The Small Twin-Aisle Market: What’s Next?

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Steve Mason, Vice President of Aircraft Analysis for CIT Aerospace, examines what lies ahead for the small twin-aisle aircraft market.

Steve Mason, Vice President of Aircraft Analysis for CIT Aerospace, examines what lies ahead for the small twin-aisle aircraft market.

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  • 1. © 2014 CIT Group Inc. The small twin-aisle market has proven to be a buoyant market with over 2,000 aircraft in service. Steve Mason, Vice President of Aircraft Analysis for CIT Aerospace, examines what lies ahead for this important market. Airbus SAS introduced the A330 twin-aisle jetliner in 1994 as a competitor to Boeing’s 767, itself introduced in 1982. The aircraft sit squarely in the 200- to 300-seat market, and both proved to be tremendously successful airframes. Together they boast over 2,300 orders since the programs began. The airframers have since launched new technology aircraft into the market: Boeing introduced the 787 in 2011, and the entry into service of the Airbus A350-900, an aircraft slightly larger than the A330-300, will be later this year. The passenger variant of the 767 has understandably seen a marked reduction in deliveries from its historic peaks, and now only a handful of passenger units reside on the Boeing order book. Meanwhile Airbus holds over 250 firm orders for the A330 and as recently as 2013 increased production of the aircraft to 10 units per month. Twenty years after its introduction, the A330 is at a crossroads. The aircraft is not selling as well as Airbus would like. The question now facing both the company and its customers is what options remain for the A330 and, for that matter, this entire seat market. Airbus has poured significant investment into the A330, to the benefit of its customers. With the introduction of its 242T MTOW version in 2015, for which CIT Aerospace is proud to be the launch customer, the A330-300’s nominal range will increase to 6,100 nautical miles from 5,570. With other planned enhancements, Airbus will have increased the range of the A330 by more than 50% since its introduction. During that time, Airbus has honed the design to compete effectively with the latest generation of twin-aisle aircraft, namely Boeing’s 787 and Airbus’ own A350 family. For Airbus and Boeing, the 250- to 400-seat twin-aisle market has proven successful, especially compared with the commoditized single-aisle market and the unpredictable very large aircraft (VLA) market. The A350-800, though, has struggled to find a foothold as a successor in the seat market the A330 occupies, and Airbus is wrestling with options for extending the life of the A330 as an alternative. Based on announcements from the manufacturers and CIT Aerospace’s forecasts, not including the VLA market, Boeing could boost its production rates to 24 twin- aisle aircraft a month – 16 787 and eight 777 models – by 2022. Airbus, meanwhile, has cited challenges in raising A350 production to 10 aircraft a month by 2018, and it could be further challenged to achieve 14 a month by 2022. If Airbus scaled back the A330 program and let it fade gradually, similar to what Boeing is doing with its 767 passenger version, then Airbus would be left competing for market share and, more importantly, production share. With just 12 to 14 twin- aisles per month to Boeing’s 24, Airbus would be making a considerable concession. The Small Twin-Aisle Market: What’s Next? Steve Mason Vice President, Aircraft Analysis CIT Aerospace “Twenty years after its introduction, the A330 is at a crossroads.” CIT Executive Insights
  • 2. CIT Executive Insights with Steve Mason The Small Twin-Aisle Market: What’s Next? The A330 Bridge Closing this gap with Boeing may well fall to the A330, where Airbus has several options for extending the life of the aircraft: Do nothing. This would result in reduced sales for the A330 and put Airbus significantly behind Boeing in twin-aisle market and production share. At industry average stage lengths for this size category aircraft, the lower capital cost of the A330 makes for a very competitive aircraft, however, the A350 and the 787 have accounted for almost 80% of twin-aisle sales since the beginning of 2012. While the A330 in its current form will continue to enjoy some additional sales, it won’t be enough to justify continuing the current production rate of 10 a month for long. The regional version of the aircraft announced by Airbus in 2013 to boost sales has not yet been the stimulus Airbus seeks; however, we do expect certain Asian carriers to purchase the aircraft in not insignificant quantities. Small changes. Airbus could continue to wring additional market value from the A330 by improving aerodynamics or introducing engine efficiencies or other design tweaks that would adapt the aircraft to additional markets and reduce its operating cost. Rolls-Royce and General Electric will be introducing modifications to their engines to reduce fuel burn by up to 1% in 2015 to coincide with the entry into service of the 242T A330. Airbus has been successful in offering incremental improvements to the A330 since its inception, and this tactic could give the company some breathing room in the market through 2017. While even minor changes in aircraft design can improve efficiency, they have their limitations. Airbus seems to have picked the low hanging fruit, and from now on every additional improvement will tend to be more technically challenging and expensive than the last. Significant changes. Rather than tweaking the design, Airbus could invest in a more significant overhaul which could include new engines, new wings, a refreshed cockpit, landing gear changes or new fuselage material. These could add to the A330’s market appeal, but timing is crucial for any significant A330 modifications. Airbus needs to bring the new version to market quickly to capitalize on the limited availability of the A350 and 787, and such major modifications can be costly and time-consuming. “Airbus could continue to wring additional market value from the A330 by improving aerodynamics or introducing engine efficiencies or other design tweaks that would adapt the aircraft to additional markets and reduce its operating cost.”
  • 3. © 2014 CIT Group Inc. A new wing, for example, will reduce fuel burn by being more aerodynamically efficient and lighter. For twin-aisle aircraft the wing and wing box can weigh between 30% to 40% of the aircraft’s empty weight. The A330-300’s range increase has been one of the predominant reasons for its success over the years, and Airbus may look to parlay this with a re-engined A330. New engines and aerodynamic improvements, such as winglets, could extend the A330’s range by about 10%, however, the integration of a new engine would increase the aircraft’s weight as newer engines are heavier than the existing A330 engines and would require extensive reinforcements to the existing wing. The company has gained a lot of knowledge from its A320neo program and has experience strengthening the A330 wing from both the A330 and A340 programs. The only real option to reduce engine weight is to introduce a composite fan system, which would also necessitate more investment by the engine manufacturer and could lead to further entry-into- service delays. Ultimately, a re-engined A330 would give Boeing good reason to further improve the 787-8, and it has opportunities to do this on the back of the improvements it made to the 787-9. Rely on the A350-800. With the first version of the A350 set for delivery later this year, Airbus has said it will develop the -800 by shrinking the A350-900, but customers have been lukewarm to the idea. If Airbus goes ahead with plans for the A350-800, it would need to either add seats or reduce the size or weight of the wings. “Shrink” aircraft historically have been lucrative because they enable the manufacturer to cover more market segments without investing in a new design. Rising fuel prices, though, have rendered this strategy obsolete. Since the A350-800 was conceived, fuel prices have doubled, and the A350-800’s larger wing design makes it a more costly plane to operate. The two largest contributors to aircraft efficiency – and therefore operating cost – are wings and the engines. A larger wing area can increase aerodynamic efficiency but not if the increased weight isn’t offset by the number of passengers generating revenue on the aircraft. The planned wing area of the 276-seat A350-800 is the same as the 777-300ER, an aircraft that can carry almost 400 passengers. Without new wings – and perhaps new engines to go with them – the A350-800 may not gain enough market share to serve as a viable successor to the A330, especially as competition from the next-generation 787 increases next year. The A350-800, as a simple shrink of the A350-900 would result in the aircraft having the same wing, engine, landing gear and empennage as the larger variant, with the only major contributor to weight-saving being the shrunk fuselage sections. Meanwhile, the A330, even with less range, still offers an advantage to airlines that don’t need longer-haul capabilities. Airbus might convince existing customers waiting for an A350 to accept a re-engined A330 if they already have A330s in their fleet and don’t need the range of the A350. This would reinvigorate the A330 and free up precious A350 slots, increasing Airbus’ unit margins in the process. Finding Additional Value Clearly, Airbus’ best option is to find ways to add value to the A330 and extend the life of the airframe. The company’s shareholders may not care in the short term if it cedes production and market share, but in the long run, incumbency creates shareholder value, as Bombardier has learned in its battle with Embraer’s E2 EJet. In addition, an improved A330 would boost Airbus’ monthly production and help close the gap with Boeing. Meanwhile, engine manufacturers are pushing Airbus to consider existing engine designs for a new A330 – dubbed the A330neo, or “new engine option” – that could benefit both Airbus and the engine manufacturers. Airbus has remained mum on a NEO version, and any such aircraft would need competitive pricing to overcome the efficiency of future generations of the 787. For the engine makers, it reduces the risk while increasing volume, and Airbus and its shareholders wouldn’t pay for a new development program. In addition, securing a sole source position on a re- engined A330 might be preferable for the engine manufacturer rather than battling it out in dual “Clearly, Airbus’ best option is to find ways to add value from the A330 and extend the life of the airframe.”
  • 4. © 2014 CIT Group Inc. engine source sales campaigns for the 787. The biggest benefit for Airbus, though, would be using the A330 production capacity to maintain its twin-aisle market share. If Airbus builds another version of the A330, though, what will be the response from the airlines and lessors? The market has seen unprecedented sales since the 787 and A350 were first conceived. Today, more than 2,000 twin-aisle aircraft are on order, compared with less than 500 in 2005. At an airline level, CIT Aerospace analyzed the capacity requirements of the 200- to 300-seat market by studying traffic growth rates on a regional basis against airlines’ current fleets and retirement policies, among other factors. We concluded that between 2018 and 2021, major U.S. trunk carriers, Asian carriers throughout the continent – especially in China – along with major European carriers will need additional capacity in this seat market. Even so, the industry doesn’t appear to have the appetite for up to 40 twin-aisles a month in 2022. Despite the allure of new technology, though, many airlines would value the “out of the box” reliability of an A330 variation because it lowers the probability of expensive delays, cancellations and down time. What’s more, while the market will have plenty of larger twin-aisles with the advent of the A350-900, A350-1000 and the ongoing availability of the 787-10 and 777X, the shift to these larger planes is creating a gap in the 250-seat range. For example, the 787-8 has represented only 13% of all 787 sales in the past three years. An A330-300 with new engines, while similar in size to the 787-9, would differentiate itself with its lower capital cost. While the A330’s sales may be trailing off, the plane remains one of the workhorses of the Airbus fleet. We believe the company’s best option for combating declining sales and maintaining market share against rising competition from Boeing is to pursue its options for extending the life of the aircraft. We believe Airbus can design a modified A330 that is competitive and that best serves the interests of its customers and shareholders. “Many airlines would value the ‘out of the box’ reliability of an A330 variation because it lowers the probability of expensive delays, cancellations and down time.” March 2014 To learn more about CIT Aerospace, visit cit.com/aerospace. Members of the press who have an interest in speaking with Mr. Mason can contact Curt Ritter at Curt.Ritter@cit.com or Matt Klein at Matt.Klein@cit.com. Additional CIT Executive Insights, which showcase our insights and ability to put our knowledge to work for the small business, middle market and transportation sectors can be found at cit.com/perspectives. Executive Biography: Steve Mason is Vice President of Aircraft Analysis for CIT Aerospace where he is responsible for aircraft economics, aircraft performance and technology, along with investment analysis for aircraft procurement. Prior to joining CIT in 2012, he spent 12 years working with Rolls-Royce plc and International Aero Engines, where he was responsible for aircraft engines sales for Western Europe and Leasing markets. Mason also held various positions with Rolls- Royce and Airbus in business management and engineering. Mason earned a Bachelor of Aeronautical Engineering from the University of Limerick, Ireland. CIT Executive Insights with Steve Mason The Small Twin-Aisle Market: What’s Next?