Podcast: Is Airbus Unstoppable?

Boeing will have to pay a big price if it wants to bring the duopoly back to parity—and suppliers should be worried if it doesn’t.

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Rush transcript

Joe Anselmo:

Welcome to this week’s Check 6 Podcast. I’m Joe Anselmo, Aviation Week’s editorial director. As the aviation industry climbs out of the COVID-19 downturn, Airbus seems to be on top of the world. The company has a big lead in backlog over Boeing, and its rival still has not found an answer to the A321neo, which has given Airbus a commanding lead in the narrowbody market that used to be split 50/50. Business is so brisk that Airbus is talking about raising aircraft production to unprecedented levels. But a cautionary note, just three years ago, Boeing appeared to be on top of the world in many respects -- a finely tuned financial colossus that was generating huge profits and returning hoards of cash to happy shareholders.

So, what are the odds that Airbus can cement its market lead for the long run? And is the potential rebalancing of the duopoly in large commercial aircraf, a bad thing, even for Airbus? Here to delve into all that is Aviation Week’s new guest columnist, Sash Tusa, an aerospace and defense analyst at Agency Partners in London. Sash wrote his first column for Aviation Week on this topic.

Also, joining the discussion is Jens Flottau, Aviation Week’s executive editor for commercial aviation and our point man covering Airbus. He is in Frankfurt. And rounding out the discussion is Daniel Williams, a manager of fleet, flight and forecast data at Aviation Week. He is based in London.

Sash, let’s start with you. Your column was pretty upbeat about Airbus holding onto its market lead for the foreseeable future. Tell us why.

Sash Tusa:

Joe, thanks very much indeed for having me, and indeed taking my column. I think there are two big issues that are favoring Airbus at the moment. One is just the sheer size of its backlog as it’s come out of the pandemic. And the second is the stability of the production system and the degree to which it’s producing at a higher rate than Boeing, and it can increase rates at least as fast as Boeing can. And that’s very, very difficult for Boeing to deal with, except by price.

Let’s look at backlogs at the end of 2021. Airbus’ declared backlog was just under 7,100 aircraft. Boeing’s was 4,100. Now, I know there’s a lot of debate about who overstates which backlog and so forth, but even if we adjust the Airbus backlog in the same way that Boeing does -- it’s a process called ASC606, which takes out dubious orders -- Airbus’ backlog is still just over 6,000 aircraft, so one and a half times the size of Boeing’s.

And that gives Airbus the ability to do, at least one or two things. Either they can produce at 50% greater rate than Boeing can for the same period of time, i.e., before both companies’ backlogs run out, or they can just keep on going. They don’t need to win very many orders. They can produce at the same rate as Boeing and they carry on for several years afterwards. Boeing has got to win more orders at at least, the rate that they did in 2021, realistically far more than that, otherwise Airbus out-produces them. And certainly on our forecast, Airbus is going to be producing 60% more aircraft over the next couple of years than Boeing will. That’s a huge economic advantage.

You go down the learning curve a bit faster, but also, and I think it’s something that should cause suppliers bit of discomfort, when you are producing at 50% greater rates than your nearest competitor, the first thing that your cost engineers do is you go to your suppliers and say, “Look, it’s not a duopoly anymore. We are clearly well ahead. We need a volume discount.” Is that volume discount 10% compared to the price that supplier would charge Boeing? That’s certainly the starting point for negotiations, and that’s a very uncomfortable position. This is not, at present, a 50/50 duopoly. And certainly on the numbers we’re looking at, it’s really hard to get back that way.

Joe Anselmo:

It was interesting in your column, Sash, you had quoted John Leahy, Airbus’ legendary chief salesman, saying in the past, that getting the duopoly far out of balance from 50/50 wasn’t a good thing for a lot of people. What did he mean?

Sash Tusa:

John Leahy achieved miracles at Airbus. He was helped by a very, very good product line, but he was the man who brought Airbus from being a European consortium with a market share down in the 25-30%  up to a 50% share over better part of three decades. That was an astonishing achievement. Once Leahy had got Airbus to a position where it was roughly selling, not necessarily delivering, but selling as many aircraft as Boeing, he realized that stability, in terms of market share, was actually much more attractive than trying to push the market share a bit higher. The reason being, that as you get above a 45/55 split, then the other guy has got to catch up again. Otherwise, you get that advantage in terms of supplier costs and so forth.

Leahy was talking from a position of a 50/50 market, plus or minus a bit. What’s remarkable now is that, due to a combination of the pandemic and Boeing’s own unforced errors, 737 MAX, 787, Boeing has actually shed half of its market share in a period of two years. And to get back, they’re going to have to do, in our view, what Airbus did in the whole period, late 1990s through to the mid-20 teens, which is trade price for volume. If you look at period from, let’s say, 2002 to 2018, Airbus’ margins were less than half what Boeing’s were. So, they were prepared to accept lower pricing to get to that stable market share. If Boeing wants to get to a stable market share, a proper duopoly, they’re going to have to trade price to get there. And that’s not something that, we think, Boeing management, Boeing suppliers, or Boeing investors have come to terms with.

Joe Anselmo:

Jens Flottau, what could go wrong for Airbus? Things look great now. Are there any stumbling blocks or minefields that they could fall into?

Jens Flottau:

They sure look great, as Sash said. But there are minefields and risks. And let me group them into operational risks and strategic risks. Operationally, obviously, the ramp up has to be achieved. It’s not a given that it’s going to go smoothly. We all remember too well what happened in ‘18, ‘19 when everyone was complaining about Airbus, that not a single aircraft was coming on time. There were multiple delays, delivery dates were shifted several times within a few months. The suppliers have to cope with this. They have to finance it. They have to, probably deal with worker shortages, possibly raw material shortages, all these risks are there. And they’re probably of bigger concern for Airbus, just given the rates that they’re looking at. And one other operational risk that I see is they’re about to sell a substantial number of their factories in Augsburg. That’s four plus another two. They’re realigning the aerostructures business internally, with a relatively new management team in charge of that. I see the rationale why they’re doing it, but I’m sure there’s risks there too.

Going to the strategic element here. Something that drives Christian Scherer up the wall is the claim that Airbus has become arrogant. That the attitude towards customers has changed. There’s been a lot of complaints that Airbus hasn’t been forthcoming in accepting deferrals or cancellations. Of course, they wouldn’t accept cancellations. That they’re not forthcoming in terms of pricing. This of course escalated in the well-publicized Qatar Airways dispute, but there’s various shades of gray underneath this. So, if customers perceive Airbus as being arrogant, then that’s a risk. And I don’t know. There may be cases where people are moving Boeing’s way just to balance it out a little bit more, if they can afford it, and if the MAX 10 works for them, or the MAX 8 works for them as well as the neo version would do.

Such highlighted the backlog. Short-term, at least, the risk is that Airbus doesn’t have much to sell anymore. They’re sold out for the next two, three, four years. If there is a customer that needs aircraft quickly, well, they’re going to have to go Boeing almost certainly because there’s nothing left, or leasing, of course. China is another element. If you look at the backlog from China -- and that’s true for both manufacturers, I would say -- it’s coming down fast. We’d have to discuss to what extent Airbus depends on China for the rates. Probably not as much as in the past, because others have jumped in. But it’s not clear to me that China will order soon, and it’s not clear to me what the arrival of [Comac] C919 means over time. Low rates right now, but they’ll grow, at least, slowly.

Two strategics I’ll just briefly mention. What if Boeing, in spite of everything, decides to launch something new against the A321neo. That would force Airbus to make that interim step between the current line and the hydrogen plans for 2035 that they would like to avoid. That’s a risk. And finally, I think the biggest risk is hydrogen aircraft being delayed well beyond what Airbus currently thinks. 2035 not being realistic, and then what? Do they have to do something in between again? So, short-term looking great. Long-term, well, there’s challenges too.

Sash Tusa:

If I can just pick up. There’s so many good points that Jens made there. Can I just pick up on the point about Christian Scherer of Airbus being worried about being arrogant? It’s a criticism that has been made by a number of airlines, in particular. Put it another way though, airlines had incredibly good time in the last 25-30 years. They have been able to place orders with very, very little in the way of upfront payments. They get feted and wined and dined by the OEMs. And they’ve been able to defer at very, very low costs, and with very, very little pressure. I think what we saw during the pandemic was that --and this was partly a reflection of the fact of Airbus’ stronger economic position -- they just started holding airlines to of the contracts that they’d signed in the first place.

Airlines haven’t been used to that for a very, very long period of time. As far as the Qataris are concerned, I think Airbus is playing tough with Qatar because Qatar has, in the past, played very, very tough with it. And I think Airbus is making a call about whether... When they have the backlogs that they’ve got, and given how the Gulf carriers might develop over the next 10 years or so, do they need to have Qatar on in their backlog in the way that they did in the past? It’s remarkable that they think that they don’t, but it’s very hard to escape that conclusion.

Joe Anselmo:

Dan Williams, let’s bring you into the cover conversation. I’ve talked with people at Boeing who think that sometimes, maybe we in the trade press over-emphasize the A321neo’s advantage. And they note that the MAX family, at the lower end, is quite competitive, and think that the MAX 10 can get enough orders. How does the MAX 10 stack up with the 321neo? And are they correct, are we overstating the advantage of the A321neo?

Dan Williams:

Thanks for having me, Joe. It’s an incredible story. The MAX 10 can do, give or take a few percent, 90% of what an A321neo can do. I think a comment I’ve made before, if you are a U.S. legacy carrier, who has MAXs or will have MAXs in the fleet, it’s not going to matter, because you are going to use them transcontinental. It’s going to fit in your fleet perfectly. You’re going to have the same pilot pool, brilliant. The A321neo, on the other hand, can do that lot extra. And if you are not a U.S. legacy carrier, then that is the aircraft that you want and you are going to need. Our 10-year Aviation Week fleet forecast says that almost a quarter of all new aircraft deliveries, not new single aisles, all new aircraft deliveries, 19-plus seats, will be the A321neo. That’s how much of an impact it has on the market.

Because we were seeing the shift pre-pandemic away from twins, big twins, into these more single aisles. And ultimately, Boeing was the forerunner for this, with the 757 doing all the trans-Atlantic. They built the market for this. They opened up routes that were only exclusively twin-aisle aircraft before. And then, all of a sudden, my local airport was Manchester Airport, I started getting U.S. legacy 757s in there. And that’s a trade that’s going to carry on with the A321neo. And I think that’s why the Qatar MAX order is a dig slightly at Airbus, because they’ve just gone to the competitor and ordered the similar aircraft type. Now, will that do what Qatar wants it to do? Probably not, because Qatar works on those longer routes, connecting everybody in the Middle East, and the other Middle East carriers, likewise, will want to do similar.

Will the MAX 10 work for some of their routes? Totally, but it’s not going to work for them all. And obviously, with their spat with Airbus, but back to Jens’ point on last week’s podcast, there could well be an out-of-court settlement prior to the end of all this, and who knows the outcome of that? They may get reinstated. We also noted on the Airbus backlog that’s just recently been released, not only did all the A321neos of Qatar get canceled, but also two A350-1000s came off the backlog of Airbus, as well. That wasn’t mentioned in the initial press release.

Joe Anselmo:

Sash, revolutionary technology for propulsion, aerostructures, even digital design, it’s not there yet. It’s not there. Can Boeing afford to go and launch a me-too aircraft -- does Boeing have to launch a me-too aircraft to take on the A321neo, that’s just evolutionary? Or can they afford to just digest this loss of market share for a good number of years and wait until the technology is ready?

Sash Tusa:

It’s very, very difficult to have a strategy which says we’re languishing in terms of market share, but we can afford to wait. Because all the time that you do that, you’re giving Airbus economic advantage. It has an advantage in terms of its entire supply base, and they should make very, very good use of that. We’ve argued, for some time at Agency Partners, that Boeing needs to launch a new narrowbody. And we’ve been astonished at the degree to which Boeing has just said ‘No, we don’t need it yet.’ And this is the ultimate dilemma for the OEMs this decade. And as Jens’ pointed out, Airbus doesn’t want to launch an interim aircraft, either. We think that the risk for the industry is that R&D goes up and production runs get shorter. Because what we cannot rely on in the future, with new technology, is being able to produce the same aircraft with broadly the same engines for 20, 30, in some cases, 40 years or more.

We’ve only just had the very last A320 delivered after 36 years…,  but I don’t think the next aircraft is going to have a production life like that, next engines won’t either. And that’s a big challenge in the industry. Hydrogen looks to us to be astonishingly technically difficult to do. And we’re certainly feeling that suddenly 2035 feels very, very close indeed to develop that technology. But, at least, they’re thinking about that. Production technology, yes, the manufacturers need to be bringing that in this decade, because what you don’t want to do is to launch... Let’s say the next aircraft for entering service in early 2030s, you really want to have your production system debugged well before you do that.

Joe Anselmo:

Dan, you wanted to weigh in there.

Dan Williams:

Yeah, thank you. Now, just to add to that, Airbus have been incredibly lucky. I’m not going to take this away from it. They’ve been incredibly lucky. They had an aircraft in the A320 that could be re-engined with relatively minimal fuss. They had an aircraft program that was forced upon them almost in the C Series by Boeing applying pressure, who then they then ran into the arms of Airbus. It’s an incredible aircraft. And I’ve heard Sash talk about he’s very pro A320-500. I admit I’m very pro A320-500, also. I don’t think it’ll necessarily come quite yet, because there’s still plenty of A320s in the backlog. However, Airbus are at the point now where, as long as they don’t get complacent, they can afford to make some more high level strategic decisions.

One thing that they’ve done that is very good was they launched the A350 freighter before Boeing launched the 777X freighter. Now, I’ve been saying since the pandemic started that the 777X freighter had to come, because the 777X, as a passenger aircraft, was just too much of an aircraft right now, so the freighter was the way to go. Now, Airbus, again, they’ve put the roadmap out there. We talked about it on this podcast, hydrogen by 2035. They can look for that. And at the moment with Boeing almost being like a rabbit caught in the headlights, and not responding in any way, Airbus can just carry on and do that. If Boeing launch a NSA, NMA 757 MAX, call it what you will, the 5,000, 220-250 seat aircraft that is an A321neo competitor, then that will change what Airbus needs to do. But right now, they don’t really need to do anything. They can afford to wait for that step change in technology, if Boeing does nothing.

Joe Anselmo:

We are running short on time, but, Sash, I’d like to give you the final word.

Sash Tusa:

I’m very worried, Dan. We’re engaged in group think, even now. But what we are telling our clients is that Airbus has got something that is very unusual in business, which is second mover advantage. They don’t have to do anything. They can afford to, particularly in terms of narrowbodies, wait and see what Boeing does. And particularly in terms of very, very new technology, they can afford to do that. That’s quite a rare thing to have. And all the while, they’re delivering A321neos. In particular, 60% of their backlog is now comprised of those, and that should be a very profitable business model.

Joe Anselmo:

Okay. Well, Sash Tusa’s column is now available online to subscribers to Aviation Week & Space Technology and the Aviation Week Intelligence Network, and will also be in the February 21st print edition of Aviation Week magazine. Sash, welcome to the fold and thank you for your time today. Jens, I know you’re getting ready to head off to the Singapore Airshow. Thank you for taking the time. And Dan Williams, always good to have you with us.

That is a wrap for this week’s Check 6 Podcast. You can subscribe to Check 6 and Apple podcasts, Google podcast, Stitcher, and Spotify. Special thanks to our podcast editor in London, Guy Ferneyhough. Join us again next week from Singapore for the next Check 6. Have a great week and stay safe.