MIAMI — Qatar Airways took delivery of the first Airbus A350-900 yesterday, marking the entry into service (EIS) for Airbus’ first new-build aircraft since the A380 was launched by Singapore Airlines in October 2007.
Given the momentous occasion, we thought the time ripe to provide a comprehensive analysis of the A350 program.
Project Execution Exceeds That of 787 But Specifications Weakened
Airbus had an advantage over Boeing in executing on the A350 project given that it could incorporate lessons learned from its own struggles with the A380 as well as from Boeing’s problems with the 787 Dreamliner. We spoke with program head Didier Evrard at the Farnborough Airshow this past July, and he noted that Airbus had taken an extremely cautious approach with the A350’s development.
Yes, we have learned a lot from the previous programs, particularly from the A380. We’ve defined a very clear process for improvement, which was about program management, customization, which was about stability of the design, focusing on maturity, meeting maturity gates in a straight manner. And sometimes, we had to take hits at the early stage of the program to protect the back end of the program. And it’s clear that since two years, we have had a very stable plan for development, but this did not come just by chance. It came because we had really adhered to these principles. For instance we had a new block of design tools, [and] we had invested massively in these design tools that we shared with our worldwide suppliers. We developed new customization policies and we have built our [development] principles on a very rich platform, which reduces a number of issues that we have to deal with. And this platform is able to accommodate a large variety of layouts for our customers without changing its foundations. So this enables us today to be rather confident at the start of the production… and at the start of the customization… [It’s] not just the number of aircraft, which is great, but also the number of different customers that we are addressing. Plus we have our customer definition center in Hamburg, which helps a lot from that point of view. So it’s about lessons learned, it’s about maturity, not cutting corners, and trying to provide strategy. But it’s also a lot of work – we’ve had a very stable team from the very beginning of the program and a strong management as well as our regime of partners.
As a project, the A350 was less risky than the 787 by design. Airbus incorporated far fewer new and unproven technologies, and where it did use the same technology as the 787, Airbus’ implementation was frequently more conservative. For example, the A350 has twice as many lithium-ion batteries as the 787, but more conservative power and energy levels. This is not to discount the similarities between the two aircraft. The 787 and A350 share several design solutions, including a carbon fiber reinforced plastic (CFRP) – based structure, a wing designed with high lift arrangement, and similar avionics system. But where Boeing ran into trouble with its electrical systems architecture for delivering power to the 787’s various system, Airbus found success with a conventional system passed on from the A380.
All of this resulted in an unusually smooth systems testing period for the A350, which has enjoyed a trouble-free flight test period. Whereas Boeing had to work on perfecting its systems on the 787 during testing, Airbus could instead focus on delivering systems and aircraft maturity at EIS, having long before perfected most elements of the systems.
Airbus’ conservatism and “Stop and Fix” mentality have taken their toll however, with the result an 18-month delay from the initial planned EIS of early 2013 to the present. Like Boeing, Airbus ran into difficulties with manufacturing its CFRP fuselage for the A350 as well as with other new technologies implemented in the aircraft, and accordingly, the timeline of the A350 slipped and slipped, three to six months at a time.
Even more troubling was the steady creep in weight as the program matured, with operating empty weight (OEW) 6-7% higher than planned at launch. This is still below the 9% at present for the 787 and certainly below the 12% weight increase the 787 had at launch, but substantial nonetheless.
The effect of this can be seen in the 350 nautical mile reduction in the A350-900’s published range earlier this year despite a shift to a lighter passenger configuration and an increase in maximum take off weight (MTOW) from 268 to 275 tons. All told, the A350-900’s effective range was reduced by roughly one hour, and while the A350-900 will still be able to perform 95-97% of advertised missions, this range reduction played a substantial role in Emirates’ cancellation of an order for 70 A350 aircraft earlier this year. While any such weight challenges have not yet become apparent publicly on the A350-1000, our sources at Airbus and its suppliers indicate that the A350-1000 will be overweight by at least 7-8% as it heads towards EIS in 2017.
We also spoke with sources at Rolls Royce, who revealed that the Rolls Royce Trent XWB has met most of its performance targets through flight testing, with specific fuel consumption (sfc) within 0.5 percentage points of revised targets from 2013. However, the A350-900 will likely EIS with higher fuel burn than advertised due to the weight challenges noted above.
Airbus has already ramped up well on the A350’s production in advance of EIS. Additional aircraft for Qatar Airways and the first A350s for Vietnam Airlines and Finnair are already on the final assembly line (FAL) in Toulouse as Airbus has progressed at a rate of two aircraft started per month. In the new year, Airbus will increase to three new aircraft started per month, steadily ramping up thereafter until it reaches a production rate of 10 aircraft per month in 2018, four years after EIS. However, we believe that Airbus will move to push A350 production rates higher to boost cash flow in the latter half of this decade, and speed up the break even target date (currently 2020).
We think Airbus will eventually target rates of 11 or even 12 aircraft per month, however the recent decline in fuel prices, especially if persists through 2015, could alter the timing of those rate increases based on cash-strapped airlines delaying long haul fleet replacement.
Airbus Ends 2014 with Order Momentum
From a backlog perspective, 2014 was certainly not a strong year for the A350, due primarily to the cancellation of an order for 70 aircraft by Emirates. However, Emirates was not the only airline to eliminate an A350 order during 2014, as Hawaiian Airlines also cancelled its order for 6 A350-800s, and the Alitalia/Air One order for 12 A350-800s was removed from the books as well. Thus through the first 11 months of 2014, the A350 looked to be in for a rough year, only winning orders for 20 A350-900s (10 from Kuwait Airways, 8 from Iberia [announced in 2013], and 2 from Libyan Airlines).
But the last two months of the year brought a flurry of activity, with Airbus winning an order for 4 A350-900s from Air Mauritius, a top-up order for 8 additional A350-900s from Finnair, and notably, 25 A350-900s from Delta. With the additional orders, Airbus ended the year with a net decline of 31 orders for the A350, still leaving the program with 786 firm orders (and 288 purchase options) at EIS.
The A350-900 order from Delta was a big win, as it represented the most recent head-to-head competition between the A350-900 and the 787-9, which Boeing claims has met or exceeded performance targets. Both aircraft are of course excellent, with Boeing largely shedding the issues that plagued the 787-8, but as our analysis showed, the A350-900 more than holds its own in a head-to-head comparison.
Even as Emirates cancelled its order (dealing the A350-1000 a more substantial blow), reports emerged that the airline would re-consider the A350 in a new sales competition next year, presumably searching for a medium haul widebody to complement its two pronged fleet of A380s and Boeing 777-300ERs/777Xs. While Emirates is certain to reconsider the A350-900 in particular (the A350-1000 makes little sense given the large numbers of 777-8X and 777-9X aircraft Emirates has on order), our view is that the 787-10 should be favored in any competition for a regional and mid haul widebody aircraft, given its superior operating economics on routes that it can fly. The A330-900neo could also play such a role effectively as Delta’s recent order indicates, and it would also require a smaller cash outlay on the part of Emirates.
Despite Emirates’ cancellation, year-end sales and the good feelings surrounding the EIS should soften the blow to the overall program. Moreover, given Airbus’ famed “Fifth Quarter” where lead salesman John Leahy announces a slew of orders at the airframers annual press conference in mid-January, we cannot count out the the possibility of additional A350 order announcements in the coming weeks, perhaps filling the slots vacated by Emirates from 2019 onwards.
A350-800’s Demise Offset by the A330neo
The A350-800 is dead, killed off by the A330neo. Technically, there are still 26 outstanding orders for the type (10 from Yemenia, and 8 apiece from Asiana and Aeroflot), but both Aeroflot and Asiana have up-gauged a portion of their A350-800 orders to the A350-900 in the past and could likely be easily persuaded to do so. Yemenia is in financial shambles, and will likely convert or cancel its order outright.
Recent history and basic aeronautical science show that aircraft shrunk from the base variant (whether the 737 MAX 7, A319neo, or earlier the 737-600 and A318) tend to suffer from poor operating economics relative to the base model. Even the 787, for which the 787-8 was technically the base model, is likely to gain most of its sales from the 787-9 and 787-10 moving forward. 75% of what Airbus wanted to achieve with the A350-800 from a strategic perspective can be met by a mix of the A350-900 and the two A330neo models. While customers will have to sacrifice some range and or take on increased capacity with either alternative, few routes need the A350-800’s excess range over the A330-800neo, let alone over the A350-900. Moreover, by eliminating the A350-800, Airbus will improve its future financial performance (especially cash flow) through two mechanisms.
First, it will avoid a substantial cash outlay (perhaps as much as $1.5 – 2 billion) that it would have spent on developing the A350-800 and retooling its production to ramp up production of the type. Additionally, the A330-800neo and A330-900neo have already had their production line development largely written off and are relatively cheap to develop ($2.5 – 3 billion). For that reason, the A330neo is likely to be a positive contributor to cash flow in a way that the A350-800 would not have been. Until 2020, each A330neo sold in place of an A350-800 generates millions of dollars of net excess cash flow.
The A350-900 is a Powerhouse
While Airbus may face challenges on the smallest and largest members of the family, the base variant of the XWB is in fantastic shape. With 585 firm orders (plus 16 likely conversions), the A350-900 represents 74.4% (76.5%) of the overall backlog. For its core mission of replacing the Boeing 777-200ER and A340-300, it is clear that the A350-900 has been a resounding success. Amongst its largest customers, the A350-900 will (at least partly) be replacing 777-200ERs and LRs at Singapore Airlines, Japan Airlines, Air France-KLM, Asiana, Vietnam Airlines, and Thai Airways. Meanwhile, amongst A340-300 customers, the A350-900 will play a replacement role at Air France – KLM, Lufthansa, Cathay Pacific, Finnair, China Airlines, TAP Portugal, Kuwait Airways, SAS, Iberia, Air Mauritius, and Sri Lankan Airlines.
Admittedly, the A350-900 shares this replacement market with the 787-9, but there is no doubt that it has been a resounding success. We believe that Airbus will eventually easily surpass 1,000 sales for the A350-900 and perhaps even approach 1,500 sales in an upside case scenario. This is a far cry from the tepid market response to the A350 Mark I, though some concepts from that offering have been resuscitated by the A330neo.
In terms of its cost competitiveness, our most recent estimates regarding the A350-900’s operating costs based on our proprietary model were released in our analysis of the Delta widebody order. You can find the summary table here, and the assumptions used can be found in the main body of the article. While the recent drop in fuel prices affects some of the specific numbers in the table, we believe that our broader conclusions are still applicable. The table illustrates the competitive parity between the 787-9 and A350-900, and the A350-900s abilities as a 777-200ER/LR replacement.
Furthermore, an operating cost analysis does not even take into account the A350-900’s superior revenue generation potential versus the 787-9. The A350-900 will seat anywhere from 5-15 additional passenger (315 in a two class configuration) versus the 787-9 depending on configuration, as well as superior cargo capacity. The A350-900 is the most capable aircraft in its class, to the point that it can even function as a viable 747-400 replacement for certain airlines looking to down-gauge on certain routes or boost frequency. For example, Delta will use the A350-900 to ply many of the same missions currently run by 747-400s inherited in its merger with Northwest Airlines.
The A350-1000 is a Viable Aircraft but Has Been Outflanked by the 777X
The largest A350 variant has come into its own since boosting the aircraft’s specifications back in 2011. While it was struggling at the time, subsequent orders have boosted the aircraft’s viability. At present, Airbus has 169 firm orders for the A350-1000, including 37 from Qatar Airways, 35 from United (converted from A350-900s), 26 from Cathay Pacific, 22 from Etihad, 18 from British Airways, 13 from Japan Airlines, 10 from Asiana, 5 from Air Lease Corporation, and 3 from Air Caraibes.
169 orders by itself is a firm foundation for a program that many speculated was destined for cancellation as recently as 2012, but unfortunately, the A350-1000 cannot escape the competitive glare of Boeing’s 777X. The 777-8X is the same size as the A350-1000 (and similar to the present-day 777-300ER), though it offers an additional 1,200 – 1,500 nautical miles worth of range. However, the A350-1000 holds a substantial edge in operating economics (our most recent estimates, not publicly released, place the figures at a 6-7% cost per available seat mile [CASM] delta including capital costs), even after taking into account the fuel burn improvements offered by the new General Electric GE9X engines.
The 777-8X is likely to be a niche aircraft for the few operators that require an ultra long haul (ULH) aircraft, and to date, only 43 777-8Xs have been ordered (35 by Emirates, 8 by Etihad).
The core 777-9X presents a far more interesting competitive comparison, with a stretch that offers anywhere from 40-50 additional seats versus the A350-1000. To date, Boeing has sold 243 777-9Xs (115 to Emirates, 50 to Qatar Airways, 21 to Cathay Pacific, 20 to Lufthansa, 20 to ANA, and 17 to Etihad), outselling by itself the A350-1000. Moreover, since it was launched, the 777-9X has effectively won three of five head to head order competitions with the A350-1000 (ANA, Lufthansa, and Emirates [in a manner of speaking] while Airbus won the smaller Japan Airlines and British Airways contests).
Moreover, Boeing won roughly an equal split with the A350-1000 amongst Middle East customers Qatar Airways and Eithad, as well as at Cathay Pacific. And we do see British Airways as likely to eventually order the 777-9X given space constraints at its London Heathrow home base.
Our most recent analyses of the 777-9X’s operating costs versus those of the A350-1000 were released in March and April, corresponding respectively to the ANA order and an initial consideration of the Delta widebody RFP. While these analyses were conducted assuming a higher price of fuel than at present, the broader conclusion of a small but statistically significant CASM advantage for the 777-9X still holds, especially given that lower fuel prices will narrow the trip cost gap with the A350-1000.
Both aircraft hold their merits, but from an airline fleet planner’s perspective, the 777-9X may hold a slight edge, if the extra space can be filled. The 777-9X does have higher trip costs, but that is offset by the lower CASM and extra revenue potential (both from additional passengers and from larger cargo capacity), assuming that an airline can take advantage of that potential. For example, Japan Airlines, operating from a capacity constrained hub no less, decided that given Japan’s economic and demographic trends, that the 777-9X was too much airplane for the market demand in its network.
So there are clearly airlines for whom the A350-1000 makes more sense, but from a long run perspective, we think that Boeing will be able to outsell the A350-1000 with both 777X models by a 55-45 or even 60-40 ratio given present conditions. That being said, the next couple of years may be slow for 777X and A350-1000 sales given Boeing’s desperation to fill its 777 production gap by selling 777-300ERs at cost, and the reduction in fuel prices causing airlines to delay fleet replacement plans. Even allowing for the fact that Airbus can theoretically bracket the 777-9X with the A380 on the (extremely) high end, Boeing appears to have seized the upper hand in this segment.
Enter the A350-1100?
While Boeing today holds the upper hand, Airbus could counter with a stretched A350-1100, which would close the capacity gap with the 777-9 while restoring the overall economic advantage for the A350 program over the 777X. Airbus needs a 400-seat A350 variant, but achieving that with the current Trent XWB engines is complex.
Without improvements in specific fuel consumption (beyond the usual 1-3% from performance improvement packages), the A350-1100 would have to sacrifice range like the 787-10. Alternatively, Airbus could increase MTOW to maintain, which would be prohibitively expensive given that it would require a stronger wing and higher thrust engines.
One alternative could be to use Rolls Royce’s new Advance engine, which we believe will be used to power the A380neo. Using the Advance, which would offer a 5% fuel burn improvement over the present day Trent XWB, allowing Airbus to offer an aircraft cost-competitive with the 777-9X with a similar range.
Even with Boeing’s ability to offer superior pricing on the 77X, with a 2021 or 2022 EIS, such an A350-1100 would bring Airbus to parity in the segment. We believe that Airbus will in fact launch both an A380neo and an A350-1100, both powered by the Rolls Royce Advance and targeted for EIS in the early 2020s.