Tag Archives: A320

Bombardier CSeries program vs. A320/737 duopoly? Closed by 2017.

In a few days (March 7th) Bombardier will provide a CSeries program update. I do not normally follow very closely this program, but I was reminded of it twice during the last month.

The first time was when a colleague shared the following article: “Bombardier CSeries: How will Boeing/Airbus Duopoly Respond?“.

The article is interesting as long as it tries to make a strategic analysis of the possible moves that Airbus would arguably have to make because of the entry into market of a new entrant (taking Boeing 737 strategy as similar to Airbus’). That theoretical exercise is… an exercise.

I found some arguments difficult to sustain:

  • “Assuming that Bombardier effectively executes its 50% market-revenue capture“.
  • Bombardier CSeries aircraft is positioned as value advantaged in the commercial airplane manufacturing market space.  Since the CSeries offerings deliver superior value to customers relative to competitors at lower list prices, Bombardier’s go-to-market pricing strategy is consistent with a penetration pricing methodology.  Bombardier’s aggressive entry tactics for the CSeries aircraft offers a credible threat to existing Boeing and Airbus revenue.”
  • “With over 382 commitments for CSeries aircraft“.

I must say that I am no expert in commercial aviation market, but from my point of view, here are some rebuttals:

  • To start with, I would take as commitments only firm orders, of which the CSeries hasn’t got 382 to date, but 180 a/c (less than half).
  • I would say that an aircraft is positioned or perceived as “value advantagedwhen the market actually responds to that statement. See in the graphic below the market response to A320, 737 and CSeries since the launch of the CSeries program:
CSeries, 737 & A320 net orders and market shares.

CSeries, 737 & A320 net orders and market shares.

In the table and graphic you can see that since the CSeries launch it started piling orders in 2009. If we compare its net orders to Airbus and Boeing ones in these years, the CSeries has captured a 3.2% of the market share, in contrast to 50.5% of Airbus A320 family and Boeing 737 46.4%. I would not derive from these figures that the CSeries is perceived as value advanted product.

It is curious to note how 737 and A320 families have been alternating market share lead year by year in the recent years.

“Price will go up also when delivery dates are confirmed, and we’re flying the aircraft. Whether we like it or not there is a Boeing discount. We’re being told [by our customers]: “We want 100 [aircraft], but because you won’t be on time, we want a discount.” I say, “Listen, we will be on time. We will be performing as promised. So, if you want to wait, wait.”

If I take that statement as truthful, and having myself estimated for years Boeing Commercial discounts, I would not describe Bombardier as “aggressive”.

As I said to my friend, rather than doing this strategic analysis about CSeries versus A320, I would have done it in the past about A320neo and 737, and now about A350 vs. 777 (where there must be really going this kind of analysis), take bold assumptions and check in a few years how the strategy of each company has evolved.

The second time was after this tweet from the aerospace analyst Scott Hamilton:

My impression, despite of Bombardier’s earnings webcast information, is that:

  • if now firm orders stand at 180 a/c,
  • if the plan to deliver 20-30 a/c in the 1st year and 120 a/c after 3.5 years
  • if the customer interest, in comparison to A320neo or 737MAX, stays as it has been in previous years…

… the programme is closed by 2017 (1).

****

(1) A bold statement for my forecasting career, this one to be checked with some colleagues down the road.

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A380, a game-changer

Probably you remember having seen in some magazines ads paid by airlines showing their luxury A380 cabins. Singapore Airlines was the first one in launching this kind of branding campaigns.

According to the definition by the Business Dictionary: Branding aims to establish a significant and differentiated presence in the market that attracts and retains loyal customers.”

Few days ago, I received an email with publicity from a company that operates the A380. As you can see, they go a step beyond: they now use the A380 not only for branding but for advertising a concrete product, a specific flight. In one of the destinations offered you may see a label indicating that the flight is served by an A380.

Ad: flight served by an A380.

From the Wikipedia: Advertising is a form of communication intended to persuade an audience to purchase or take some action upon products, ideas, or services.”

If they use it there must be a reason behind. I have heard from colleagues that, in fact, the companies already operating it in some of their routes are noticing that repeatedly the connections offered by an A380 show higher passenger load factor or occupancy rates than the same connections when offered by a different aircraft.

I have never seen anything like this before. It could have happened when the B-747 entered into service in the 70’s, but I was not here then; I didn’t witness it. It doesn’t happen now; not with the 747 nor with other aircraft. I certainly do not base my buying decisions, when I have to flight within Europe, on whether the airline operates a B-737 or an A320 (maybe I should!). But exactly this is happening in the case of the A380. And airlines are profiting from it.

In a previous post I wrote about the difference in current forecasts for the A380 that Airbus and Boeing report (Boeing has steeply reduced its reported forecast in the past decade). If the appeal of the aircraft continues to bring customers in, we could have a reason to believe that in end the orders figure of A380 maybe rather high. Only time and the market will let us know.

In its website, Airbus dubs the A380 as game-changer. One could expect this when a company is talking about one of its products, however when others are basing its branding and advertising on it, we seem to be really facing a game-changer.

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Salesmanship at Airbus

Yesterday I saw John Leahy, Airbus sales chief, in the corridors of the company for the first time since I arrived to Toulouse. At night, I found via Twitter this special report about him by Reuters.

The report is a very interesting piece, and reading in it about Jean Pierson reminded me of a very curious story I heard some years ago and I wanted to recall for you (this is the only reason for this post).

Pierson was the CEO of Airbus from 1985 to 1998. The story I am talking about appears described in the book “Boeing versus Airbus”, by John Newhouse (I haven’t yet read it but is in my wish list). Let me extract the summary that Reuters gave in this other article.

Pierson [...] was at US Airways’ headquarters for what he thought would be a short meeting to tie up a 400-plane deal, the anecdote runs.

At the last minute, US Airways’ then-chairman Stephen Wolf started arguing for a 5 percent discount on the selling price.

“Pierson began slowly lowering his trousers and saying ‘I have nothing more to give.’ He then allowed the trousers to fall around his ankles,” says Newhouse in his book.

Wolf replied: “Pull up your pants. I don’t need any more money,” and the deal was signed, according to the book. The author says he got the story from Pierson himself, and it was confirmed by another person present.

Shortly afterward, US Airways announced the purchase of 124 single-aisle Airbus A320 family jets with options for 276 more, a stab into the heart of Boeing’s competing 737 program. It put the European company on track to overtake Boeing in global orders only two years later.

If the situation ever calls for me to drop my trousers I hope there is no one nearby with the intention of reporting it in a book :-).

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Aircraft discounts and new entrants

Boeing has recently unveiled its latest Current Market Outlook (CMO): a commercial aviation market forecast for the next 20 years. It calls for 30,900 new aircraft deliveries worth 3.6 trillion dollars. Today, I wanted to write about aircraft discounts and the possibility of having new entrants.

Boeing Current Market Outlook.

Both Boeing and Airbus give their market forecast and backlog figures in what they call as list prices. If you take figures from CMO, you will reach average list prices for regional jets (31M$), single-aisle (79M$), twin-aisle (230M$) and large aircraft (306M$). These figures are in accordance to the prices published in their website (dating from 2008).

However, if you take their published numbers of deliveries each year and use the same prices, you would come to much higher revenues figures than the ones they publish in the year-end results: this is because aircraft makers actually sell the planes at a much lower price. How much lower?

Discounts

I took the figures of revenues, orders and deliveries of the last three years and tried to reach what would be the corresponding discount Boeing’s customers manage to get on average.

I assumed that new orders come with a 3% down payment in the year of the booking, while the remaining cost I assumed that was paid on the year of delivery (for simplicity I didn’t consider more intermediate payments, the 3% figure was taken from the AIAA paper “A Hierarchical Aircraft Life Cycle Cost Analysis Model” by William J. Marx et al.). I also used estimated figures for Boeing Commercial Aviation Services ranging from 2.2bn$ to 3.3bn$.

With these assumptions, I concluded that the average discount that would best replicate revenues figures for Boeing Commercial Airplanes with a minimum error was: 38%! (being the errors in revenues of: 0.05% for 2009, 3.2% for 2008 and 0.5% for 2007).

Thus, when figuring out the value of those 30,900 aircraft we could rather estimate it at 2.2 trillion dollars (instead of 3.6 trn$).

New entrants?

Randy Tinseth, BCA’s VP Marketing, was quoted in Flight Global saying that he expected at least one more competitor in the single-aisle segment. If there are more competitors, competition is going to be tight.

Today Boeing Commercial Airplanes and Airbus Commercial yearly revenues together approximately account for 70bn$. If their revenues are to grow with Boeing’s forecasted world airplane fleet growth of 3.3%, along the next 20 years the revenues of both companies combined would amount to 1.94 trillion dollars.

Considering that the whole market, factoring in discounted prices, was going to be 2.2 trn$, this leaves the rest of competitors a share of the pie of about 250bn$ for the next 20 years (excluding regional jets), this is just 11.4% of the market.

If we look at it on a per year basis: 12.5bn$ a year for all new entrants (CSeries, Embraer, MS-21, SSJ, C919, Koreans, Japanese…) would mean about 250 aircraft a year (compared to the ~380-400 single-aisle that each Boeing and Airbus are delivering per year).

There is room for one commercial success comparable to the 737 or A320 family, but there is not room for two… maybe this is why Randy says “one or two of those guys into the mix” (despite of the many more new possible players).

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The real comfort starts from 300 kg seats

In a previous post we introduced some comparisons of aircraft by its price per kilogram. There, we could see a trend in bigger aircraft being cheaper in this per kg basis. This raises the question: do bigger aircraft require less weight per seat? Are they lighter in a kg per seat basis?      

This is what intuition seems to tell us; after all, once you have put in place the engines, wing, tail… what can be the difference between a larger or smaller fuselage…     

Let’s use the same sources we used in the previous post and take the typical seat configuration that the OEMs (Original Equipment Manufacturer) indicate for each aircraft model. We get the following table:     

Aircraft OEW (kg) per seat.

 

Our intuition wasn’t very successful again. In the upper part of the table we find the A320 family and 737s aircraft (those used by e.g. Easyjet and Ryanair in short-haul routes). In the bottom of the list we find the A380, A340, A330, 787, 777…, the biggest aircraft.     

We see that the average is about 400 kg per seat. Let’s compare this figure again with cars, with the same cars as we did in the previous post. We now get following table:     

Cars empty weight (kg) per seat.

 

It turns out that cars also need around 300-500 kg of structure per seat (an average for these ones of 360 kg). Since most cars carry 5 passengers, here it’s easy to see the trend: bigger cars employ more kilograms per seat.     

Let’s go for a closer comparison:     

  • Small for small: take the A321 with 253 kg/seat, it is quite similar to the Renault Megane with 230 kg/seat.
  • Large for large: take the A380 with 527 kg/seat, it is almost identical to the Audi Q7 with 527 kg/seat.

One step further: The A380 used so far is the 3-class configuration with 525 passengers, but wasn’t there a high density configuration with 853 passengers in a single class? (This matches well with the jargon: cattle-class…). This configuration gives us 325 kg/seat… this is again almost identical to the 329 kg/seat given for the Audi Q7 in “high density” configuration, obtained with the optional 3rd row of seats, which only adds 35 kg to the weight of the car. Aren’t these remarkable coincidences? Is it a constant of the universe? :-)     

Let’s compare these results with buses, city buses and minibuses:     

Buses empty weight (kg) per passenger.

 

When we compare the figures of touring and city buses in an all-seated configuration we get again similar figures than planes and cars (~290 kg/seat ~ A320 family). If we take a fully loaded city bus we descend to the crude reality of mass transportation and complete lack of comfort (100 kg/seat; that is cattle-class…). We may notice as well that a minibus weighs less than a Q7 and carries twice or three times as many people.     

Let’s now see the train and subway. For this purpose, we’ll check the coaches R-142A and B of the subway of New York which are built by Kawasaki Heavy Industries (which a supplier for the Boeing787 as well). The train we’ll use is the AVE Series 100 of RENFE, built by Alstom, which was the first high-speed train ever used in Spain in 1992. See them in the following table:       

Subway and high-speed train weight (kg) per passenger.

 

The subway is below the levels of aircraft, but not that low as city buses. As far as the train is concerned: that’s another story, a luxurious experience (achieved with ~1,200 kg/seat) that can only be improved by Singapore Airlines Suites.     

Below we can see again a graphic with all modes of transportation compared, there we may spot some trends.     

Modes of transportation weight (kg) per passenger/seat.

 

We could say that comfort starts above 300 kg/seat… How heavy is your car?     

Different modes of transportation.

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