MIAMI — With the 2014 Farnborough air show now formally wrapped up, our team talks takeaways and the final order tally in our show wrap-up.
Lessors Dominate Headlines:
The majority of the order-action from this show came not from airlines, but from leasing companies. Indeed, the likes of AerCap, ALC, Avolon, BOC, CIT Aviation, and SMBC were busy throughout the week. In particular ALC, Avolon, and CIT Aviation bought from the big two, including competing products.
As to why lessors assumed most of the action, two related reasons. First, all of the present generation of in-demand aircraft (737 MAX, A320neo, A330neo, A350, 787, 777X) are all sold out at least until 2019, and in many cases past 2021.
There’s no need for an airline with replacement (or growth) needs to commit capital to aircraft purchases that far out when it could be de-leveraging, or investing in other product factors as well. We still expect lots of fleet replacement action in North America, Europe, and particularly China but not quite yet. Second, at any given moment in the airline industry, there exists a balance of power between leasing and buying aircraft.
Buying aircraft tends to be more attractive (from a cost perspective), when the cost of capital is low and access to capital is high. Leasing in other conditions. Given the slowdown in economic growth in many emerging markets and tightening access to capital, the balance of power is shifting towards lessors.
The French-Canadian manufacturer surprised with 76 total orders and purchase commitments for the show, far outdoing its normally lackluster showings at such events. The majority, 71, came from the company’s Cseries jet, which has recently been battling its share of demons in flight testing. The orders, though none of them firm, bolster support for the airplane and mutes critics that have been too quick to write the project off.
Of particular note, aside from the surprisingly high number, were the orders from China. Bombardier has been working on building inroads to China for some time now, and it appears to be paying off a bit. That, plus the company has been providing support to COMAC for its projects, leading to rumors that the two could wind up in a more substantial tie-up down the road.
Still, that places it in fifth for order count, behind competitors ATR and Embraer (plus Airbus and Boeing). Plus the Q400 turboprop didn’t do so hot, only tallying up eight orders despite the company now having three distinct varieties of the turboprop (regular, high density, cargo combi). It’s CRJ-900, which the company says provides a better value proposition against the re-engined Embraer E-Jet E2s, failed to book any orders, though an undisclosed order for 24 CRJ-900s was revealed before the show (full disclosure, Bombardier flew the two-strong Airchive Farnborough team to and from the show on the jet).
Still not enough:
Orders for the A330ceo and 777 classic are likely to make Airbus and Boeing, respectively, rather happy. But while encouraging, the orders don’t bring either program anywhere close to closing expected production gaps between the current and coming generation types. Boeing’s 777 classic orders, for example, don’t even amount to two months worth of work. It needs to fill about three years. Lots of work still to go here. Despite a good show, locking in 130 commitments and options, Embraer is in a similar position between the E-Jet and the new E2, facing a one-year gap.
That being said, we are confident that all three manufacturers will manage to fill their respective production gaps. Ultimately, selling an aircraft with higher operating costs is all about lowering capital costs (as Delta so vividly illustrates). For the case of Boeing and Airbus, since the 777 and A330 production lines are fully amortized at this point, each manufacturer can literally sell the aircraft at marginal cost. Even up against fuel efficient 787s and A350s, 60%+ discounts on current generation widebodies is a steal.
No real surprise, but the formal launch of the A330neo will eventually kill off the A350-800. No one said it exactly, but it’s going to happen. On the other end, the company strongly hinted at the A350-1100 becoming a reality down the road. Related, the A380neo, which Emirates has been badly pining for, is still on the table too.
VLA Market nears Absolute Zero:
Both Airbus and Boeing have struggled to sell the A380 and 747-8 respectively over the past 18 months. Neither aircraft won an order at the show and Boeing’s 747-8 appears destined to fade into the sunset once an Air Force One replacement order is completed. The A380 lives on for now, though serious orders are unlikely to come without a re-engining (the 777X has the A380 beat on operating costs including capital). But re-engining would be a tough pill to swallow for Airbus, who have already invested billions into a program that won less than 330 orders.
Order tally (includes options and converts to firm):
A320 family (unassigned): 43
ATR 42/72 600: 130
737 MAX: 111
ARJ 21: 5
E175 E2: 100
E195 E2: 50
Viking Air, 2:
Twin Otter: 2
Show Total: 1,185