors they need to take into account. The bottom line is that stopping production is generally not a feasible option for many different reasons.

Therefore, the industry’s main players need to find the least, but still extraordinarily expensive, way to muddle through what is likely to be a dismal two years in which the worst combination of factors comes to play:

(1) No demand for new aircraft, yet the Boeing 737 MAX is expected back in service (and production) in the next few months.

(2) Airbus, until only a few months ago pushing hard to maximize output, is now forced to reverse course and slow down an industrial machine that was stretched to its limits.

(3) The business case for Embraer’s E2 family was based on the assumption of significantly higher output than for the E1, yet the company is now dealing with the exact opposite trend for an aircraft that was struggling to gain traction in the market even before the pandemic closed off the previous outlook.

That there will be structural change for the industry at least in the short- and medium term is evidenced by Mitsubishi’s decision to freeze flight-testing of the M90 and shelve work on the already redesigned M100.

There were three regional jet manufacturers with realistic prospects for global sales two years ago—Bombardier, Embraer and Mitsubishi. Embraer is on its own for the foreseeable future. Ironically, those aircraft that were struggling to find acceptance outside and, to an extent, even inside their home markets, such as the United Aircraft Corp. (UAC) Superjet and the Comac ARJ21, are still around and blocking broader access to what would be attractive targets for Embraer.

That factor will become more important in the narrowbody market once the Irkut MC-21 and Comac C919 near service entry.

Airbus made a decision to cut production in April and sees no need for major revision (see page 38). The cut was a 33% reduction compared with 2019 levels and around 40% when measured against an output increase planned for 2021. Airbus was producing roughly 60 single-aisle aircraft per month in 2019 and planned to hit 63 in 2021 and then grow by about one additional monthly delivery every year. By 2025, Airbus could have been building 67 or 68 A320neo-family units per month.

There are multiple reasons Airbus selected rate 40. The main one is that it is the threshold below which management believes the Airbus supply chain could go from severe turbulence to destruction. Key suppliers, stretched to their financial limits already, would not be able to survive lower rates. That in turn means Airbus is producing a substantially greater number of aircraft than demand justifies.

While Airbus saw a substantial recovery of deliveries in June compared with May, the level is still much below precrisis and current production rates. The manufacturer delivered 36 aircraft during the month, 31 of which were A320neo-family units. The other five were one A220-300 to Air Canada and four A350-900s: two to Iberia and one each to SAS Scandinavian Airlines and Air France. But there were just 24 deliveries in May, so June numbers represent a 50% increase.

The manufacturer received no new orders in June; an order for one A330-900 was canceled. Total firm net orders for the year stand at 298—365 gross orders less 67 cancellations.

Airbus will be producing more aircraft than it delivers until the end of 2021, according to Faury. By then, airlines are expected to take delivery of 40 narrowbodies per month again, but by then Airbus will have built up an inventory of completed yet undelivered aircraft waiting to be flown in scheduled service later.

In some ways, although for completely different reasons and at a lower scale, the situation is similar to that of the Boeing 737 MAX with hundreds of completed aircraft to be rolled out to customers, likely from this fall. The unwanted supply of MAXs is going to burden airline balance sheets in 2021 if they were unable to defer or cancel the orders. At some point, Boeing will flood the market with the MAX backlog, and Airbus will try to deliver a large number of A320neo-family aircraft.

For now, Airbus also plans to build eight widebodies per month: six A350s and two A330neos. It is taking significant financial risk in keeping rates at these levels, betting on the need to protect its ability to rebuild capacity in the years to come.

Keeping intact as much of the supply chain as possible is one main reason for the relatively high level of production; the other one is internal. Airbus has an interest in keeping as many people employed as it can, assuming it will need them sooner or later for engineering work and, subsequently, in the factories. Given a 40% output reduction, 36,000 of the 90,000 positions in the Airbus commercial aircraft business were at risk mathematically. Measured in terms of actual demand, it is probably a significantly higher number. Yet Airbus announced it will reduce employment groupwide by only 15,000. That is one-sixth of the commercial unit’s workforce and includes 900 positions at its German aerostructures affiliate Premium Aerotec that were to be cut independent of COVID-19 to deal with that company’s specific troubles.

Negotiations with unions are ongoing, and Faury hopes to reach agreements with all of them by the fall so positions can be eliminated by next summer. In Europe, restructurings of this kind traditionally take years to be completed, so the targeted speed shows the urgency of the situation.

One factor not to be ignored is politics. While the French and German governments, both Airbus shareholders, officially stay out of running the business, they have made it clear publicly that they expect layoffs to be limited to an absolute minimum. Both have stepped up support for aerospace by providing billions of euros in research funds from which mainly Airbus will benefit as it is designing the next generation of aircraft. The programs not only will provide welcome financial support but also will be helpful in retaining engineers who would otherwise be without work. The combination of factors means Faury’s team has to find ways to cut the targeted number of positions largely by voluntary measures: unpaid leave, early retirement and, to a large extent, reductions to part-time work.

The pandemic does not seem to be stopping long-term research into a more sustainable aircraft, which Airbus expects to introduce into revenue service around 2035. The exact definition of that aircraft in range and size is going to redefine Airbus’ product strategy even prior to its arrival. In all likelihood, the aircraft available 15 years from now will cover the lower end of the narrowbody segment at best. The larger A321neo-size part of the market, which also happens to be the fastest growing, is to be covered by a more conventional design.

In the nearer term, the A321XLR remains Airbus’ only substantial development program. With suppliers in the process of producing the first parts specific to the XLR, the aircraft’s schedule has not changed. Its first flight is planned in 2022 and first delivery in 2023, in time for what the industry hopes will be a return to 2019 traffic levels.

Embraer aircraft — Azul took delivery of its first Embraer 195-E2 in September but deferred most of the order. Credit: Jens Flottau/AW&ST

Airbus’ move to take over the C Series program from Bombardier and broaden its portfolio to include any aircraft down to 100 seaters—right into Embraer territory—prompted discussions at Embraer about teaming up with a big partner for its commercial aircraft division.

For two years following the preliminary agreement to hand over majority control of Embraer Commercial Aviation to Boeing, management worked on disintegrating the Brazilian aircraft manufacturer, moving employees into what was going to be Boeing Brasil Commercial and others into what was left of Embraer. An entirely separate corporate information technology system was built for the new unit and, as it was about to go live, employees were sent home for an extended company holiday over five weeks to restart based on the system. No aircraft were delivered during that time.

That was in January. Then the pandemic began to spread globally, and on April 25, Boeing terminated the proposed partnership agreement. Embraer was sent back to square one. Its way forward will be turbulent, its prospects unclear. There are factors from which it will benefit, but they may well be outweighed by the new burdens.

The Embraer reset is all-encompassing. Just weeks after the Boeing deal collapsed, its main internal sponsor, Embraer Commercial Aviation President and CEO John Slattery left to become CEO of GE Aviation. He was succeeded by former sales chief Arjan Meijer.

In all likelihood, Embraer will have to go it alone for the foreseeable future. Industry sources say China and Russia have been in touch to discuss a possible investment in the company, but given geopolitics, the risks of any such tie-up would far outweigh the benefits even if an agreement on industrial and commercial terms could be reached. But who would now come up with anything near the more than $4 billion Boeing had once agreed to pay for the entity? And why would Embraer’s board accept anything well below that?

Embraer therefore is aiming to reintegrate, to the extent possible, the commercial aircraft division into the group. One item to be watched will be whether Meijer will try, as Slattery did, to make decisions for the unit as independently from the group as possible or coordinate much more with Embraer CEO Francisco Gomes Neto. Early indications are, insiders say, that Neto will become a lot more involved with the commercial unit.

A reintegrated, possibly more centralized Embraer is facing a much-changed market. Unlike Airbus and the A220, it cannot offer joint deals between its E2 family and a larger (Boeing) narrowbody. That will make it much more difficult to compete with the A220 and achieve what was its earlier strategic target: to get into the mainline carrier segment. Instead, it looks tied to its traditional niche of offering large regional jets.

Within that segment, a lot has changed. Demand for new aircraft is down to essentially zero for now and likely to stay there for some time just as Embraer was planning to ramp up production of the E2 family and trying to recover the development cost for the latest generation of the E-Jets.

While Embraer has not communicated any decisions, it is widely expected to shelve certification testing of the E175-E2 for as long as possible to cut back on capital expenditures. There are no orders for the smallest of the three E2 variants anyway. It does not comply with U.S. scope clauses and in spite of the deep crisis, there is no indication that scope relief is nearing. Furthermore, Embraer’s existing offering for the niche, the E175-E1, has a monopoly for the foreseeable future. Mitsubishi is finalizing the last deliveries of its recently acquired Bombardier CRJ program. At the same, it has shelved flight-testing of its own M90 and development of the E175-E2 competitor M100.

Embraer’s medium-term plans now are also highly unlikely to include a new turboprop that Slattery had pushed the board to approve. That project was always tied to being able to complete the Boeing deal because of the investment necessary. Now, Embraer is not only under intense pressure to contain costs wherever possible, but also is watching Europe invest billions of euros into research on new propulsion technologies, in particular hydrogen, that could form the basis for a new generation of regional aircraft emerging in 2030 or later.

Turboprop manufacturers ATR and de Havilland Canada are facing the same market headwinds as everyone else. The Longview Aviation unit had just taken over control of the Dash 8-400 program from Bombardier in 2019 and was forced to pause production because of COVID-19 in March. It announced a restart in May, though it has not resumed “full-scale production.”

ATR will not disclose its current, lower production rate.

Faury told Aviation Week that Airbus has no plans to change its position in the joint venture with Leonardo. Both old rivals de Havilland and ATR hope they will benefit early from a traffic recovery as airlines prefer smaller, less expensive units to “test the water temperature,” as ATR CEO Stefano Bortoli puts it.

—With Thierry Dubois in Lyon