[Link].

net

In this issue:
• IATA analyzes Airbus, Boeing orders in 2006
• USAF clarifies tanker competition
• Airbus postpones A380F, Boeing drops C-17—opening opportunities for
Airbus?
• Chinese consider large passenger jet

IATA publishes excellent analysis of 2006 orders demographics

The International Air Transport Association (IATA) last month published a good
synopsis of aircraft orders in 2006, focusing on Airbus and Boeing but containing passing
mentions of Bombardier and Embraer.

We’ve reproduced an IATA chart below showing the orders by region and airline. The
1,834 orders from Airbus and Boeing are the second-best on record (following 2005).
Historically such numbers have led to over-capacity situations when the airplanes are
delivered years later. This time, however, IATA thinks this won’t happen (barring some
cataclysmic event).

“[T]here are some positive signs that the airline industry may largely avoid the mistakes
of the past cycles, and that the record number of new orders will not create significant
capacity” except on a few specific routes, IATA concludes.

The entire six page report may be found here:

[Link]
521E7BE84D73/0/IATA_Economic_Briefing_2006_Aircraft_Orders.pdf

IATA broke down the orders from Airbus and Boeing by world region and airlines.
IATA analysis

Clarifying the Tanker

Last week we noted that the US Air Force said there would be opportunities “down the
road” for two suppliers for the aerial tanker program, and speculated that this was
probably a reference to the KC-Y program rather than the KC-X program. Reuters
provided the original report. The news agency followed up with another story later in the
week. The relevant portion is excerpted below:

WASHINGTON, Feb 28 (Reuters) - U.S. Air Force Chief of Staff Gen. Michael Moseley said on
Wednesday he hoped both teams bidding for a $40 billion aerial tanker refueling competition
would "stay in the game" for the longer term.

Moseley said the Air Force still planned to award a first contract for 179 tankers to a single
winner.

But he said it was important that even the losing bidder remain engaged since the Air Force
ultimately needed to replace over 500 of its aging KC-135 tankers, used to refuel fighter jets and
other planes in mid-air.

"I want everybody to stay in the game," Moseley told reporters after a House Armed Services
Committee hearing. “If you win, stay with us. If you don't win the first buy, stay with us because
there will eventually be opportunities," he said.

This pretty well validates our assessment of last week.

Airbus drops (for now) the A380F; Boeing to drop C-17

To the surprise of no one except the over-wrought general assignment reporters who
don’t know any better, Airbus postponed further work on the A380F and UPS canceled
its order for 10 airplanes.

With only 10 UPS orders remaining at the time Airbus diverted resources, clearly the
A380F had become an after-thought to the priorities at the company. Headlines by the
uninformed called UPS’ cancellation “another blow” to Airbus. Hardly, and The Wall
Street Journal got it right: the move wasn’t all bad.

As we told some media, engineers are needed on more important programs. At the time,
Airbus had not announced where personnel would be reassigned and we speculated that
engineers would go to the passenger A380 as Airbus works to bring this program back on
track; or perhaps even the A350 XWB, which is by far more important than the A380F.
(Airbus subsequently announced the engineers were going to the A380P effort.)

Postponing the A380F also relieves Airbus of the cash flow required for further
engineering on the airplane as well as certification costs. One person knowledgeable of
the program suggested that this could save Airbus $1 billion in cash flow. We have no
way of knowing if this is an accurate figure, but any savings in cash flow at this time is
something that is crucial to Airbus.

Finally, we also think that a delay in the A380F program will enable Airbus to design a
more capable freighter while dealing with many of the criticisms leveled by Boeing in its
highly successful, if sometimes misleading, public relations campaign to denigrate the
A380F. Airbus accused Boeing of “bending the facts” about the A380F’s capabilities in
its comparison with the 747-8F. From a third-party view, both sides had some valid
points but since the 747-8F and the A380F are different classes of airplanes (something
Boeing finally has acknowledged), we were always perplexed at the school-yard name-
calling. But this is a discussion we’ve had in the past, and we’ve digressed a bit.

Getting back on point, the postponement of the A380F is, at this stage, the least of
Airbus’ worries. Implementing Power8 and dealing with the silly European unions that
are staging wildcat strikes is far more important. So is getting the governments out of the
business of governing Airbus. We’ve linked several articles in which Airbus and EADS
officials have gone public with their disdain over government interference.

While Airbus was postponing the A380F, Boeing announced that it will begin winding
down the C-17 program. The Pentagon did not include any money for further orders in
the proposed budget beginning October 1. With long lead times, Boeing had to take the
decision to notify suppliers of the corporate decision to cancel the program.

The might be life in the civilian market for the airplane, however. Bloomberg News
reported that Global HeavyLift Holdings may be interested in between 30-60 C-17s and
that it has obtained credit of more than $10 billion to buy the airplanes.

This deal is far from a certainty. Perhaps first and foremost, an act of Congress would be
required. For the moment federal law prevents selling the C-17 for civilian purposes. But
a precedent has been set. During the 1960s or 1970s, the Lockheed C-130 was operated
by a few airlines, including oddly enough, Delta Air Lines, as the L-100 freighter.
Visionary Lamar Muse, as president of cargo carrier Universal Airlines, looked at the
possibility of using the C-5 as a cargo and passenger plane for his carrier.
If Global could pull this off, it would breathe new life into the C-17 program, which
many Congressmen say is vital to logistical support for the war on terror in Afghanistan
and in the tar-baby, Iraq. Setting aside the debate over the Iraq war, the Congressmen are
right about the C-17’s role.

But there is another angle to this that few have noticed. As we looked into who Global
HeavyLift is (we had never heard of them), we came across a February 2006 article that
heavily quoted a Global official, Myron Stokes.

What particularly caught our eye was the analysis that in the absence of a C-17 program,
the US won’t be producing any large cargo airplane, perhaps leaving the field open to
Airbus—which is producing the smaller but newer technology A400M.

Stokes said, in this 2006 article:

"Waiting in the wings, no pun intended, will be EADS with its A400M, ready and willing to provide
these aircraft by 2009. At this time, they are suggesting to potential customers in Air Forces
around the world to acquire the retrofitted C-130J, which they will acquire in a buyback program
exchange once the A400M is available. In our estimation, it is a brilliant strategy and the epitome
of that which constitutes economic warfare in a Sun Tzu sense, with Boeing being effectively
eliminated from the provision of airlift aircraft for at least a decade. It goes without saying that the
impact on the manufacturing base will be considerable: 700 suppliers in 42 states who build the
C-17 either cease to exist or must scramble to find alternative work."

The full article may be found here:

[Link]

Airbus rendering

Lockheed Martin continues to offer the C-130J, which is smaller than the A400M and it
is based on a design that is now around 50 years old. The C-130J was eliminated from
consideration in the Army-Air Force Joint Cargo Aircraft competition because it has not
been certified by the US Federal Aviation Administration.

If the C-17 program is, in fact, discontinued, does this open the field for Airbus to make
real inroads, as Stokes suggests? We don’t follow the military side of aviation that
closely, but the question is certainly intriguing.

Chinese large commercial aircraft?

Finally, Reuters reports that China is considering developing large passenger jets in order
to wean itself from reliance on Boeing and Airbus. China is already developing a
regional jet. The market potential in China is forecast at 2,600 jets over 20 years.

Our good friend Richard Aboulafia routinely turns up his nose at the thought of the
Chinese developing a competitive jet. But Embraer is building the ERJ-145 in China,
Airbus plans to open an A320 manufacturing plant in China and China has long built
components for Airbus and Boeing. While the Western manufacturers like to say they
control technology transfers with these deals, we’re not so sure the Chinese nonetheless
don’t get enough out of these to apply the technologies to domestic engineering.

China takes a long-term view of everything, and the Chinese are a patient people. China
is on the cusp of becoming a Super Power in more than just name. It’s put a man in
space, it’s shot down a space vehicle, it’s building a blue water Navy, it holds more US
debt than people want to admit and its economic power is world-class.

We don’t put it past the Chinese to develop a viable airplane. Even if they never sold one
outside of China, every one sold inside the country is one less sold by Boeing or Airbus.
And with a 20 year market of 2,600 airplanes, this is nothing to sneeze at.

By Scott Hamilton, March 6, 2007