Boeing is flying high but SpaceX has lofty ambitions

In the global airframe manufacturing duopoly that is Airbus versus Boeing, the balance of advantage has unexpectedly shifted towards Boeing. But maybe they should both be worried about SpaceX.

Airbus saves Bombardier

On 06 November last year I wrote in these pages that the October deal between Airbus (EPA:AIR) and Bombardier (TSE:BBD) whereby Airbus would manufacture the new generation of Bombardier Series C jets at its own production facility in Mobile, Alabama (and thus avoid swingeing 300 percent US tariffs) was one made in Heaven. That way, Bombardier would be able to fulfil its order from Delta Air Lines (NYSE:DAL) – one of the top three US airlines – to supply at least 75 of its super fuel-efficient aircraft without impediment. Moreover, Airbus and Bombardier had complementary product portfolios. The potential for synergies if Bombardier were to come under Airbus’s wing (excuse the pun) seemed considerable.

The US decision to impose tariffs on Bombardier’s aircraft, as I discussed, had huge ramifications in the United Kingdom where Bombardier employs 4,000 people in Belfast, making it Northern Ireland’s largest employer. Wings for the C-Series jets are built in Belfast and about a quarter of the staff are involved with the project.


More good news followed for Belfast. In early December it was revealed that Bombardier’s Belfast plant had been chosen to develop a new engine component for Airbus’s A320neo family of aircraft. The deal will involve Bombardier providing Airbus with nacelles – engine casings – for the Pratt & Whitney (a division of United Technologies (NYSE:UTX)) aircraft engines which will power the A320neos.

This seemed like one up to Airbus in its never-ending struggle with its American counterpart. But it was inevitable that Boeing Corporation (NYSE:BA) would fight back. Boeing has been complaining for some time that Bombardier was dumping aircraft in the US market having received unfair government subsidies – hence the massive tariffs agreed by the US Department of Commerce back in September.

Boeing strikes back

Just before Christmas it was revealed that Boeing was in talks to buy Bombardier’s arch-rival, the Brazilian aeroplane manufacturer, Embraer SA (BVMF:EMBR3) at a price tag of “considerably more” than its $3.7 billion stock market capitalisation. Shares in Embraer surged by about 25 percent on the Brazilian market.

Such a deal would of course require the consent of the Brazilian government. On 05 January Brazil’s defence minister said that the Brazilian government would give its blessing to any partnership or joint venture between Boeing and Embraer that would boost sales of Embraer’s products but that it would rule out any change of ownership. About 17 percent of Embraer’s output consists of defence systems for the Brazilian government. Furthermore, despite having privatised the company in 1994, the Brazilian government holds a golden share in the company and could block any takeover. However, it is reported that Boeing is still looking to gain majority control[i].

Embraer competes with Bombardier in the market for sub-100 seater regional jets. It is about to embark on its own programme to build a new 100-150 seater regional jet which will compete head-on with the Bombardier C-Series.

The sales so far

At the Dubai air show in mid-November the battle to sell ever more efficient short-haul single-aisle aircraft erupted again. Both airframe giants announced new orders totalling more than $100 billion.

Airbus claimed to have signed its single biggest aircraft order for 430 A320s with deliveries to four different airlines. This included 237 A320neos and 157 of the slightly larger A321neos worth $49.5 billion at catalogue prices. The deal was signed with Bill Franke who leads Indigo Partners, the US private equity fund which has substantial stakes in Wizz Air (LON:WIZZ) (Hungary), Frontier Airlines (USA), Jetsmart (Chile) and Volaris (Mexico). Airbus announced a separate deal with Wataniya Airways of Kuwait for 25 A320neos just before the Dubai air show opened.

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Wizz Air will be taking 146 of those aircraft. It already has a fleet of some 90 aircraft and has revealed that it considered opting for the Boeing 737 but came down in favour of the A320. It seems that Wizz Air has real ambitions to take on Ryanair (LON:RYA) and EasyJet (LON:EZJ) as a European budget airline giant.

Neo stands for new engine option and supposedly these aircraft have lower running costs in an industry where the name of the game is to squeeze out costs as far as possible so as to compete on price alone.

Boeing announced that it had signed a deal to deliver up to 225 of its 737max aircraft to Fly Dubai, the short-haul sister airline to Emirates. This is Boeing’s largest ever sale to a Middle East-based airline. The Boeing 737max is a direct competitor with the A320neo. In total, Boeing signed orders worth over $50 billion in Dubai for 296 aircraft including 40 long-haul 787 Dreamliners for the flag-carriers Azerbaijan Air, Ethiopian Airlines and Egyptair. Egyptair has previously placed orders for the Bombardier C-Series.

Au revoir, A380 Superjumbo…?

What became clear in Dubai was that Airbus’s wide-body, double-decker four-engine A380 Superjumbo had not had any new orders for two years. It had been assumed that, since Dubai is home to Emirates, which, along with Etihad and Qatar Airlines, has been the principal customer for the A380, there might be a new order forthcoming for the 360-seat aircraft.

Emirates is currently operating 100 A380s and reportedly has another 42 on order. But no new orders for the A380 materialised in Dubai. It has been suggested that Emirates is wary of placing a new order for a product which may soon be discontinued – with all the headaches that would engender concerning the supply of spare parts and so forth. In that respect, the fate of the A380 has become a kind of self-fulfilling prophecy.

This week, on 15 January, John Leahy, the outgoing America-born CCO at Airbus, announced that Airbus was prepared to shut down the entire A380 programme if a new deal with Emirates could not be agreed[ii]. However, Mr Leahy emphasised that a new order for the A380 was “imminent” – though he did not identify the buyer.


Fabrice Brégier, COO, who is also leaving Airbus this month, confirmed that the production line for the A380 outside Toulouse would be downgraded. This year Airbus will produce 12 A380s, falling to just eight in 2019. (As compared with about 60 single-aisle aircraft per month.) Thereafter, it is envisaged that production of the A380 will continue at a rate of about six aircraft per year until such time as demand revives. Mr Leahy apparently believes that very large aircraft will return to favour as airport congestion inevitably increases. “This is an aircraft I assure you whose time shall come” he told the Financial Times.

Then, yesterday, on 18 January 2018, Emirates finally threw the A380 a lifeline with a firm order for 20 new Superjumbos and an option on a further 16. That will keep the aircraft in production for at least another decade[iii]; though in much reduced numbers, meaning that production economies of scale will be lost.

Whatever the final outcome, the fact that Airbus prioritised the development and manufacture of the A380 now looks like a major strategic blunder. Much of the Airbus production facility adjacent to Toulouse Blagnac airport appears to be dedicated to the A380 even though that model is evidently contributing little to Airbus’s bottom-line.

Recent trends in the airline industry have militated against large – and especially four-engine – aircraft. In 2013, Air France withdrew A380 services to Singapore and Montreal and switched to smaller aircraft – although, in 2014, British Airways replaced three 777 flights between London and Los Angeles with two flights using A380 per day. Emirates’ CEO Tim Clark foresaw a large potential for Asian A380-users, and has criticised Airbus’ marketing efforts in Asia.

Business travellers prefer the increased choice offered by more frequent flights, flying a route numerous times per day on smaller aircraft rather than once a day on one huge aircraft. United Airlines (owned by United Continental Holdings (NYSE:UAL)) observed that “the A380 just doesn’t really work for us”. That airline now largely relies on Boeing 787 Dreamliners operating at a lower trip cost.

When the A380 was launched most Europe-Asia and transpacific routes used Boeing 747-400s with fairly low frequencies. But since then airline route networks have proliferated with Open Skies. Correspondingly, most airlines have preferred to use smaller aircraft offering higher frequencies and more routes.

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An airline’s overriding aim is to get capacity utilisation (the passenger load factor) as near to 100 percent as possible. Infrequent flights using the A380 tended to have more empty seats. For transpacific routes where time zones restrict potential frequency, consolidation has impacted route networks. The three US majors have emphasised daily frequencies for business traffic with mid-size aircraft like the Boeing 787, thus extracting higher yields.

The ancient Boeing 747 (which first came into service in the 1970s) was superseded on transatlantic flights by the Boeing 767 and on transpacific flights by the Boeing 777[iv]. Newer, smaller aircraft have lower seat-mile costs and allow more direct routes.

As I wrote in my piece The Aviation Revolution in the July 2017 edition of the Master Investor magazine, the trend now will be for super-long haul operators to take business away from the hub-and-spoke operators. Qantas (ASX:QAN) will inaugurate a non-stop flight on specially configured Boeing 787 Dreamliners from London Heathrow to Perth, Australia (17 hours) in March this year. In ten years’ time most flights from the UK to Australian destinations will probably be non-stop. The same applies to flights between the Antipodes and the USA. This will take business away from hub-oriented airlines like Emirates, Etihad and Qatar Airlines.

The state of play

Airbus is still leading Boeing on the backlog of orders but Boeing is number one in terms of deliveries. Airbus delivered 718 planes in 2017 against Boeing’s 763. Orders amounted to 1,109 against 912[v]. The ratio of orders to deliveries is known in the trade as the book-to-bill ratio. Mr Leahy famously predicted that Airbus would finish 2017 with a book-to-bill ratio of less than one. In the event it was more like 1.5.

Airbus’s backlog of orders amounts to some 7,200 units of which over 6,000 are A320neos – so the question arises as to whether they have sufficient capacity to meet demand in a timely manner.

Both firms are confident that 2018 will see bountiful new orders. The aviation industry worldwide is continuing to expand robustly. On the downside, kerosene prices are edging up as oil tiptoes towards $70 a barrel; plus interest rates are tightening. But the upside is that synchronised global growth continues; and in developing countries an emerging middle class has an unsatisfied appetite to travel.

Airlines are also better managed. Boeing recently observed that, globally, airlines have made more money in the last three years than in the previous 30 years – though about half that profit was generated in North America. No wonder Warren Buffett has been investing in the airline sector.

There is also some concern amongst analysts that so many of Airbus’s key management personnel seem to be leaving at the same time while Boeing exhibits a high degree of management continuity.


Airbus’s latest long-haul model, the A350-1000, has not yet entered service, though it has completed development, flight testing and certification. The first customer aircraft is parked in Toulouse awaiting approval by Qatar Airways CEO Akbar Al Baker. His airline should have taken delivery of the aircraft before the end of 2017. This event is significant because it marks the end of a long development cycle. After the A350, Airbus has no more major civil aircraft development programmes underway.

Airbus’s was founded on a midmarket aircraft – the A300. While it was an important catalyst for the creation of a joint European aircraft manufacturer, the A300 was not a commercial success. The shrunk, long-haul A310 was even less successful. Then the A380 became the commercial disappointment the industry is witnessing today. As a result, Airbus will be extremely cautious in deciding whether to re-enter those segments.

But perhaps both Boeing and Airbus should be looking over their shoulder for the next revolution in aerospace…

SpaceX has a new rocket

During 2017 the idea of low Earth orbit travel became a serious topic of discussion. In July, the Head of the US Airforce General David Goldfein told a conference in London that the US military should take seriously plans by Virgin Galactic and others to make intercontinental near-space travel a reality[vi].

The General observed that most rocket fuel costs are from the surface of the Earth to 50,000 feet because that is where the air is thickest. But if you can get a mother ship to take you to 50,000 feet and then launch from there the cost equations become attractive. He speculated that the US should be applying such technology to get Special Forces to any place in the planet in less than one hour…

Meanwhile SpaceX is about to launch its new rocket, the Falcon Heavy. This will be the most powerful rocket ever made by a private company[vii].

Since SpaceX’s inception in 2002, Elon Musk has set lofty goals – and has normally achieved them. The Falcon 9 rocket has become an affordable ride to space that launched a record 18 times in 2017. He has shown the feasibility of reusing rocket engines, landing 21 engine cores and re-flying five of them.

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The Falcon Heavy will be able to lift 54 tonnes of payload into space, more than twice the payload of the Delta IV Heavy, at a reported one-third the cost of other launchers. With the Heavy carrying an electric-powered Tesla (NASDAQ:TSLA) car as its payload, all the world shall be watching its imminent launch.

Mr Musk’s ambitions are momentous. He intends to build a Big Falcon Rocket that can reach Mars… and then to colonise the Red Planet… And to fly passengers from London to New York in 30 minutes. He is working on communications satellites that will fly in low Earth orbit. The main roadblock of the Mars mission, as Mr Musk has admitted, is finance. It seems obvious that if SpaceX could generate cash flow from low Earth orbit transportation using its re-usable rocket technology – probably in the first instance for high net worth individuals and specialist government contracts – that’s what it will do.

I suspect that SpaceX is already nearly in the black and that it will be floated sooner rather than later. Airbus and Boeing should watch out. This enduring aviation duopoly might soon wake up to find that the game has changed.

[i] See: https://www.ft.com/content/ec9c628c-f1b6-11e7-ac08-07c3086a2625

[ii] See: https://www.ft.com/content/113efb4e-f9e2-11e7-9b32-d7d59aace167

[iii] See: https://www.ft.com/content/2c8a4e4a-fc52-11e7-a492-2c9be7f3120a

[iv] I can share from recent experience that British Airways offers one flight per day on the London Heathrow to Nairobi, Kenya route using a veteran Boeing 747 Jumbo!

[v] Aviation Week podcast of 17/01/2018 available at: http://aviationweek.com/commercial-aviation/podcast-no-losers-2017-airbus-boeing-battle?NL=AW-05&Issue=AW-05_20180118_AW-05_471&sfvc4enews=42&cl=article_2&utm_rid=CPEN1000003926294&utm_campaign=13271&utm_medium=email&elq2=1e59a9a76553427fb5991e10da459f28

[vi] Daily Mail, 19/07/2017.

[vii] See article in Aviation Week, 12/01/2018 at: http://aviationweek.com/space/opinion-spacex-engine-progress?NL=AW-05&Issue=AW-05_20180116_AW-05_884&sfvc4enews=42&cl=article_3&utm_rid=CPEN1000003926294&utm_campaign=13240&utm_medium=email&elq2=018f00addfe24853ba5380f60b0ce4f5