Aviation Week editors discuss why Airbus and Boeing will need to further trim output to ride out the COVID-19 crisis.

Don't miss a single episode. Subscribe to Aviation Week's Check 6 podcast in iTunes, Stitcher, Spotify and Google Play. Please leave us a review.

Below is a rush transcript of Aviation Week’s Sept. 3, 2020, Check 6 podcast.

Announcer:

You're listening to the Check 6 podcast brought to you by editors from across the Aviation Week Network. Listeners now have access to special subscription offers, including 30% off Aviation Week and Space Technology. Go to podcast.aviationweek.com to learn more.

Joe Anselmo:

Welcome to the Check Six podcast. I'm Joe Anselmo, Aviation Week's editor-in-chief. There's a lot of talk these days about when the commercial aircraft industry will recover from the COVID-19 crisis and return to normal. And “normal” is almost universally defined as the year 2019. But what if Airbus and Boeing were already at peak production in 2019 with little room for growth over the coming decade. Scary as that thought may be, a look at the numbers suggests it's possible.

And that in turn raises questions about whether the two air framers have reduced production enough to weather the COVID-19 storm. Joining me from Frankfurt to make sense of all this is Jens Flottau, Aviation Week's executive editor for commercial aviation. And, here with me in Washington is Michael Bruno Aviation Week's senior business editor, who's closely watching production rates and the aviation supply chain.

Jens, let's start with you. You wrote a column in the August 31st edition of Aviation Week & Space Technology that I don't think Airbus or Boeing are going to be too happy about. What'd you say?

Jens Flottau:

Probably not. Well, what I did is I looked at the Airbus global market forecast, which is the forecast for the next 20 years. And, by the way, the Boeing figures are pretty similar. But for practical purposes, let's just stick with the Airbus version. I looked at the forecast and production rates and compared the two figures. The market forecast Airbus puts out is for 39,000 aircraft over the next 20 years. Divide that by 20 you come up with an average annual production of a 1,970 aircraft -- that's across the entire industry.

So, that's Airbus, Boeing, all the other manufacturers in there. Now, I compared this with the actual production rates for 2019 and the plans for 2019 on the Boeing side, because remember, the MAX wasn't delivered. So, there's a big difference between what they planned and what they actually did. So, the plans for Airbus and Boeing were already over 1,800 aircraft for 2019. They were already very, very close to the average rate that Airbus claims is the size the overall market over two decades. And that is ignoring all the others. There are going to be aircraft delivered by Comac. There  are  going to be aircraft delivered by UAC, by Embraer, and who knows, maybe someone else will come in that we don't know yet on the hybrid electric front maybe, some newcomer.

So there's no more room for growth by both Airbus and Boeing. And if you remember, Airbus in particular was pushing its suppliers very, very hard to go higher. They were talking about rates beyond 70  aircraft per month, and that wasn't in the 2030s, that was in the next few years. So, my point is they were already producing too many aircraft before COVID based on their own assessments of the market. And, now with COVID, of course it's a whole different story. And, my conclusion is that they haven't made deep enough cuts so far and more will follow,

Joe Anselmo:

Well, Jens, you're right that when we started 2019, everyone was asking “How fast can the supply chain ramp up? How quickly can Airbus and Boeing increase production?”  I guess what you're saying is everybody was wrong.

Jens Flottau:

Yes. Everything. The industry went too far in its appetite for growth and its vision. Look back -- the industry was coming out of the global financial crisis in ‘08 and ‘09, which was a big crisis by the standards back then. And then we had this decade of unprecedented growth. The industry got used to growth rates that were twice of global GDP, which is typically the level of growth that aviation has seen over the past decades. Looking back, it is clear to me that this could not be sustained for that much longer.

Now, the crisis we're seeing now is probably more dramatic than anyone could have expected, but on the other hand, that growth could not have continued at the same pace was equally clear.

Joe Anselmo:

Airbus has cut production to 40 units a month for the narrowbodies, the A320 family. And, you're saying that's still too high?

Jens Flottau:

Yes. I mean, there were at 60 a month, they went down to 40. That's a cut of roughly a third. If you look at what they were going to do next year, then it's kind of a 40% cut, but I believe the cut is not deep enough. There are analysts out there that think they should go to down to 25, which would be more  55-60%. And, I think that's what could happen very soon. There are factors at play that I don't fully understand. I don't know how political pressures are behind the scenes that may keep Airbus from making more cuts that I think are required. There are other considerations that we'll talk about inside the industry, the supply chain, for example, but just looking at the market itself, I think there's more to come.

Joe Anselmo:

Let's bring Michael into the conversation. Michael, you have your own column this week in Aviation Daily. You also think there's going to need for more production cuts?

Michael Bruno:

Yes. Not only do I agree with what Jens is saying, but I'm increasingly hearing it from financial analysts on Wall Street and in the credit rating industry. These independent analysts are saying essentially that they expect that there has to be some other step down when it comes to Airbus and Boeing and the production rates for the large commercial aircraft. And, whether that is a major step down and a formal announcement that comes from the two OEMs, or whether it is an informal step down where they don't ever raise the targets beyond where they are set now. But, everybody knows quietly that the supply chain and the OEMs are not hitting the target that they set.  You cannot look at the target that Airbus and Boeing have set out and believe that that is actually what is going to be hit.

There are several reasons behind it., one of which is what Jens was just talking about. The whole supply chain -- and when you save the whole supply chain, that includes the two OEMs -- was struggling to get at the targets they had set before the max crisis, before the COVID-19 crisis. If we go in the way back to 2018, we remember that the aero structures and the engine providers were struggling to get to the rates that Boeing and Airbus had set. They were in trouble with Boeing and Airbus. At the same time, airline customers were getting mad at Airbus and Boeing for not doing their own in helping the supply chain, get to the rates and get the deliveries to the airlines.

So, you have that scenario, but now you've got a whole of other factors that are complicating things. And, one of which I will put out there, is the idea of that with the 737 MAX it has gone from being a liability on the airline sheets to now being a benefit. If you are a 737 MAX customer, the way Wall Street looks at it is you now have increased optionality to defer or even cancel orders than you would have normally. And, that's just an amazing mindset twist to think about. It used to be bad. Now it's good. And, that's going to  be the rule probably for the next two years.

Joe Anselmo:

Wow. Michael, suppliers have already been hammered by both the max halt in production and then obviously the production rate cuts. When can they expect to hear more from the OEMs about what the path forward is?

Michael Bruno:

That is a great, great question, because from what I hear both formally in the quarterly conference calls and informally through sources in the supply chain and the analysts and advisors that cover them and help them, is that it's still a real piecemeal situation. If you're a supplier, you are trying to get some direct information and many of these suppliers do have regular conversations, Spirit AeroSystems in Wichita, Kansas for instance. They're interacting with Boeing, not just on a daily basis, they're interacting on an hourly basis with Boeing. And yet there's a degree where they are still in the dark about where Boeing is going or where Airbus is going because Boeing and Airbus themselves are still kind of in the dark about where their own airline or lessor customers are going when it comes to deferrals ,cancellations or just what new order appetite might be out there.

So, the suppliers complained that there isn't enough information coming, but they can't really expect to get it from the OEMs themselves because they know the OEMs are in the dark. You hear suppliers trying to look at the end customer in a way that they've never looked at before. They're trying to suss out what the airlines are doing themselves. What the lessors are doing, what the TSA traffic at airport might be indicating, because now everybody is trying to look at the same indicators and figure out, "Okay, what is this going to mean for the ultimate market?"

Joe Anselmo:

Jens, the leadership at Airbus seems resistant to cutting below 40 narrow bodies a month. Why are they taking this risk?

Jens Flottau:

That's a tough one, Joe, to be honest, I don't know whether considerations are taken into account behind the scenes might be political -- that there's some pressure in the Airbus countries to not go below a certain threshold. But I'd also say that it could still change, right? If we look at what's happening on the customer side, on the airline side, then it's not good. There's all almost exclusively bad news these days in the U.S. but also in Europe. There's further restrictions to travel coming in. Germany's just reintroduced quarantine measures from October, which will basically kill air travel to 80% of the rest of the world.

 There's talk about new government bailouts by various countries, including here in Germany. So, once that all filters through and gets accounted for in the projections, I'm pretty sure we will look at these further cuts at the latest by the beginning of next year is my guess, at least on the other side. You were talking about risks, Joe, or asking about risks. I see two main risks here, well, actually three.

One is the supplier to supply chain that Michael has talked about. I don't understand why you would want to make your customers even weaker than they already are. If you force them to take the aircraft that are on firm order where there are contractual obligations and so on, you will make them weaker. Why not allow them to defer, allow them to recover, and then go back to normal slowly over time in a reasonable fashion.

My second point would be that it's also bad for Airbus and Boeing for that matter to flood the market with unwanted capacity now. Because, further down the road, three years from now, five years from now, your pricing will have suffered dramatically. Imagine you're an airline and you're recovering over the next few years, and you're looking at new capacity in 2025. You have great options then because there will be a lot of aircraft still out there that no one wants. There are three years old, two years old, four years old. You can take them for probably bargain prices, rather than ordering new ones from Airbus and Boeing. So, they would be hurting themselves and I don't think it makes sense.

Michael Bruno:

I think it's really interesting, something that Jens is pointing out there about that, the big question about why would you hurt your customers more? And, that is a real, real potential risk. And yet at the same time you can see that there is so much mystery and so much unknown on the supply side of things that you can almost understand why the OEMs and why the major Tier Ones are willing to take that risk. And, what I'm getting at is there are two problems here. One of which is the supply chain and the rate at which it must have to be sustainable. And, my feeling is nobody really knows.

There isn't any good way that either OEM can look down into their supply chains and say, "Okay, add a narrowbody rate of," -- I'm picking this out of the air, but -- "25, 737s or eight, 320s a month, we'll be able to sustain things and there will be some casualties and a little bit of carnage, but we'll be able to keep the capacity go." They cannot say that right now. And, one reason they can't say that is no one at the OEM or the Tier One level has ever really, truly, understood their supply chain much beyond the Tier Two level. It's just a fact of life that we've known about for years.

It's a complaint, even when the Tier Ones or the OEM say, "Everything's going fine." You talk to a Tier Three or a Tier Four mom and pop shop, and they'll tell you that it's complete chaos. And, they're delivering sort of on a monthly basis. It takes heroics to get there. And, that was in good times. Now in bad times, nobody can understand what the forecast is supposed to be and so nobody can tell you what is going to be sustainable going forward.

The other main problem I think we're going to increasingly be talking about in the coming months is that with the thought of so much government aid potentially still out there it's a question of who gets it and how does that affect the feeding chain? So, if the airlines get bailed out to a much greater degree, you can expect the OEMs to turn around and say, "Hey, airlines, you better make a good on all those orders that you placed and we're going to deliver those aircraft because we know you have the money." Well, if the OEMs get bailed out, you can expect the airlines to say, "Wait a minute, you guys are doing fine. We don't have to take all those aircraft.

Meanwhile, the supply chain are going to look at the OEMs and say, "Hey, you've got a bunch of money we should be getting, so you should be flowing it down to us." So, there's so many of these puzzle pieces to work out, depending on who gets the money from the government. We know there's more government aid coming one way or another, we just don't know how much and who's going to get it.

Joe Anselmo:

Well, that sounds like another podcast all by itself.

Michael Bruno, Jens Flottau, thanks for your insightful reporting on this. We know it's not easy. We know you certainly take no pleasure and writing these things, but you're doing your very best to give our readers and our listeners the most accurate view of the industry possible.

That's a wrap for this week's Check 6 podcast. A special thanks to our producer, Donna Thomas. Join us again next week for another edition of Check 6, which is available for download on iTunes, Stitcher, Spotify and Google play. Also, if you like what you're listening to, please give us a positive review. We'd love to hear your feedback.

Thank you for your time.