Southwest, airtran and the 737-800

Addison Schonland from airinsight has this interesting piece about Southwest and airtran and what an order for the 737-800 could mean. He is absolutely right I think: to understand the rationality behind it you have to take a deeper look into the economics of the 737-800 and it’s competitor, the A320.
Say (just for simpliciy), the operating costs of the 737-800 and the A320 are equal (inreality it depends from airline to airline, route to route etc., see also Fuel burn and operating costs) . Then, because the 737-800 is a little bit larger than the A320 (a fair comparison has 162 seats for the 737 and 150 for the A320), the operating costs per seat are lower for the 737-800 by 8%.
The reengining of the A320 will drive costs down by roughly 15% (per the better SFC, the skarklets, the lower maintenance costs of the engine and whatever Airbus might do besides that).
Now the A320 has an advantage: 15% per flight, but considerably less on a per seat basis. This kind of explains why Boeing (at least officially) thinks they can forego the reengining and work with incremental improvements instead to match the A320 costs on a per seat basis.
But as fuel costs will rise in the future (who is so optimistic to think they will stay where they are or even go down?), the advantage of the A320NEO will be harder to match. And as I explained in  A320NEO vs. B737NG+, lower noise fees in Europe and elsewhere will add to the –NEO’s advantage. So it is not yet clear, that Boeing will not do a reengining of the. Lately, Boeing hinted that a decision will only be taken in 2011, so they might wait for the acceptance of the NEO and what Airbus will build into that upgrade besides the new engines.
Ad the Economist wrote last week, the decision at Airbus to go-ahead with the reengining is due tomorrow – then the last call is with the EADS as the owner of Airbus. They have to give the green light. If it is given, we can expect Airbus to market the NEO in the middle of October. Expect orders – or conversions from existing orders – to roll in soon!


The Lufthansa Order and what it might tell us

Yesterday, Lufthansa ordered 48 aircraft to be delivered from 2012: 32 A320 family aircraft, eight A330-300 and 8 E195. When I first read the news, I wondered what that order means, when there are more efficient aircraft available in the next years (think of 787 vs. A330, CS100/300 vs. E195 or, further out, A320NEO  vs. A320(current).
To clarify the situation I would like to direct you to Jens Flottau's article in the Aviation Week:
Most of the A320 are for replacement of older A320 or the even older B737 (-300's and -500's). Swiss will get A320's and A321's, but no A319's - that makes sense, as the CS300 would be clearly more efficent. Swiss (via LH) only has ordered 30 CS100 so far, but there are 30 more options which could be converted to CS300 if needed.
So I don't think right now that the A320 order is a vote against the NEO, but it probably all depends on what Boeing does: if they would come up with a 737 replacement by 2020/21, I see LH switching from A. to B. for their (6 abreast) narrowbody fleet in the long run. The CSeries should have it's role also, not only at Swiss, but also as a Avro replacement at Brussels, maybe at Austrian, LH Italia - and who knows what happens to SAS - they would be happy to find a home in the LH Group and expressed interest in the CSeries earlier.
The question why Austrian does not get any new aircraft is sufficiently answered in the article.
Another question that struck me, is: why A330-300's! Why do they not order the B787 or the A350??? Does LH (aka Nico Buchholz) know something about these two natural candidates for A330 replacement we still do not know? Any further (and then probably significant) delay of the B787? Problems in the A350 development program? Fact is that the flight test program of the B787 has slowed down in the last two weeks (as well as the B747-8 flight tests did). Aircraft number 6 is also delayed further.
I guess we will have to wait until the Boeing Q3 earnings call until we hear what is going on there. Until then, have fun with wild guessing...


Aviation and the Environment

Today, at the „Aviation and Environment Summit“, taking place in Geneva, IATA’s Director General  Giovanni Bisignani called on the world’s government to unite in support of aviation’s ambitious targets to combat climate change and to agree on a global approach at the ICAO Assembly in Montreal.
As probably everyone who is interested in aviation (politics) knows, these targets are:
  • To achieve carbon neutral growth by 2020
  • To improve fuel efficiency by 1.5% on average annually (based on RPM)
  • To cut net emissions by 50% in 2050 compared to 2005
Let’s see, if – or which - these targets are ambitious and which are achievable!
Taking the data from RITA BTS (Research and Innovative Technology Administration – Bureau of Transportation Statistics), where one can obtain flown RPM’s and fuel consumption, the US Carriers bettered their efficiency by 3.4% annually on domestic flights (less, but still more than 2% on international traffic).
Looking into the Sustainability Report of german flag carrier Lufthansa reveals that fuel efficiency between 1991 and 2008 also rose by an average of 3.4% annually.
Thus the target of 1.5% does not seem to be too ambitious.
A total different story is the goal to achieve carbon neutral growth by 2020:
Let’s take the Boeing CMO: an annual RPM growth rate of 5.3% minus 1.5% efficiency improvement per year leads to a yearly growth in carbon emissions of 3.8% - take the more ambitious ICAO goal  of 2% annual improvement and the gap is still 3.3%.
Now what makes us believe that – suddenly – from 2020 on we can close that gap to zero?
The answer: Offsets! In other words: Emissions Trading! Nothing else are the “economic measures” or the “fourth pillar” of aviation industry’s strategy, with the other three being investing in new technology, more efficient infrastructure and more effective operations.
So, in reality, we won’t see carbon neutral growth from 2020, as aviation will have to pay for a “letter of indulgence” for their then still-growing emissions – given that we still have that kind of continuous growth in aviation as we had historically until today (over the long run, ignoring short-term lows e.g. after 9/11 and the financial crisis).
In 2009, according to Bisignani, aviation emitted 625 million tones of CO2.
In 2020, this would grow to 1.081 million tones, assuming the 5.3% growth rate and the 2% efficiency improvement every year.
In 2005, aviation used about 75 billion gallons of fuel worldwide, I found somewhere. This would lead to about 702 million tones of CO2 – as we can assume that aviation grew enough between 2005 and 2009 to let fuel consumption grow also, this source is a little bit conflicting to Bisignani’s number for 2009. Nevertheless: if we want to achieve the 50% target in 2050 and now even assume no growth between 2020 and 2050 we would have to save about 730 million tones in 2050 compared to 2020.
The biggest part from that would have to come from biofuels.
Now advances in biofuels have been enormous over the past few years and probably will be in the next years. But it remains unclear, when it will be possible to produce 2nd or 3rd generation biofuels in such large quantities that it will have an impact on overall CO2 emissions in  the aviation sector. And we should not forget that there are other transportation modes which want to have their slice of the pie. Even if it looks like automobiles are more likely to use electricity in 2050 than any form of fluid fuels, in the meantime the worldwide fleet of diesel- and gas powered cars will raise.

What’s the point for today?
Well: Please, Airbus, Boeing, Embraer: come forward with your re-engining plans – or decide quickly to come up with all-new designs by 2020. It won’t save the planet, but would make the problem a little bit smaller.

Have a nice weekend!


Fuel burn and operating costs

Obviously, the comments from Boeing’s  Randy Tinseth about reengining and what it means to the operating costs of an aircraft caused some confusion about the relation between fuel burn and operating costs.
Randy Tinseth said that the reengining, widely believed to result in a fuel burn advantage of  13-14% would mean that operating cost would be 3-4% lower than today.
Some people were surprised by this low number (at least compared to the 15% better SFC the engines shall deliver), but it becomes clear, if you put it in perspective:
With a fuel price around $2/gallon, fuel accounts for roughly 40% of the cash operating costs. 14% from 40%....- that’s 5.6% cash operating improvement. Mow all depends on the airlines capital costs to determine the effect on direct operating costs.
But it’s not a too long way to come from 5.6% to 3-4%, so Tinseth’s numbers seem to be in the right range.
The question is, if he is right when he says that these 3-4% would just close the gap between today’s narrowbody families, bringing the A320NEO essentially on par with the B737NG.
I guess that’s there many airlines (and Airbus of course) would disagree. As both aircraft manufacturers as of today own about 50% of the market, I would say that the aircraft are more or less on par - in the end it depends on the exact mission an airline has for the aircraft (stage length, cargo revenue potential, etc.) to decide which one is better for it.
Now: 3-4% does not sound like a lot – does that justify the reengining effort?
Yes! It becomes clear if you take a look at the results of airlines like American or Continental. Taking the numbers from their quarterly filings one can obtain their operating profit and operating margin. As fuel costs are listed separately, you can see what would happen if the whole fleet would be 15% more fuel efficient.

Of course, this is a simplification, but still impressive, I think - it makes Continental in 2009 going from a $147m. loss to a +$350m. operating profit - American would have made an operating loss of (just) $171m. instead of $1004m.


A320NEO vs. B737NG+

Signs are getting clearer that Airbus will proceed with the A320NEO to go ahead and announce that in the coming weeks. Meanwhile flightblogger comes with the news that Boeing has a 3rd way to react (with the 1st being also doing a reengining, the 2nd going with an all new design).

Boeing claims that that the A320NEO would only have a 3-4% operating cost improvement over the existing version. Hard to believe, if one believes the likes of CFM and P&W: 15% fuel burn reduction minus 1-2% through integration of the larger and heavier engines, plus the 3-4% improvement via the sharklets would result in 16-18% reduction in fuel burn. Considering that fuel costs are at 40% of the total COC this would lead to a COC reduction of 6.4-7.2%. If you then believe that maintenance costs are 20% below today’s engines and consider lower environmental costs, Boeing and their B737NG+ will significantly fall behind the A32XNEO, especially the A321NEO will burn the B737-900ER, which even today is a slow seller.
Then consider lower environmental costs, especially for European operators:
a) The inclusion of aviation in the ETS (Emissions Trading System) will add about 12% to the fuel costs.
b) Lower noise fees could save up to 4% COC of a 500nm flight. For example, at Paris CDG Airport an A319 today pays $177 (at $1.30/€) more than the CSeries CS300 will pay for noise. The difference of the A320NEO vs. the B737NG+ would be in the same range.
c) NOx fees at many European airports will also be lower, but this contributes just a few € to the equation.
All in all, Boeing could only sell their B737NG+ for a steep discount, profit margins will fall. At the same time they have to invest (more or less, but probably more) heavily in their most profitable program, the B777, as the A350XWB threatens to eat these margins, with the B787 and the B747-8 being far away from being profitable.

Not a good time to be a Boeing shareholder…


The CSeries and what it already did to aviation

We don't know today if the Bombardier CSeries will ever become a success. But one thing is for sure: it has initiated a maybe never seen activity in aircraft development, if you count re-engining activities as aircraft development.
Airbus and Boeing would never have lost a thought about that matter - and they just started when it became clear that the CSeries would have the potential to eat into their market.
This has a lot to do with the Geared Turbo Fan: Airbus started their re-engining studies only after they tested the GTF-Demo on their A340-600 testbed.
But it does not end with A. and B. - also Embraer today thinks about a re-engine programme for their successful EJet-Series. They feel the pressure that comes with the MRJ70/90 on the low end and the CS100 on the high end of their product line.
A re-engining with the same engines could be a straightforward and low-risk solution. Why:
a) The GTF works as advertised. Then the E170/175RE with the "MRJ GTF" would regain it's leading position, as the MRJ70 is (somewhat surpringsingly) heavier than the EJets, so that with the same engine and (probably) a new wing, as Embraer would have to redesign the center wing box to accomodate a longer gear anyway would provide less fuelburn. The same would be true for the E190/195RE against the CS100. For routes typically flown by the EJets (<1000nm), they would be unmatched in fuel burn. Embraer would have the market for themselves.
b) The GTF does not work (which is, from my perspective unlikely, but let's just play the game...): then there is no competion to the EJets anyway and they can flip back to the CF34  - the MRJ is dead, the CSeries is dead, BBD can't do anything to keep the CRJ family competitive as they are financially burdened with the CSeries, the Lear85, a Global successor and maybe the Q400X, the SSJ100 will not have a big impact in the western markets.
c) Embraer decides to take another engine, either a CFM/GE LEAP-X/TECH-X or a RB282 from RR: then there is the risk that the GTF works but the alternative fails - and Embraer is out of the market altogether.

But there is also the possibility that Embraer decides to develop a whole new aircraft. Probably to compete with the CSeries. Then there is the danger that it will be a "me-too" aircraft. They will probably go a little bit higher in capacity than the CS300 (see B787 vs. A350XWB), as aircraft tend to get biger anyway. But they would then also compete heavily against A. and B., so they would have to bet on new narrowbody aircraft families by A. and B. coming earlier than it is expected today. These aircraft families then would probably start at the size of todays A320 and 737-800, so that there would not be any direct competition to the new potential Embraer Jet.

Enough food for thought for today - whatever Airbus as the catalyst for all what is coming after that decides  - and annouces - in the coming weeks: it will lead to a series of decisions to make by all others involved.

Meantime - good luck to Bombardier: they are the ones we have to thank for all the debates we can do today ;-)

Have a nice sunday!


Don’t consider Pratt being dumb…

Again the “usual suspect”, writing on the GLG website, tries to tell us that P&W would be dumb enough to develop separate engines for the MS-21 and the A320NEO. He believes to know that the MS-21 (still – more or less – in the definition phase) needs 32klbf of thrust - and the fact that the A321 has a max. thrust of 33klbf drives him to the conclusion that P&W would have to start the design of a fourth engine to cover the A32XNEO thrust range.

Now – if you would be an engine maker: would you do that? Or would you design one engine that covers the full range up to 33klbf – especially as Airbus seems to be the far more important customer than the Russians?
Interestingly he does not see the need for CFM to come up with two different engines for the C919 and a potential B737 re-engining – just because a CFM official told him that the LEAP-X1C would fit under the wing of the B737. The C919 needs around 30klbf of thrust – the stretch version to be introduced later even more, far more than the B737 needs, so that the LEAP-X1C would be far being the optimal solution for the B737 – it seems that it would be better matched for the A32XNEO needs.
This might be an explanation why Boeing seems so skeptical about the re-engining.

But let’s wait what we hear out of Chicago after Airbus announced what they will do – I expect this to happen in late September or October…