Why Airbus And Boeing May Need To Cut Production More
Six months after commercial aerospace entered its worst-ever crisis, more data on traffic trends is becoming available, and analysts are beginning to better understand what the near- and long-term outlooks are for commercial aircraft production. New Aviation Week Intelligence Network data suggests demand will be down around 30% over the next 10 years compared to previous assumptions. The more worrying near-term threat is that OEMs have not yet cut production enough and will have to decide on more reductions quickly.
Some big-picture perspective is needed to recap where the industry is. Twenty-nineteen was the last year in what was called a super-cycle. Airlines in the U.S. in particular finally found ways to generate good profit margins, so good that American Airlines CEO Doug Parker predicted they would never suffer a loss again. Traffic growth flattened and overall airline profits declined toward the end of the last decade, but times were still really good.
Aircraft manufacturers believed in a never-ending growth cycle, too. Airbus at one point talked about monthly single-aisle production in excess of 70 aircraft. Boeing was chasing its rival, only to be held back by the grounding of the 737 MAX, angering customers that complained the OEM was destroying network expansion and profits at a time when more capacity was needed.
- More aircraft production cuts loom, analysts say
- Aviation week data suggests 16,000 deliveries in 10 years
- Market contracts by 30% compared to previous forecasts
There is an argument that pre-COVID-19 production planning was too optimistic, even if the good times had persisted. In its 2019 global market forecast (GMF), Airbus projected a demand for 39,000 new aircraft over the next 20 years, while Boeing saw a market for 44,000 units. If Airbus’ projection had been accurate, the industry as a whole could have produced an average of 1,970 aircraft with more than 100 seats annually until 2038. But in 2019, Airbus and Boeing alone would have already ended up close to 1,900 aircraft had MAX deliveries continued as planned. Taking the GMF into account, there was already no more room for any growth beyond last year’s rates. And there was hardly any room left for existing or emerging competitors such as Embraer, Comac or United Aircraft Corp. (UAC) that would surely take a share of the large regional/small narrowbody demand—or more painful for Boeing and Airbus, the domestic China and Russia markets.
Going into the COVID-19 outbreak, the thinking was still that there would be a relatively short-term dip through which narrowbody deliveries could be sustained at a relatively high rate. That rate would have even allowed Boeing to resume some level of MAX deliveries from the end of this year or when regulators unground the aircraft. The target OEMs had in mind was to reach the level of production they were used to as quickly as possible. Only a few weeks ago, Airbus CEO Guillaume Faury was still dreaming of a steep rise in narrowbody deliveries from 2022, which admittedly could still happen if things go exceptionally well. But the sentiment from most analysts has now changed. The summer, as illustrated by the July traffic figures released by the International Air Transport Association (IATA), continues to be disappointing. Global air travel is still down 80% from last year, and long-haul international travel is hardly existent as most countries keep some form of travel restrictions in place.
The outlook for the fall and winter, low seasons even in economic booms, is so frightening that IATA Director General and CEO Alexandre de Juniac is now calling for a second round of government bailouts: “The initial round of measures will need to be topped up, and the debt burden cannot be increased,” he said. According to IATA, governments have pumped around $120 billion into the airline sector globally to avoid financial collapse.
“If airline passenger volumes don’t start to improve meaningfully in 2021, we are likely to see further aircraft production rate cuts,” writes Jonathan Root, senior vice president at Moody’s Investors Service. Large commercial aircraft production will be around 30-40% lower than 2019 levels in 2021. New-aircraft build rates will partially depend on resumption of Boeing 737 MAX production, with manufacturing volumes for other aircraft remaining flat or even declining, Root wrote in an Aug. 27 report.
The outlook from credit analyst Root matches what a growing list of sell-side stock analysts are expecting. A trio of AllianceBernstein analysts told their investor clients on Aug. 24 that they are not seeing substantial improvement in prospects since a June industry report. Doug Harned, George Zhao and Caius Slater said they expect Airbus and Boeing to eventually deliver most airplanes currently in production, as airlines have already paid in cash and the aircraft have been built for specific carriers. But they see risk rising later this year and into 2021, with airlines reluctant to put more cash into progress payments.
“Even with high replacement demand, which we expect, production rate plans at Airbus and Boeing through 2023 are too high relative to deliveries,” they said. “This is particularly an issue for Airbus, which intends to produce 40 A320neos per month through 2021. Airbus was able to deliver those in July, but we do not believe that rate can be sustained. It is an issue for Boeing and Airbus on widebodies, [as both] are already delivering far fewer airplanes than they are producing. If one expects a global resolution of COVID issues in 2021 that could change the outlook. But we see the odds as against that.”
Agency Partners analyst Sash Tusa wrote to clients: “We remain very surprised that, given an arguably weakening COVID-19 backdrop, and impending oversupply as Boeing restarts 737 MAX deliveries, Airbus should even be talking about raising production rates, let alone from as early as the second half of 2021. We suspect that Airbus and Boeing are now playing a potentially damaging game of chicken: Neither will cut rates until airlines agree to pay the costs of the deferrals, especially since premature cuts might cede deliveries share to the competitor.”
Airbus so far cut rates for the A320neo family from 60 to 40 aircraft per month, for the A350 from 10 to five, and for the A330neo from five to around two. But Tusa argues more painful reductions have to be made. He predicts that A320neo rates will shrink to 24 aircraft per month in 2021, while A220 output will go from four per month in 2019 to two, new-build A350 aircraft will be down to three, and A330neo production will drop to two.
In 2025, Tusa expects Airbus to produce no more than 46 A320neo family aircraft monthly, as well as six A350s, six A220s and three A330neos.
However, Charles Armitage, European Aerospace and Defence analyst at Citi Research, has a different view. “What [Airbus] is doing is not stupid,” he says. “If you believe that 2,400 aircraft is the demand over the next four years, then it is a sensible thing to do.” He argues that it is not very painful to build up inventory in a low-interest-rate environment because it saves Airbus the difficulty of cutting back and then rebuilding in a few years and does not disrupt production unduly. The question is whether the market will recover to the expected level and when it will do so. “There are huge uncertainties,” Armitage says.
Another twist comes from the opportunities for order cancellation and deferral stemming from the MAX debacle. “Earlier this year, we thought having 737 MAX exposure was a liability for U.S. airlines, and in January we downgraded Southwest Airlines on this,” Vertical Research Partners wrote Aug. 19. “Now we view a MAX orderbook purely as a source of fleet optionality, a valuable asset when the demand outlook is less certain than ever.”
What Vertical’s Rob Stallard, Karl Oehlschlaeger and Darryl Genovesi mean is: Because Boeing has failed to meet its contractual commitments, firm MAX orders have become options for airlines to take MAX deliveries “if and when they see fit.” Vertical’s forecast is that Boeing will deliver only 45 MAXs this year and just 192 in 2021. That would equate to 53% of the currently parked MAX inventory, with the rest being delivered in 2022.
“While this means that our 737 production forecast is more elongated than Boeing’s plan of getting to 31 [aircraft per] month in early 2022, we still think there is downward risk to our estimates,” they add. “For airlines to be taking these 237 new MAX aircraft in 2020-21 is dependent on [recertification] timing, demand recovering, no further coronavirus waves, and no additional trade war flare-ups.”
According to the Aviation Week Intelligence Network forecast, the active global air transport fleet will be 10% smaller at the end of 2020, compared to a year earlier, thanks to a blend of retirements, temporary storage and a precipitous drop in deliveries. Looking further ahead, lower demand coming out of the novel coronavirus pandemic will reduce new-aircraft deliveries 30% in the decade ahead compared to pre-downturn projections.
Global passenger and cargo carriers will have 27,300 aircraft in service on Dec. 31, down from 30,500 at the start of the year, the revised figures show. The net decline of 3,200 aircraft includes a projected 720 retirements, or 2.4% of the active fleet.
Deliveries this year are projected to total just 895 aircraft. The timing of the Boeing 737 MAX return-to-service approvals could affect this number, as the manufacturer has more than 450 built MAXs sitting in storage that it would very much like to hand over to customers. Assuming regulators do not start granting MAX approvals much before late in the year, however, an aggregate delivery total of fewer than 1,000 new aircraft is a strong possibility.
If so, it would mark only the 10th time in the last three decades that air transport manufacturers jointly handed over fewer than 1,000 aircraft in a calendar year—and the first time since 2006. Last year’s total, held down by the MAX delivery halt that kept some 400 aircraft from entering service, was 1,425.
The drop in deliveries and jump in both retirements and temporary removals will leave the year-end 2020 global fleet of aircraft certified for 19 or more seats on par with 2015’s fleet size, underscoring the pandemic’s ramifications on global air traffic demand.
While retirements are on the rise, many stored aircraft are expected to rejoin operators’ fleets to support demand recovery. Aviation Week projects 2,100 aircraft returning from long-term storage by 2023.
The global fleet is projected to grow at a compound annual growth rate of 2.4% in 2021-30, resulting in a fleet of 38,300 aircraft, the forecast says. New deliveries will total 16,200 during the decade—about 30% lower than prepandemic estimates.
Widebody deliveries likely will total about 2,500 during the 10-year stretch, which is 42% below the prepandemic forecast, reflecting the slower expected return of long-haul demand. Narrowbody deliveries will top 11,500—a 28% decline compared to prepandemic calculations. Regional jets, already on the decline, thanks largely to upgauging trends, are projected to account for 1,150 deliveries, or 38% less than before the COVID-19 outbreak.
In other words, there is room for an annual average of 1,150 narrowbody deliveries for the entire industry, 250 wide-bodies and 115 large regional jets. In 2018, Airbus and Boeing combined delivered 1,225 narrowbodies (and only 816 in 2019 because of the MAX grounding). The two OEMs handed over 380 widebodies in 2018 and 426 last year, showing the degree of contraction that is needed to adjust to the new demand level.
Airlines will permanently retire nearly 9,200 aircraft during the decade, the Aviation Week forecast shows. Calendar-year peaks are projected to come in 2028 and 2029, with each year expected to see more than 1,000 retirements.
The average of 920 retirements per year during the coming decade is a notable jump over recent figures. Aviation Week data shows that annual retirements in 2015-19 averaged 657 before climbing to a projected 720 in 2020, in part due to the pandemic’s fallout.