Airbus and Boeing will be building a lot more A350s, A330neos, 787s and 777Xs in the coming years. Wall Street analyst Rob Spingarn, managing director at Melius Research, joins the podcast to explain why.
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Joe Anselmo:
Welcome to Aviation Week's Check Six podcast. I'm Joe Anselmo, editorial director and editor-in-chief of Aviation Week magazine. Aviation's sick child appears to be on its way to a full recovery. I'm speaking of the market for widebody, long haul passenger jets, which has been buoyed by a return of long-haul travel and the reopening of China.
While Boeing's ongoing woes with the 787 have grabbed a lot of headlines, the long-term picture for the sector is brightening by the day. Air India has signed letters of intent to acquire 40 Airbus A350s, 10 Boeing 777s, and 20 787s. Airbus has also announced plans to expand production of A350s. And the fortunes of Boeing's new 777X, ,not long ago, dismissed as too large for the post-COVID-19 travel market, have markedly improved. Our guest on today's podcast, a longtime Wall Street analyst, says the market is in the ‘early innings’ of all years long rebound.
Rob Spingarn, managing director at Melius Research, will lead us off. He'll be joined by two of Aviation Week's leading editors, Jens Flottau and Guy Norris. Rob, we invited you back because you were one of the first analysts to predict this widebody recovery. You were talking about it way back in 2021. You've done a new analysis now that forecast deliveries of 787s, 777s, Airbus A330s, and Airbus A350s could rise more than 100% from 2022 levels over the next few years. So, tell us a little bit about your forecast and why you're so upbeat.
Rob Spingarn:
Well, Joe, thanks for having me. And just going back, investors are always looking ahead into the future to discount eventual growth into stocks and see where the opportunities lie. And because the reaction to COVID was so extreme and so fast, production rates and delivery rates of all kinds of aircraft dropped very suddenly. And of course, international travel was more impacted and impacted for longer than domestic because of different health rules and entry requirements in various countries. And I think the initial reaction in 2020 was international travel is going to take a very long time to recover and it may not recover fully, but we know when we have very big existential shocks, we get into a pendulum effect. And so the negativity surrounding COVID and the response in the air traffic and aerospace world to me probably over-corrected in one direction and therefore, we would bounce back the other way. It's as simple as that.
And so you were referring just a moment ago to a piece we put out here a couple of weeks ago that shows if we compare widebody delivery rates for 2022 to what we expect to see a few years out as they raise delivery rates, we see 112% increase in those rates. That's driven primarily by the 787, which you know is at a depressed level today because of idiosyncratic issues with the 787 and its fit and finish. We did 31 aircraft in 2022 for the 787, but we see 120 aircraft a few years out when they get to the targeted rate of 10 per month, which would be somewhere around 2025, 2026.
But we also see increases in other widebody aircraft. We see a doubling of the 777 rate from 24 last year to 48 a few years out. We see the A350 up 65% and we see the A330 up 38%. But bear in mind in almost every one of these cases, I'd say except for the 777, those numbers are below 2019. So, even though we're looking for a very robust recovery, those rates don't even get you back to 2019. So, I would argue there might even be upside to these future rates that we're talking about.
Joe Anselmo:
And, Rob, I wanted to ask you about the 777X specifically. If you go back a couple of years, conventional wisdom sort of was, ‘This thing's a dog, it's just going to be too big for the market.’ And it just seems like everything's falling into place for Boeing. The program was delayed, certification was delayed, but that sort of helps, it gives Boeing time for the market to catch up. You don't think it's a dog at all, do you?
Rob Spingarn:
No, I don't. I think that what you just said, Joe, that the extra time is essential here. By the time the aircraft is ready -- right now, we're looking at 2025, it's had a couple of delays, so I wouldn't necessarily rule out 2026 -- the market should be recovered and healthy. And let's remember, and this is important really across the entire market, the total, the TAM, the total addressable passenger market in the mid 2020s will have grown from what it is in 2019. I think we sometimes make a mistake talking about when are we going to get to 2019 levels, is it going to be '23 or '24? Because we also have to remember that during those four or five years we are compounding demand as the population grows and more and more people fly. So a normalized 2025, let's say, when that aircraft comes into play and starts to deliver should be something like 20% or 30%. The market should be 20% to 30% larger than 2019, despite the fact that we had COVID and we had other issues in the interim.
And so we think that airplane's going to show up just when demand is quite robust and it's about 10% larger from a payload perspective than Airbus’ largest offering, the A350-1000, and we will have retired virtually all of the four-engine giants, the 747, the A380, those are going to be gone by then. We thought they would be gone during COVID. Some have come back just out of necessity because on trunk lines you need big airplanes, and 777-8 and 777-9 are going to be the future's big airplane, along with the Airbus A350-1000. But we think Boeing will continue to dominate and that this will end up being a successful aircraft. And you're starting to see those orders again now.
Joe Anselmo:
Well, let's head over to Germany. Jens, Airbus is in your backyard. You spend a lot of time there. Airbus is pretty bullish on this market too. I mean, the A380 is just a figment of history now, no, in terms of production.
Jens Flottau:
Well, I mean, it's ironic that it isn't history in a way, because, I mean, a lot of people are reactivating the aircraft for reasons that Rob just described. There isn't enough capacity of new aircraft in the market right now. So, people like Lufthansa that a year ago would've said. ‘Absolutely no way we'll bring the A380 back.’ They are bringing the A380 back. But that's obviously an interim step. Yes, Airbus is optimistic. They have all reasons to be optimistic. You mentioned the Air India order, 40, A350s, they bought. The interesting bid in that one is for me is the fact that they went for 34 A350-1000s. The 1000 hasn't sold very well over the past few years. Now that's a big order.
Don't forget Qatar Airways, that was 23 aircraft off the backlog during the dispute. Now they've settled that. The 23 aircraft are back. At the current rates that's quite a big chunk of current production. And then if you look back into orders placed years ago, Emirates is going to start taking delivery of their A350s next year and they want two aircraft a month. So, at the current rates, that's between a third and a half of the production. There aren't a lot of slots left, and if you keep all that in mind, Air India, Qatar, Riyadh International Airlines, the new airline in Saudi Arabia that may place an order very soon. People are going to be concerned about securing slots. So, the fact that there is a big order now will probably accelerate others by people that might not have been quite ready but are going ahead now just to be on the safe side and have capacity.
Joe Anselmo:
Guy Norris, let's not beat around the bush. We had more bad news last week about the 787. It looks like maybe just a hiccup, but Boeing had to halt production yet again, and they're only building one of these a month. I mean, has Boeing turned the corner on 787? Are we really going to get this back up to speed where it needs to be?
Guy Norris:
Yeah, well, it's a great question, Joe. I think, obviously, the market is looking, as Rob mentioned, for this extra capacity and 787 is so vital to Boeing's plan to meet that demand. Questions have to be asked, you're right, this was last week. We are not sure whether it's a long-term or short-term thing. Probably a short-term issue because it's related to extensive, well, paperwork issues essentially regarding the redesign of the forward pressure bulkhead, that is in the forward fuselage section that Spirit [Aerosystems] provides.
But what it does to me, what it really illustrates, is the fragility of this production ramp-up recovery and the thin ice that Boeing is still on as far as the 787 is concerned. The whole market is still recovering from the 737 MAX fallout in terms of the sensitivity and in-depth requirements for certification. And that impacted the 777X as well, as we know.
So, I think what we're looking at here with the 787 is that they've not only got an issue still with the forward pressure bulkhead, but they're also very vulnerable to Spirit's redesign of the large sections of the section 41 itself. They're still working slowly through all of the improvements that they have to do for getting the inbuilt inventory back to the market, back to deliveries. So, it's not a slam dunk by any means. And this target of 80 aircraft that they have for the year, for '23, is going to be a reach. There's no doubt about it. I'd be amazed if they make that, to be honest. But there's a lot of airplanes that they can start to process.
At the moment we think it takes about five months, for example, from pulling an airplane out of storage to getting it to the delivery ramp. Maybe they're going to sort of reduce that as they also increase the ramp with new airplanes. So it's a very interesting question right now. We don't know all the answers, and I don't think Boeing does yet either.
On the 777X, now that's absolutely vital for the 777X because we know that there's two main stumbling blocks right now. The sort of existential one really is EASA's agreement on the certification basis for the aircraft, and as we all know, they've basically come to Boeing and the FAA and said, ‘We think there's a potential for this common mode failure in the flight control system in the actuator control electronics.’ And Boeing has basically said, ‘No, there is none because we're basing it on known statistical evidence from the 787 and 777 flight control systems,’ both of which form the DNA for the 777X system.
So, if we really boil it down to the brass tacks, EASA has been able basically saying ‘We want this to be an Airbus design’ and Boeing saying ‘It doesn't need to be because we've proven in history that this is a safe system.’ So, we think that there's a meeting of the minds coming together slowly on this, that there's a compromise being hatched as we speak. We don't know yet what the details are of that, but that's looking like there’s progress, which is great news.
The other one is that the FAA was due to issue type inspection authorization on the 777-9, which is the first model, the version of the 777X model, around this time two years ago. amazingly. Now it does look as if there's movement there as well. As soon as TIA arrives, everything they're doing for flight test will go towards credit for certification. So that's huge news and I think if TIA is approved, which we could see in the next few months, that would give the green light for a lot of other things to start moving.
One of the big things, of course, is the restart of production. They did stop production to focus on freighters while this whole business was sorted out. And that's going to be a key. They need to get production going sometime this year if they're going to meet those demands for deliveries in 2025 and have a sufficient ramp going through the Everett facility. So, tons to happen this year. It's really got to happen in the next 10 months.
Joe Anselmo:
And Rob, I read your report that you referenced. If Boeing does get it right, get everything and can pull this all together, there's a heck of a lot of upside on 787, no? And a lot of upside on 777 as well?
Rob Spingarn:
Yes, and I think when we think about this from the perspective that I spend my time considering, which is the investment community, to some extent the timeframe is really what governs whether or not you get into these stocks. I think all of these things we're talking about will sort themselves out over time. And yes, we have new issues we haven't seen before. We have a higher level of scrutiny, I think, from the regulatory community because of what's happened over the past few years. But my point is, at some point down the road, at some moment in time, we will have a normal size market with normal type growth and airplanes that are safe and flying. And if you are an investor and you can wait, whatever that time period is, if you're a longer term investor, then you have the opportunity to buy aerospace stocks. And I think we'll profit from that as long as you are patient.
It's the short term folks that have time things around announcements like the 787 announcement the other day, disappointments when we have to pause either production or delivery lines, order announcements that make things very volatile. So, what I tend to do is think longer term out into the future for a period where I think we're going to be back to where we need to be. And what that means to some extent is I don't see a lot of demand destruction from what happened during COVID affecting the market over time.
Joe Anselmo:
Guy.
Guy Norris:
Yeah, I was just going to say, just following on from something that Rob said earlier, and Jens in fact, that when you look at the demand cycle for the 777X and the size of it, you mentioned that a lot of people were critical of the large size of it going back four or five years, really. It's really interesting when you look at the history with the 747-400 sunsetting, that whole fleet going away, a process that was accelerated by COVID, what you're looking at is the market's falling into this requirement for something that's bigger than a 747-400, but not as big as the A380. And what they're saying, in fact, Boeing is sort of saying to themselves, ‘It's on us, it's our fault. If we had the 777-9 out there today, which we'd originally planned to, you wouldn't see any of these A380s coming back,’ because there's no other option right now.
So if you imagined, as Rob says, that this normalizes and you get back to what we would've been seeing pre-COVID, you will see the 777-9 fit perfectly into this resized market. And A380 much as though it's a magnificent achievement, I think it's been given this extra lease on life, which we wouldn't have seen otherwise. But anyway, just a thought.
Jens Flottau:
Guy mentioned how that 2023 is going to be a crucial year for the 777X. I fully agree, also because a lot of airlines want to see movement now and are getting increasingly worried that there's going to be another delay, and another delay. And if that happens, if Boeing doesn't manage to convince the airlines that this time it's for real, it is going to arrive in whatever, late '25, early '26, then airlines might think about ordering an alternative and the alternative would be the A350-1000. I've heard that from several operators; those concerns.
If you look at my hometown airline here in Frankfurt, Lufthansa, they are operating A340s. Would you believe it? They are operating 747-400s. Would you believe it? A380s are coming back. That's unsustainable. It's unsustainable from a cost perspective, it's unsustainable from an environmental perspective, it's unsustainable from a product perspective.
They're still flying the business class seats introduced in 2010, 2011. So they're completely out of date. They are waiting for the 777X to arrive, desperately. And frankly, I wouldn't be surprised if they're losing patience soon if there was going to be another delay. And I'm sure Lufthansa is not the only airline thinking that way.
Guy Norris:
Just to sort of to add to that. I think when you look at the pacing items that will be between now and when, say, Lufthansa would want to take delivery in '25, the other key thing [is that] in a way you're looking at Boeing sort of quietly getting more confident that finally things are falling into place on this, even though we're still waiting for TIA and EASA approval on the certification basis.
Things like for example, the engine, right? I mean, GE has had its issues with the GE9X as we know, it was the initial delay, six-month delay after the February, 2018 issue. Then they had the more recent November issue that Jens and I wrote about on the hot section. I think what we're sort of saying here is that a lot of issues that would've probably got in the way of certification and discoveries that would've been made during a normal flight test program have happened even before they've got started on certification flight tests.
And so in a way, it's a silver lining, really, to a very black cloud. But you can imagine that by the time we do look at '25 for deliveries, everything that things that might have been horribly discovered in service or during certification will have been done and dusted. For example, the failures on the GE9X, that's going to be crucial to ensuring that not only Boeing gets more confidence in the fact that it can deliver, but also the airline community that all of these problems will be sorted. So that's another reason to say this year is pretty darn crucial for it.
Rob Spingarn:
I just wanted to say as a follow-up to what Guy said, this extra time that these delays create and this silver lining that you talked about where other things get solved during that time, was something that happened throughout the development of the 787. Remember the 787 was essentially delayed from 2008 to 2011. I think we had six or seven delays in there roughly every six months. And while the things that they talked about, the key delay drivers were being solved, other things were getting done, and that's just a cycle that's going to repeat itself here. And so time does allow, because these engineering teams are massive and so they can task people with the problem that they talk about, and then you still have everybody else working on what they should be working on. And so things that you don't see get solved quietly during the extra time.
Joe Anselmo:
So Jens, we've seen A380 go out of production, the last 747 was delivered last month. So, the one thing your team has written about is this C929, this widebody project between China and Russia. Given current geopolitical tensions, is that even something that we should still be talking about? Is that still a reality?
Jens Flottau:
It's virtual reality, I would say. It's very, very hard to understand what's going on there, to be honest, from the outside. I mean, there's this whole debate between the Chinese and the Russians who take the lead. It keeps on changing. Frankly, I don't see it moving anytime soon. The program's been delayed by obviously the fact that we've got all the Russia sanctions in place now, so there has to be rethinking about what suppliers they might be using in the end, and so on and so forth.
So I don't see that coming anytime soon, even if there's a geopolitical alignment between China and Russia that we might observe these days. The other question is the market, and I would say maybe in Russia and China, of course, but outside, no way.
Rob Spingarn:
I was just going to, Jens, I was going to follow on with that. I've written quite a few times on the 919 and I see that as an airplane, that is a first-gen aircraft. It's a teething airplane for China's aerospace industry and I don't see it having a significant place in the global commercial market. It's heavy. It's got a truncated range and payload as a result. And I know from having been over there and meeting with them, although it's a few years back now, that integrating an airplane was a real big challenge for them. And they'll get better at it over time. With the 929, to me it's even more complex. Yes, maybe it's sort of half a generation newer, but now you have two parties trying to work together, which geometrically complicates things. And as you mentioned before, we've got geopolitical elements that factor into this that we didn't know about when all of this started. So, when I think about the global market other than captive audiences for Russian and Chinese aircraft and maybe a few other nations in their sphere of influence, I do not see much market impact from either a 919 or a 929.
Joe Anselmo:
Guy, speaking of the 929, I mean, China has a long way to go in standing an indigenous propulsion capability, right?
Guy Norris:
Yeah, exactly, Joe. And I think that's always been the long pole in any airplane development tent idea. It's generally the first thing that you start developing, and it's the hardest part of the whole program from a technology perspective. So, at the moment, obviously, China's looking to develop its indigenous CJ-1000 engine from the AECC commercial aircraft engine company in China from the CJ-1000AX demonstrator. They have to then develop the scaled up-core from that and redesign the whole low pressure modules for this CJ-2000, which is the sort of 60,000 to 70,000 pound engine they want for the 929. And to be frank, I think that that's a huge ask, really. So anyway, just to your point, I think it's a bit of a long shot.
Joe Anselmo:
So, Rob, we're running short on time, but I wanted to ask you to pull out your crystal ball. Two years ago you were bucking conventional wisdom on the widebody market. What else is the conventional wisdom getting wrong today in aviation?
Rob Spingarn:
Well, I don't know that it's really anything more than timing, and I think some of us were too constructive or bullish on the recovery in the original equipment market, whether it be narrowbody or widebody. And one of the key things there, which continues to be an issue or nagging issue, is our over-optimism, if you will, for the recovery of the supply chain. That has been a massive drag.
And when you look back, and this is a bit of Monday morning quarterbacking, I guess it should be. I can't think of any industrial product that's really more complicated than a commercial airplane. And when you think about the number of parts, they used to say a 747 had four million parts, I don't know if those numbers still stand up. And my guess is the numbers coming down over time, but it's still hugely complex.
And when you think about the incredible labor dislocation that resulted from COVID globally, everywhere, it's understandable in the rear-view mirror that we had the trouble in the supply chain that we've had. Very complex product, very long cycle with a labor force that was tremendously dislocated and still isn't fully back to where it needs to be. And remember, when they get all these people hired, they still have to train them. And so, this is going to be a long recovery. And I think sometimes, at least from my seat, thinking about the stock market and the investment community, we thought things would happen more quickly than they will. And so, this goes to production rates, it goes to delivery of aircraft out of inventory, it goes to development of new airplanes like the 777X. All of this has been delayed. We can't really rely on the timelines that we've been given. But again, I go back to what I said before, eventually we'll get there.
Joe Anselmo:
Okay. Well, Rob Spingarn, we'll have to wrap it up on that note, but thank you for taking the time to join us and talk with our listeners today. Guy Norris, thanks for your insights as always. And Jens, thank you for joining us as well. That is a wrap for this week's Check Six podcast. Special thanks to our podcast editor in London, Guy Ferneyhough. Join us again for another Check Six next week. And thank you for your time. Have a great week.
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