Podcast: Airbus Up, Boeing Down And The Diverging Duopoly

First-quarter 2022 financial reports from Airbus and Boeing were snapshots of the different fates the two leading airframers face. Commercial program malaise, defense aircraft charges and growing debt plagued Boeing, while Airbus doubles-down on producing as many as 89 narrowbodies a month, when counting both the A320neo family and A220 programs. 

In this episode of Check 6, Commercial Executive Editor Jens Flottau and Senior Editor Guy Norris speak with Senior Business Editor Michael Bruno about the increasingly diverging paths within the duopoly.

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Rush transcript

Michael Bruno:

Welcome to the Aviation Week Check 6 podcast. I'm Michael Bruno, Senior Business Editor. And joining me today are Guy Norris, our Senior Technology Editor, and Jens Flottau, our man in Frankfurt, head of the Commercial Aviation Reporting team. Guy, Jens, thanks for joining me.

            What I want to talk about today is Boeing, Boeing and Airbus, but Boeing specifically, because it seems that April was the cruelest month to Boeing. The company on April 27th kicked out its financial results for the first quarter of 2022. And if you read any headlines from those reports, it was rather stunning. Whether you were a financial person, you may have been disappointed at all of the red ink that the company reported.

            If you are a programmatic person, you may have been shocked by some of the updates to the programs that Boeing is working on. Whether it's on the commercial side or the defense side, there was a lot there to digest. But then just a few days later, Airbus comes out with its results and they're practically a complete opposite.

            Guy, I want to start with you and talk about some of the programmatic announcements that Boeing made this past week or so, and just how surprising they are. We have known all along that the 737 Max is facing a bit of a slow comeback for various reasons. Let's start there. What did we hear about the 737 Max and the production, and maybe where the forecast is going?

Guy Norris:

Yeah. Well, you're right, Michael. It was a pretty gloomy, surprisingly gloomy outlook that we got, particularly since, as you mentioned or hinted at, I think a lot of analysts particularly were hoping that we'd already been through the bottom of this and we were starting to see signs of light at the end of the tunnel. But there are still signs of light, but they never seem to get much closer at the moment.

            Particularly, let's see, let's look at the MAX for example. Production wise, I think it was, everybody expected that this, the rate of that they were just reaching of 31 a month was about on track. But I think further off, there was hopes that there would be more signs, stronger signs anyway, of a stronger commitment to increase that rate as they'd hoped would happen, certainly for signs of increasing to beyond 40 for 2023. But they were backing off from that.

            More worryingly, I think particularly from the bigger picture is the fact that the final two derivatives of the MAX family, the Dash 7 and the stretched Dash 10 were both left hanging. And we're still not sure what's going to happen with either of them because Boeing is literally hanging on to know whether it's going to be able to certify by the deadline of the end of this year.

            And knowing that, it will really be hugely important for the overall arc of the program going into '23, particularly because Boeing needs to get into the market with the Dash 10. It's the only thing they've got in capacity terms that matches Airbus' A321, which is rapidly becoming a best seller. It's important for many characteristics.

            The other thing that we ought to really mention is the fact that the 777X, which was already delayed and not looking as if it was going to be delivered until '23, is now being pushed back to 2025. We'd heard rumors, of course, Tim Clark at Emirates had talked to Jens in early April about that. So we had hints that was coming, but the actual, Boeing actually coming out and saying it, it was a bit of a bombshell. And then finally-

Michael Bruno:

Which is a five year delay. Right?

Guy Norris:

... It is.

Michael Bruno:

This is five year from the original projection?

Guy Norris:

Yeah, exactly. Yeah. Yeah, thanks for remind, it's almost hard to believe that five years is the normal time in the old days for actually getting from the end of development into service. And yet here we are looking at five years even delayed from the original target of entry in service. It's a different world.

            And the last thing of course to mention is the cash cow, which was the 787 which is vital for Boeing's a longer term wide body cash flow situation is still on hold. Deliveries we know they're going to start again soon, but they've got over 100 airplanes sitting there waiting to go. They need the rubber stamp from the FAA on that approval plan that they've got. There's all these things happening across all of the programs. And there's very little light coming through at the moment.

Michael Bruno:

Right. It just struck me as part of that earnings announcement, April 27th, that the good news that Boeing had was that they had submitted a safety plan to the FAA when it comes to the 787 production. Right?

Guy Norris:

Right. Exactly. I mean, if you look at it program by program, you can see where progress has obviously been made. But the overall picture is very gloomy because it's all come together at once. And it's all down to really the FAA's incredibly tighter scrutiny now that's being imposed on all of these efforts. And it's all congested. It's come together at one time. And now you've got this situation where across its programs, Boeing is now hamstrung by all of those implications.

Michael Bruno:

And I think it's worth mentioning that on the military side, there was a widespread disappointment with the amount of charges and the breadth and depth of new charges that Boeing had to announce whether it was the KC-46 Tanker, or the MQ-25 unmanned aircraft, the T-7 Trainer. It was hard to find a major program that Boeing has that they weren't acknowledging a new charge. The whole BDS, Boeing Defense and Space sector, revenue was far lower.

            And the business results were much worse than Wall Street had expected. And of course, there was just red ink across the board when it came to the final net numbers that Boeing had to report: the losses, the increase in the net debt, the net debt actually went up a couple of billion dollars.

            And so the company is facing this sincere and substantial doubt on Wall Street about whether it can actually turn into a cash flow positive entity this year. And that's a little bit of inside baseball in the finance world, but it's a key milestone. And Guy, it goes hand-in-hand with the programmatic issues you're just talking about.

            But Jens, let's go over to Airbus here. I mean, it's a tale of two cities when it comes to Airbus and Boeing these days and everything from the finances that they're enjoying, and the programmatic results. I'm going to start with one number, Jens, and ask you to explain 75. What is 75?

Jens Flottau:

75 is the monthly rate of single aisle A320 new family production I should say really that Airbus plans to reach by 2025, so three years from now, basically. The real number though is 89. And because you need to obviously add the A220 as well, which is competing with the smaller versions of the 777 Max.

            We are soon in a situation where Airbus may be producing almost three times as many single-aisle aircraft as Boeing. Now that's of course, assuming Boeing is not moving up from 31, which it will. That's not fair, but still, there's a huge, huge gap that in terms of market share will only widen the difference between the two.

            It's got important ramifications across the Airbus industrial setup, in particular for Mobile, Alabama. Mobile does get a second, A320Neo family line. Remember, they have one already, of course, they have an A220 line, and now they get a second line. So there's big investment coming for Mobile.

Michael Bruno:

In fact, I want to interject there because from a business standpoint, it just fascinates me that there could very well be more production in Mobile, Alabama for Airbus aircraft than there are Boeing aircraft in Charleston.

Jens Flottau:

Oh, yes. Sure. Yeah. I mean, if you look at 787 in Charleston, that's going to be, what is it, Guy, five or six a month? You're talking, I would say more than 10 combined A320neo's and A220s from Mobile. So yeah, for sure. I mean, you would have to go to very high rate 787 production to reach levels. But of course, one is wide body, one is single wide. It's not really fair to compare them, but yeah, you have a point there, of course. Yeah.

Michael Bruno:

Let me ask you about the A321XLR because there was news there also about that program?

Jens Flottau:

Yeah. So it wasn't all good news, of course, out of Airbus either. They did announce a delay, not two years, but three months, but it is significant. And the reason why it's significant is certification is taking longer than they had thought. They have an issue with the rear center tank, which is an additional fuel tank that they're installing behind the main tank to have space for extra fuel for the extra range.

            There is an issue with fire protection and how to ensure that there is a process ongoing with the European and Aviation Safety Agency. And the FAA is involved as well. That's not yet been sorted out. [inaudible 00:10:34] says. And so we have a delay. Airbus says it can be contained to three months, meaning the aircraft will not come by the end of '23 by the end of next year, but in early '24. As I said, not great news for them, but if they stick to three months, that's obviously manageable.

            I wanted to touch on two points very quickly before we move on to next subject. You talked about operating profit margins. I just wanted to point out that in the first quarter, the commercial aircraft business at Airbus reached a 14%, 1-4, 14% operating margin, obviously in stark contrast with Boeing as well.

            And on 777X, Lufthansa happened to put out results this week, and was talking about how could it compensate for the shortfall of triple 777X deliveries now that demand is coming back so strongly? And they're now so desperate that they're actually considering to bring back the A380, which they had ruled out for two years. Suddenly even the A380 is becoming an option again.

Michael Bruno:

I'm sorry. Did you say bring back the A380?

Jens Flottau:

Yeah. I did.

Michael Bruno:

I just want to make sure everybody heard that correctly.

Jens Flottau:

I did say bring back the A380, which they had ruled out for two years because they said it's too uneconomic. Doesn't make sense, too big, no money to be made there. Now, they're starting to think about it again.

Michael Bruno:

Goodness. Well, that's going to, I think, touch off a lot of questions about the future of what aircraft to build and who to buy them from. And that's where I want to go with you two gentlemen. Jens, I want to start off with you where we were. Jens, I cut you off before, but there are major implications to the difference in production rates of these narrow bodies and wide bodies between Airbus and Boeing when it comes to market share.

            The market used to be pretty close to 50/50 across the board, whether it was narrow bodies or wide bodies. I mean, it differed a little bit, but basically Boeing and Airbus had the same market share. And they were in this long-term rivalry to see who could get to 51%. But that's all changing dramatically. In fact, there's a lot of openly expressed concern that it may be changing permanently. Can you explain a little bit about how this might happen?

Jens Flottau:

Yeah. I mean the 737 Max on the customer side does have... There are issues. There is no debating about that. I mean, we don't have to talk safety here. I don't think that's the real point. It's technology, it's issues like the uncertainty over can they actually certify this, the latest versions based on the latest flight crew alerting standards, which is the deadline that is looming by the end of the year.

            The Max is hurting from a credibility standpoint in the marketplace. Obviously it's bad if you have a 30% market share versus your competitor who has 70% on the customer side. It's also bad on the supplier side because the larger the volumes are that you can offer your suppliers, the better deals you can expect. The unit costs of producing one A320neo are likely going down in relative terms.

            Whereas on the Boeing side, that effect cannot be expected on the Max. So it's not only more aircraft, but also more profitable aircraft. The gap is widening that, at least that's the danger from the Boeing perspective. How can they stop it? I don't know. Very, very hard. New program would be the answer, but can they afford it? Not really. Right?

Michael Bruno:

No, that's one of my bug-a-boo's is just financially I don't think Boeing is able to get Wall Street's buy-in for what could be a $20 or $25 billion program right now to come up with a new clean sheet aircraft.

            But that's a whole issue for another podcast. Guy, I want to turn to you and drill down a little bit into all of these headwinds that are challenging Boeing. Some of them are certainly external: China. Some of them are internal. Can you go over, I mean, we've got engineering, we've got China certifying the Max. What are these headwinds that are just walling Boeing right now?

Guy Norris:

Yeah, well, I think the main one really on the commercial side has got to be this agonizing process of redefining their relationship with the FAA and the other regulators. I mean, from the top down, that is dominating everything that's going on right now at Boeing commercial, because of they're dealing with primarily it's the fallout of what happened with the MAX, of course.

            But now it's now completely dominating their strategic planning for re-certifying the 787, getting deliveries back to normal. It's impacting, as we've mentioned, the Dash 7 and the Dash 10, whether they're even going to make certification on that by the time of this arbitrarily defined deadline at the end of the year.

            And of course, the 777X now being pushed out additionally two years. And the fallout from this is the fact they're now battling on all fronts in terms of engineering resources. They've had to shift priorities towards the narrow body and the 787 side of things, because they're the most immediate, as they see it, the most immediate needs.

            The only good thing they've seen so far is the fact that the wide body market has been sluggish in its recovery. And a lot of the carriers have said, "Well, we don't need that capacity anyway just yet." But as Jens has just said, "Well, some of them actually do look as if they're going to need that capacity." That's an additional issue that they've got to face.

            On the commercial side, I think the big lesson from Boeing's perspective is that they're saying, "Look, from now on, don't expect these five year, even seven year programs anymore. These things are going to take a lot longer, and you just got to reset expectations from the market perspective. Everybody's got to assume that everything's going to take longer."

            The other thing, of course, just going back to your earlier point, Michael, when you started about the military side, they've been chasing and winning so many of these big programs because they've offered these fixed price military contract deals, and they've course that's come back to bite them so hard right now.

Michael Bruno:

Would you say they low-balled their bids there?

Guy Norris:

Oh, they've completely.

Michael Bruno:

And not just low-balled them, they just were practically unrealistic bids.

Guy Norris:

I think that's the horrible truth here. And I know they know it. That's the other thing. Dave Calhoun was basically saying never again. Those days are over because we can't afford it. And so VC-25 that the Air Force won, T-7 which was held up as this, the great new model for the future. Ironically, there's bad news on the cost on the charges for that program came literally two days before the rollout of the first one.

            The timing has just been a nightmare really for them. It's such a tough time for them. It's very, very challenging. Anyway, those are the big picture takeaways, I think, from this on both sides. I mean, it's being painful obviously, but I think you're going to see Boeing emerge out of this a much wiser outfit. There's so many hard lessons being learned here, but boy, they're going to come out with a different attitude out of all of this, I think.

            And the last thing I was going to say is, and this is what you both just talked about, what's going to result out this? And the bitter taste of all of this is that a new project is not coming anytime soon. They just can't afford it. Their engineering resources are already stretched and reprioritized.

Michael Bruno:

It's not coming anytime soon. But, Guy, you know better than anybody that everyone says something has to come. Right?

Guy Norris:

Yes, yes, absolutely. And we do keep getting little bits of intelligence to say that underneath deep down there are things going, swirling around. There are things, projects. I mean, you can't let these things just lie because of the sheer length of time in the development cycle, there has to be something coming.

            Of course, we've seen Boeing, we've had it on our front cover several times, the transonic truss-braced wing, for example. New concepts that will actually meet the demands of some sectors of the market. It's not as if they're standing still, it's just where they're going to get that money from. And maybe they could call Elon Musk. He's just spent all that money buying Twitter. That would cover three of these programs.

Michael Bruno:

Oh, goodness. That also a topic for another podcast. But unfortunately, that is all the time that we have today. Please join us again next week for another episode of Aviation Week's Check 6. Until then, why not check out Aviation Week's Window Seat podcast? This week, IATA Director General, Willie Walsh joins the podcast to discuss the challenges airlines are facing and ramping operations back up.

            You can find the Window Seat podcast wherever you're listening to Check 6. And one last request, if you're listening to us in Apple podcasts and want to support this podcast, please leave us a star rating or a review. Guy, Jens, thank you for joining me today, so much to talk about.

            We'll probably be back on another podcast, hopefully, with a little bit better news when it comes to both sides of the duopoly here. But thanks again for joining me. And all of you listeners out there, bye for now. Stay safe and have a great rest of your day.