Airbus production plan exposes strategic differences with engine manufacturers Reuters

Author: Tim Heffer

PARIS (Reuters)-Disagreements between Airbus and engine manufacturers over plans to increase jet production have impacted strong aviation earnings this week, and concerns about supply chain industrial capacity obscured a deeper comparison of business strategies The level of tug of war.

As travel demand in the United States and China’s major markets picks up, Airbus hopes to almost double jet production within a few years as it takes advantage of the surge in orders for new jets and the recent troubled US competitor Boeing The dilemma of the company (NYSE:).

In May of this year, it released a series of firm goals and scenarios. It is estimated that by 2025, the monthly production of narrow-body aircraft will increase from the current 40 to 75, and it will be 60 before the COVID pandemic.

This makes engine manufacturers and others uneasy. They worry that the world’s largest aircraft manufacturer will disrupt their own recovery by launching new aircraft too quickly on the market, forcing existing aircraft to retire directly instead of repair shops.

“Engine manufacturers looked at production plans and found that they were replacing old aircraft that were still profitable for them,” said Richard Aboulafia, an analyst at Teal Group.

Aboulafia said this deadlock may accelerate engine manufacturers’ efforts to adjust their service-dependent business models by charging more upfront costs for engines.

There are potential risks in doing so, because aircraft manufacturers are also looking at a larger share of supplier service revenue.

Suppliers said that public disagreements on production may disrupt the entire supply chain and reduce risk appetite.

Few people questioned the steady recovery of the narrow-body airliner in high demand to the pre-crisis level, because Boeing was still more cautious after getting rid of the 737 MAX’s separate crisis.

“They (aircraft manufacturers) can feel that the momentum is picking up,” John Slattery, the head of GE Aviation, the world’s largest engine manufacturer, said on the Eurocontrol podcast, while promising to support narrow-body aircraft in early 2023. Return to the pre-crisis level.

But industry sources say that GE’s French engine partner Safran (PA:) When it questioned plans to rapidly increase production to an unknown level, it represented many suppliers.

“I have to say that we are not sure whether the market has an appetite for such interest rates, and interest rates well above 60 are sustainable,” Safran CEO Olivier Andris told analysts on Wednesday. Echoed the previous warnings about overproduction.

Pratt & Whitney parent company Raytheon Technology (NYSE:) CEO Greg Hayes also spoke to analysts in mid-year results, expressing surprise at the “quite aggressive” Airbus production plan.

Airbus Chief Executive Guillaume Forry defended these plans, saying that he was ready to “calculate” with suppliers based on reliable orders. He told analysts: “I am really disappointed to see some ordinary partners still challenging interest rates.”

In public, the debate revolved around the elasticity of demand and the weak supply chain.

Some industry sources said that behind the scenes, this kind of controversy exacerbated differences that had been brewing for years.

An industry source said: “The industrial concerns and risk appetite of low-tier suppliers are justified. But it is also reasonable to say that engine manufacturers must get rid of the work of aircraft that are already in service.”

Split business model

Both jet aircraft manufacturers and engine manufacturers benefit greatly from the demand for popular narrow-body aircraft used by low-cost airlines, but they generally recoup their investment in different ways.

Although aircraft manufacturers get paid when they deliver new jets, which allows them to absorb fixed costs fairly quickly, engine manufacturers rely on servicing old jets and must wait years to recover the costs.

So far, the strong economy has left room for both types of aircraft and supports record orders for new jets, while allowing old aircraft to fly long enough to generate lucrative service visits.

But Airbus’s plan has sparked disagreements on how to share the burden of the crisis. Engine manufacturers are already facing delays in future parts revenue because the maintenance clock for thousands of jets that were idle during the crisis has been suspended.

An industry source said: “It is quite surprising to see that production has reached the highest level ever, and the number of aircraft in stock has also reached the highest level ever.”

According to industry sources, CFM, a joint venture between General Electric and Safran, and CFM, which powers all Boeing and some Airbus narrow-body jets, and Pratt & Whitney, which competes with CFM for Airbus jets, have expressed their opinions. Private concerns about the long-term effects of the plan.

CFM, Pratt & Whitney and Airbus declined to comment.

As the sole supplier of the 737 MAX that has recently been hit by the security crisis, CFM will also be wary of its signal to the American company if it helps Airbus take the lead in the market with its A320neo series, an industry source said .

Aircraft manufacturers stated that they are the main risk-takers and believe that the entire industry has met the demand for their products.

They argued that although engine manufacturers would dilute their profits in the short term by delivering engines with little or no cash, they made high profits in future repairs.

Production tensions are just one of the threats to the fragile balance between the $150 billion jet industry business model.

For environmental reasons, airlines are also under pressure to retire jet aircraft early, sometimes in exchange for COVID relief. This can also reduce the number of precious engine overhauls.

Recent climate reports by Airbus and Boeing reveal the trend of shortened lifespans, and they calculate jet aircraft emissions based on a lifespan of approximately 22 years.

This is lower than the mantra that has supported the growing aviation finance industry for 25 years, and has a potential impact on aircraft prices, lease profits and future aircraft orders.

“The market will determine how many engines the engine manufacturer will produce,” Airbus Chief Commercial Officer Christian Scherer said in a recent interview.

“Ultimately, I think you will see a convergence in the number of engines and airframes being produced.”