Sean Broderick, Michael Bruno, Guy Norris, Jens Flottau But the outlook for next-gen airliner and engine timing—and what they will look like—is less clear now than before the COVID-19 crisis.
Boeing’s 737-10, pictured during its first flight in June, is to enter service in 2023. Credit: Boeing
Sean Broderick, Michael Bruno, Guy Norris, Jens Flottau
Signs of life are returning to the commercial aerospace sector: Airlines are placing orders, profits are back, and aircraft builders and suppliers are once again arguing about how quickly production rates can be ramped up. But hanging over these positive indicators is a cloud of uncertainty about the industry’s long-term future.
The outlook for when the next generation of commercial aircraft and engines will arrive—and what they will look like—is even less clear today than before the COVID-19 crisis. Boeing has been talking for years about a potential new aircraft program roughly in the 757 niche and continues to study the business case. Airbus is holding derivatives for its A320 and A220 families in its back pocket—even as it eyes a big leap to hydrogen-powered aircraft. GE Aviation and Safran have launched the Revolutionary Innovation for Sustainable Engines (RISE) technology development program. But at this point, figuring out how such programs will evolve requires a reading of the tea leaves.
Boeing’s first profitable quarter in almost two years may have been a pleasant surprise for Wall Street, but between the lines the numbers hint at a further slowdown for any all-new aircraft and a near-term doubling down on derivatives and deliveries. Airbus, which already has a large lead over its U.S. rival in the narrowbody market, has no incentive to go first. And some industry veterans are interpreting the RISE project as GE/Safran playing catch-up on much-needed technologies.
Boeing President and CEO David Calhoun says the company’s spending is focused on supporting certification of the ongoing 737-10 and 777X programs, as well as development of the 777X freighter—the next most likely new project on the manufacturer’s agenda. He adds that spending on product development will not increase in the near term, strongly implying that the launch of an all-new airliner remains unlikely anytime soon.
“My view is we are fully funded on the important [R&D] efforts that will support Boeing Commercial Airplanes (BCA) broadly,” he says. “I want to separate that from development funding, which is the ongoing certification work associated with the 737-10 and 777X, and I hope, and in the relatively near term, a freighter version of that airplane.
“So we are going to be very busy and have been very busy on the development front and spending a fair amount of money on it,” he adds. “I don’t expect that number to go up significantly at any point in time in the relatively near term, not because we’re not going to take on new stuff—just because.”
But while money continues to be spent on current and near-horizon efforts, there is no disguising the general decrease in Boeing’s overall R&D outlay. In 2020, it was around $2.5 billion, down about 20% from 2019. The downward trend is continuing in 2021, with the company spending only $996 million net on R&D in the first six months of the year, of which a mere $524 million was allotted to BCA.
Money—or the lack of it—remains an issue for Boeing’s next-generation ambitions.
“They don’t have the money to spend right now, and Calhoun doesn’t have the stomach for it,” says Ron Epstein, managing director of aerospace and defense at Bank of America Global Research. “They have the 787 and 777X situations to handle. Are they really in a position to launch a new program?”
The recent sales success of the 737-10, including an order in June for 150 aircraft from United Airlines, may also help explain why Boeing continues to defer strategic decisions on successor models for the 737 and 757 market sectors. The overall perceived relative resilience of the 737 MAX-family orderbook, plus evident operator interest in the stretched 737 model, might be a growing buffer against any urgency to counter the predatory threat of the Airbus A321XLR.
But the question remains: Can Boeing really afford not to launch a new program when Airbus continues to grow its single-aisle production at the suggested pace? That could take Airbus far beyond 60% market share in the segment over the next few years and make Boeing’s position untenable. Combining the A220 and A320neo-family plans, Airbus could produce close to 90 single-aisle aircraft per month by mid-decade, provided it gets buy-in from the supply chain. “Boeing does need to build a new aircraft, a 737 or 757 replacement, but it is becoming increasingly clear that they cannot [afford] that,” says a senior industry source.
Another factor likely will be General Electric-Safran joint venture CFM’s decision to develop the RISE Open Fan propulsion demonstrator. While Boeing continues to hammer home the message that airframe technologies, including production costs, will be critical to any go/no-go decision on a next-generation product, Calhoun for the first time is emphasizing the importance of new propulsion technology. Although in early June Calhoun told Aviation Week that he did not believe “propulsion alternatives are going to give us as big a step forward on efficiency” in defining the next aircraft (AW&ST June 14-27, p. 46), he now underscores the important role engine-makers will play in achieving future sustainability goals.
“That next airplane will have to meet some serious sustainability tests. I do think that sustainable aviation fuel is going to be a big part of that and [for] our propulsion suppliers with respect to the packages that they’re now promoting,” Calhoun says, specifically referencing CFM’s RISE initiative. “I think it’s going to be a fight between sustainability, propulsion packages and meeting that spec. Then for Boeing, [the challenge] is to make this the most efficient airplane it can possibly be.”
While GE Aviation says an all-new engine based on RISE technology research and development will not be ready until 2035, it is an open question as to whether individual elements of RISE could be applied more quickly to a next iteration of the current Leap engine to power a new Boeing aircraft toward the end of this decade. “RISE is a technology program to develop a gearbox that GE desperately needs,” one industry executive says. “Its core is the usual stuff anyone would put into a new engine now.”
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Of course, such an upgrade would be available to Airbus, too, along with any incremental or further improvements of Pratt & Whitney’s geared turbofan (GTF) engine. But Airbus’ strategic position is quite different. The OEM has begun the long and expensive research and development work for a hydrogen-powered aircraft to be ready by 2035, and it has no interest in spending more money on an interim upgrade of its conventional technology aircraft unless it absolutely has to. Instead, Airbus is trying to make the most of its 6,150-aircraft-strong narrowbody backlog by increasing production (and with it, cash flow and profits) as fast as possible.
Airbus is moving from rate 40 to 45 per month, which it expects to reach in the fourth quarter. Output is to grow to 64 aircraft monthly by the second quarter of 2023. That is the firm part of the plan. Airbus has also asked suppliers to look into how they could accommodate a rate of 70 just nine months later and a rate of 75 at some point in 2025.
The rate of 63 aircraft per month was the highest level reached before Airbus cut back to 40 aircraft per month as the COVID-19 pandemic unfolded early last year. On top of A320neo-family deliveries, Airbus plans to deliver 14 A220s monthly by 2025, almost tripling current production rates.
While dominating the narrowbody market, the OEM is nonetheless in a complicated situation. By the time it reaches rate 64 in 2023, it will essentially have had three years of much lower production than planned before the pandemic. Its target over the last 18 months was to avoid cancellations at almost any cost but to be more flexible when it came to requests for deferrals. To that end, hundreds of slots have been shifted into later years, based on agreements with airlines and lessors. Even at rate 64, that is equivalent to eight years of production—and in reality, it is significantly more because that level will not be reached for almost two more years.
One of the challenges for Airbus is that the number of open production slots until 2026 is very small. Getting additional A320neos from the production line will be difficult for any customer that does not already have confirmed slots. As a result, customers needing aircraft sooner will have to turn to lessors—in case they have unallocated capacity—or to Boeing. Neither is an attractive option for Airbus.
Of course, Airbus’ viewpoint is based on the assumption that the backlog is secure. It is anybody’s guess how secure it is, but even skeptics concede that the outlook for narrowbodies is much better than for widebodies. New coronavirus variants may yet force a change in thinking, however. India’s situation shows how difficult it is to make accurate decisions: 12% of the Airbus narrowbody backlog is for Indian airlines, which experienced a massive drop in flying during the country’s most recent devastating COVID-19 wave. Travel is slowly returning in Indian domestic markets, but new restrictions are being introduced elsewhere as variants spread.
Airbus’ case for raising single-aisle production quickly is supported by a particularly strong first half of 2021. The OEM had a substantial increase in commercial deliveries, resulting in a massive swing back to profitability. It delivered 297 commercial aircraft, up from 196 in the first half of 2020. Revenues in the commercial aircraft unit grew 42%, to €17.8 billion ($21 billion). The division also earned a €2.4 billion operating profit, after suffering a €1.8 billion loss last year.
Airbus also upped its guidance for the full year. It now expects to deliver 600 commercial aircraft, 34 aircraft more than previously forecast. The adjusted operating profit is expected to be €4 billion, double the previously forecast €2 billion. The company also expects €2 billion in free cash flow before mergers, acquisitions and customer financing—its earlier projections were a breakeven number.
To achieve its planned growth, Airbus must also convince its supply chain that investment in more capacity is now safe. Judging by comments made by Safran CEO Olivier Andries, much remains to be ironed out on that issue: “We are listening carefully to all our customers, airline customers, leasing company customers as well,” Andries told analysts recently. “And I have to say we are not sure that the market has the appetite for such rates and that rates well above 60 can be sustainable. With that being said, we’ve agreed on the number of engines that we will deliver to Airbus in [2021] and 2022. And we are discussing with them the numbers for [2023].”
Andries did not have to wait long for a public response by Airbus CEO Guillaume Faury: “I’m really disappointed to see that some usual partners are still challenging the rates,” he said. “They were challenging the rate 40 a year ago. We’ve managed to stick to the rate 40, and we really want to manage the ramp-up—the reramp-up as we call it—on the A320 that has started already in July this year.”
The disagreement reflects partly divergent interests. The supply chain has been brutally hurt by the pandemic. Airbus chose rate 40 last year in large part to ensure that everyone in the supply chain would survive and no gaps in the flow were created that could have potentially disrupted production. Suppliers are concerned about the financial burdens imposed on them for what Faury calls a “reramp-up,” such as the cost of ordering materials or parts from their own suppliers. Expanding production can be as expensive as cutting back.
However, Faury contends that suppliers should be better prepared this time around—as opposed to the previous growth phase up to 2019, when many Airbus suppliers (including engine manufacturers) fell behind delivery targets, causing severe disruptions. And they should be, in his view, because many of the supply chain infrastructure and tooling investments already had been made to manage rate 63 in late 2019 and early 2020.
Like Airbus, Boeing has seen a major improvement in its financial results and is looking at beginning (more modest) growth in narrowbody production. Boeing reported second-quarter so-called core earnings per share—meant to spotlight basic business results—of $0.40, transcending Wall Street’s consensus estimate of a $0.83 per-share loss. The OEM’s revenue was $17 billion, 44% higher than the same period last year, which saw the worst of the pandemic. The increase was driven in part by the restart of MAX deliveries, though services also grew by a stronger-than-expected 17%. While BCA still experienced a loss, with a negative operating margin of almost 8% in the quarter, there were at least no major charges.
If the latest quarterly earnings are an indication of a new trend, Boeing’s fortune may have finally bottomed out. The second-quarter results included the first in-the-black numbers since the fourth quarter of 2019—surprising investors, stock analysts and observers who widely feared more red ink after the recent 737 MAX and 787 troubles. A return to the pre-MAX and pre-pandemic glory days is still far away, but Calhoun is positioning the OEM for a return to growth and attempting to drag the supply chain along.
Boeing is keeping to its plan to move to a production rate of 31 per month at the beginning of 2022 from the current 16 per month. On the surface, the ramp-up seems plausible, considering that the rate was 52 per month just before the downturn and demand for narrowbodies—both for growth and replacement of older, less efficient technology—is showing signs of life.
Airbus is assembling the first fuselage of the A321XLR, the long-range variant of the A321neo. Credit: Airbus
Calhoun suggests that Boeing will help suppliers manage and finance the ramp-up. Traditionally, rate-breaks have been agreed by suppliers and OEMs 6-12 months in advance. “We may have to take some risks ourselves with respect to their readiness and their production rates and inventory that we might accumulate. That’s on us,” Calhoun says. “We understand that. But yes, the answer is ‘yes.’ We’ll have to give them notice, and I think they’ll be OK with that, largely because of risks we take.”
But Boeing’s 737 MAX plan hinges on one major variable: China’s approval to unground the model and restart deliveries—and likely follow-on orders—from within the world’s second-largest domestic traffic market. Chinese carriers had nearly 100 737 MAXs flying when the Civil Aviation Administration of China (CAAC) grounded the model in March 2019 after two fatal 737-8 accidents in five months, the first of a wave of groundings worldwide.
China is among those that still have some form of 737 MAX operations ban in place. The CAAC and several other regulators pledged to independently scrutinize changes to the 737 MAX that Boeing made and the FAA approved last November. The CAAC was one of 10 regulators to participate in a thorough review of the aircraft’s flight control system development and approval. While this Joint Authorities Technical Review (JATR) did not focus on return-to-service issues specifically, the work helped inform participants and augment their reviews alongside the FAA’s work as the lead regulator evaluating Boeing’s changes.
Two other JATR participants—Transport Canada and the European Union Aviation Safety Agency—were transparent about their 737 MAX concerns, each appending the FAA’s return-to-service conditions with additional requirements (AW&ST Feb. 22-March 7, p. 24). At this point, China’s approval is believed to hinge more on larger political issues than safety concerns, a view that aligns with Calhoun’s earnings-call comments.
“Technical issues are being resolved. In fact, for the most part, I think they’re all behind us,” he said. “We continue to work with global regulators and still anticipate that the remaining regulatory approvals will occur this year, including China.”
If not, Boeing’s ramp-up plans likely will change.
“Chinese failure to approve 737 MAX return-to-service (allowing cash-flow-generating aircraft deliveries), by the end of 2021 would doom investor expectations that Boeing will reach the coveted ~42/month 737 MAX fresh-production by early 2023,” industry consultant Jim McAleese notes.
“I’ll start thinking about it very hard by the end of the year,” Calhoun says. “If we get to that moment and, importantly, we’re not within a minute of getting certification in some way, we do have to consider real actions with respect to what the future rate ramp looks like.”
Considering the inherent uncertainty of geopolitics, some analysts are surprised at Boeing’s confidence. “We find management’s optimism unrealistic given the increasing U.S.-China tensions and recent statements from Chinese airlines,” Bank of America’s Epstein wrote in a post-earnings analyst note.
China’s domestic market was the first and fastest to recover to pre-pandemic levels, with some recent monthly schedules showing more capacity than comparable 2019 periods. Continued international headwinds mean widebodies can continue to fill in for the more than 100 grounded 737 MAXs and those in Boeing’s stored inventory earmarked for the country. But some airlines are enacting contingency plans to account for the lack of near-term deliveries.
“They will need to take airplanes from the leasing market as we go forward,” AerCap CEO Aengus Kelly says. “We just signed deals for the first used aircraft to go into China. We are now seeing demand from the Chinese customers for aircraft off the [AerCap] orderbook, and we expect that to continue.”
Separately, deliveries of 787s remain on hold while the company sorts out production-quality issues affecting several areas and suppliers (AW&ST July 26-Aug. 8, p. 22). It now expects to deliver fewer than half of the 100 787s that have built up in inventory during the current delivery pause and a previous one that started last fall and lasted five months. A general lack of demand for new widebodies due to low international travel demand stemming from the COVID-19 pandemic means Boeing has some time to get the 787 program on track (AW&ST May 31-June 13, p. 28).
