Commercial Aerospace Industry Marches Onwards and Upwards

In the year that Qatar Airways will receive delivery of the first A350XWB, the latest and most technically advanced plane in the now long list of Airbus aircraft developments, it seems to me that the commercial aircraft industry, and the many UK companies that are involved in it, is not only in rude health but will likely continue to move from strength to strength.

New orders received by both Boeing and Airbus during this year are once again likely to surpass earlier expectations that both companies had at the start of the year. And while it is not impossible that a slowing of the global economy could have some impact on the commercial aircraft industry, with the need for more modern and efficient planes for airlines to operate, I am in little doubt that the outlook will continue to look very positive.

Airbus will announce Q3 results on November 14th but Q3 results published by Boeing earlier this week in which the Chicago based company raised FY14 guidance at the same time as reporting an 18% jump in profits. Unfortunately, analysts looking deeper into Boeing Q3 results appeared far more concerned on lower than anticipated reported cash flow by the company than they did about rising profits and the shares fell as a direct result. So be it. Clearly, as the programme and number of variant step up costs on the 787 programme continue to increase it may be some time yet before benefits are seen. In part the cash impact may well be reasoned by the need to increase levels of parts stock ahead of the production launch of new variants but quite frankly, given Boeing’s long experience of developing excellent aircraft and bringing them into production and notwithstanding the fact that the 787 is very different than anything that has gone before, I remain unconcerned about the level of cash flow.

In saying this I suspect that we need also to remember that the company had much earlier forecast operating cash flow would be lower this year – $7 billion against a forecast of $8.5 billion made for last year but which actually delivered a very healthy $9.7 billion. I could take the view that analysts may have overreacted a touch but I’ll just keep my head down and say there we are. Note too that Boeing CFO, Greg Smith did also say at the results conference call that cash flow in Q4 would be very strong.

Bringing completely new aircraft into production is a fraught time for any aircraft manufacturer and there is no denying that Boeing has had a very tough time delivering the 787. While I am in no doubt that the bad times are all past it will of necessity be some considerable time yet before the company will be able to claim to be making a profit on the 787 programme. Even so, with 850 of the 787 aircraft on order there should be few doubts about the ultimate ability to achieve real profits success on this aircraft.

Airbus also suffered a variety of problems through the development of the A380 aircraft but what emerged is considered by airline customers and those that have flown in it as a superb aircraft worthy of all the expectations placed on it. Given lessons already learned, I do not expect to see similar problems emerge on the A350 XWB programme anticipating that like most other Airbus programmes, the transition from development to production and thence to delivery and airline operation will be smooth.

True, profitability on the A380 programme is still some way off yet but given that the aircraft is likely to be in production for a great many years I remained comfortable about the prospects of achieving that particular goal. In any case, when you have so many other aircraft programmes making considerable amounts of money such as the A330 and A320 families of aircraft? A not dissimilar situation exists at Boeing which not only has 787 production growing but also 777 and 737 programmes going from strength to strength.

Perhaps the real point to note is that when an aircraft programme is so radically different to anything that has gone before as both the Airbus A380, Boeing 787 Dreamliner and Airbus A350 XWB clearly are, there needs to be an external acceptance that unless Airbus and Boeing takes a degree of risk that they clearly have in these respective aircraft development programmes, they will quickly lose the technology advantage to competitors who, because they may be sovereign owned, will be prepared to take such a risk.

I have watched many commercial aircraft programmes over the years some of which all the way from cradle to grave. I am pleased to say that while there have been one or two that failed to attract a sufficient level of sales, there have been few if any that I would call real failures. It is of course true that not all made the sort of money that their manufacturers might have wished. But could I imagine a world today without the Airbus A380 or the Boeing 787 Dreamliner? I have yet to actually fly on either aircraft but with knowledge that the 787 is now settling down very well in airline service and, as already mentioned, that the A380 also well loved by its operators, we should take great satisfaction that if airlines are happy and their passengers are happy then chances of selling more planes to other airlines increase.

Without being able to provide the exact figures, the number of orders received for the Airbus A380 currently stands in the region of 330 planes of which I assume about 196 aircraft have now been delivered to airline customers. By the same token I wonder whether I could have imagined ten years ago that Boeing would be sitting on an order backlog worth $430 billion for commercial jets and that Airbus would end last month sitting on forward orders covering a record 5,559 aircraft. The answer is no. Neither could I have possibly imagined that Boeing would be forecasting long term world aircraft demand in the 2014 to 2033 period for 36,770, and that Airbus would be forecasting a slightly lower number of 31,350 aircraft being required over the same period.

These are remarkable forecast and with both companies having been doing forecasts such as this for many years they should be seen as pointing the way to where the commercial aircraft industry is going over the coming years. The UK is very fortunate to have a very strong position in the commercial aircraft industry, and apart from Airbus itself and its production of wings at Broughton in Wales and of course Rolls-Royce and Messier-Dowty for their not insubstantial involvement, may I mention the late, great Sir Arnold Hall, the long-time head of Hawker Siddeley for his inspiration in leading UK industry into the then Airbus partnership and for all that has subsequently followed.

The future looks good – have a nice weekend,

CHW (London 24th October 2014)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710 779785

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