Aerospace: A dogfight for the duopoly

The makeshift 3D cinema erected at the Farnborough air show last month by Commercial Aircraft Corporation of China, the fledgling aircraft maker, was all but deserted. At lunchtime on the last day of the industry’s premier trade show, only three people were watching Comac’s film about its planned passenger jets. Two of them were fast asleep.

The apparent lack of interest was surprising – Comac is the most likely candidate to break the duopoly enjoyed by Airbus and Boeing in single- and twin-aisle passenger aircraft for the past 20 years.

As economic and industrial power shifts east, Comac is pursuing a commercial jet market worth an estimated $4.5tn globally over the next two decades. It should be guaranteed a healthy chunk of this market because China’s fast-growing airlines are expected to be the single biggest source of sales in the world, outpacing demand from the US. If Comac can secure significant orders outside China, it could put the aerospace industry’s profitability into a tailspin because it will probably secure international sales only by initially offering cut-price deals to airlines.

Comac’s exhibition stand at Farnborough was a testament to China’s ambition to become a force in the industry, although the company was only founded in 2008. There were pictures of Hu Jintao, China’s president, and Wen Jiabao, premier, visiting the Shanghai-based Comac, accompanied by a statement of intent: “The company…is determined to independently build large Chinese passenger aircraft that will soon be soaring through the blue skies.”

In truth, Airbus and Boeing are braced for three new competitors in the critical battle for single-aisle jets seating more than 100 passengers. The Airbus’ A320 and Boeing’s 737 have dominated this narrow-body market, but Canada’s Bombardier, China’s Comac and Russia’s United Aircraft Corporation are all planning single-aisle jets over the next five years.

The greatest interest is focused on Comac’s C919 aircraft, seating 158 to 174 passengers and scheduled for launch in 2016. Aircraft programmes are expensive – development costs typically run to at least $10bn – and involve setbacks along the way, so analysts reckon state-controlled Comac is best-placed among the new breed of challengers to Airbus and Boeing.

Russian safety in focus after jungle crash

Russia’s ambitions to become a global player in the passenger jet market received a serious blow in May when a Sukhoi Superjet 100 crashed into the side of an Indonesian mountain.

All 45 people on board Russia’s first commercial passenger aircraft since the end of the Soviet Union were killed when the demonstration jet hit Mount Salak.

An initial investigation found that “technical problems haven’t caused the [jet] crash”, says Mikhail Pogosyan, president of United Aircraft Corporation, parent of Sukhoi.

Indonesia’s national transportation safety committee has not reached final conclusions but, in a report in June, it said Sukhoi should review its procedures for demonstration flights, and arrange additional training for flight crews, especially in mountainous regions.

Vladimir Putin, during his first tenure as Russian president, created state-controlled UAC in 2006 to bring together several of Russia’s aerospace companies that date back to the former USSR – including Sukhoi.

The group is embarking on the highly ambitious task of trying to replicate Russia’s success producing fighter jets in the commercial aircraft market.

In a break from Soviet-era aerospace projects, UAC is relying heavily on western technology and support.

Boeing was a consultant on the 95-passenger Sukhoi Superjet 100. Its engines are being supplied by a joint venture with France’s Snecma, part of Safran.

The jet was launched in 2011, more than two years behind schedule.

There are orders for 174 aircraft, with many coming from carriers and leasing companies in the Commonwealth of Independent States.

Finmeccanica, which has a 25 per cent stake in the Sukhoi company making the Superjet, is responsible for selling the aircraft on western markets – where it will compete with similar regional jets by Bombardier and Embraer.

The Superjet is due to be followed in 2017 by the MC-21 narrow-body jet by Irkut, another UAC subsidiary.

The MC-21, seating up to 212 passengers, is supposed to go head-to-head with the dominant single-aisle workhorses – the Airbus’ A320 and Boeing’s 737.

Fabrice Brégier, Airbus’s new chief executive, acknowledged the potential scale of the threat posed by Comac when he said at Farnborough: “We know…this market of over 100 seats will open to new competitors, so we need to be prepared to be competitive…We take the C919 as a very serious development, managed by a very serious company.”

Another person close to Airbus says: “Of all the newcomers [Comac] will be the strongest – not because they have the best skill base today, but because they have more financial firepower than anybody else. They can sink billions into [aircraft] projects without any concern for [the] bottom line.”

The consolation for Airbus and Boeing is that their efforts to keep the new competitors at bay are working – so far. The European and US manufacturers are notching up large orders for planned new versions of their existing narrow-body workhorses featuring more fuel-efficient engines, in effect shutting Bombardier, Comac and UAC out of much of the market during this decade.

However, aerospace is a highly cyclical industry and there is a very real risk that Boeing and Airbus could swamp the market with unwanted aircraft over the coming years. Amid the eurozone crisis, the possibility of the US being plunged back into recession by its looming “fiscal cliff” of deep spending cuts, and slowing economic growth in several developing countries including China and India, some airlines are going bust, while others are cancelling aircraft orders or postponing the time when they take delivery of new jets.

Should the trickle of recent order cancellations and delivery postponements become a flood, it could wreak havoc for Airbus and Boeing.

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In the second half of the last decade, Airbus and Boeing were nervously mulling the case for brand new narrow-body aircraft. Both were scarred by delays and cost-overruns on new wide-body jets – Airbus’s A380 superjumbo and Boeing’s 787 – so were cautious about committing to new single-aisle aircraft.

Then in July 2008, Bombardier set alarm bells ringing at its larger rivals by announcing plans to use a new generation engine developed by Pratt & Whitney – called a geared turbofan and offering a step change in fuel savings – on its planned two new narrow-body aircraft.

As the oil price lurched to a record $147 a barrel, Bombardier was able to claim that these engines would enable its new aircraft – called the CSeries – to burn 20 per cent less fuel than current generation of jets by Airbus and Boeing.

Airbus responded in December 2010 by ditching the case for a new aircraft and instead announcing plans for a tweaked version of its existing narrow-body jet – featuring similar Pratt & Whitney engines to Bombardier’s CSeries or alternative ones by CFM International, the joint venture involving General Electric of the US and France’s Safran.

Crucially, Airbus’ A320neo – which stands for new engine option – is due to be launched in 2015, just two years after Bombardier’s CSeries.

If Airbus had opted for a new aircraft, it would have been unlikely to fly until well into the next decade. After some dithering, Boeing has adopted a similar strategy by putting new, more fuel efficient engines on its existing narrow-body jet, and calling it the 737 Max.

Following these decisions, single- aisle aircraft orders have mushroomed for Airbus and Boeing – minimising the sales opportunities in the short to medium term for the new breed of narrow-body jet makers.

The strength of Boeing and Airbus in the single-aisle market helps explain why Embraer, the Brazilian aircraft maker, baulked last year at the risk posed by building a jet bigger than its current 122-seat model.

“Can we do [a] 200-seater? Probably yes, but it would stretch the company and introduce risks we did not think were acceptable,” says Frederico Curado, Embraer’s chief executive.

The immediate threat to Airbus and Boeing is further reduced because some of the new aircraft makers are not focused – at least initially – on their main market. Japan’s Mitsubishi Aircraft Corporation is developinga narrow-body aircraft, but it will be a regional jet with 70 to 90 seats.

The most advanced threat to the duopoly comes from Bombardier, which has been making aircraft since 1986. But the surge of orders for the A320neo and 737 Max suggests the Canadian company’s planned new narrow-body jets are struggling to secure widespread support. So far, Bombardier has orders for 138 CSeries aircraft, which will have between 100 and 149 seats.

In an effort to improve its position, Bombardier in March signed an agreement with Comac under which the two companies will seek cost savings by collaborating on aspects of the CSeries and C919 programmes.

Bombardier is hoping the collaboration with Comac will give it bigger sales opportunities in China, which is expected to be the most valuable aircraft market in the world over the next 20 years. Airbus estimates China will need more than 4,000 aircraft worth $545bn.

Guy Hachey, head of Bombardier’s aerospace business, says the work with Comac “evens up the field” with Boeing and Airbus. “We’re a small company…that competes against two giants,” he adds. “They will do everything so that we don’t destabilise the duopoly.”

For Comac, the collaboration with Bombardier should help the Chinese aircraft maker’s capability, as well as provide some welcome credibility. Nick Cunningham, analyst at Agency Partners, a research firm, says the “major hurdle” that Comac has to overcome is demonstrating that its aircraft will be safe to fly.

“If a western airline bought Chinese aeroplanes and they proved to be unsafe that would be disastrous for the airline – [possibly] fatal,” he adds.

Comac is asserting that its aircraft are safe, partly by highlighting how they rely heavily on western technology – for example, the C919 is due to have similar CFM engines to those planned for the 737 Max.

Comac says it has orders and commitments by 12 customers to buy 280 C919 jets. Most of these orders are with Chinese airlines and aircraft leasing companies, and the domestic market is likely to be Comac’s main source of deals in the coming years.

Comac is attracting some foreign interest, however – Ryanair, the Irish low-cost carrier, last year agreed to collaborate with the company on the development of a 200-seat C919.

At Farnborough last month International Airlines Group, parent of British Airways and Iberia, raised the possibility of buying C919s by agreeing to provide information to Comac on what aircraft specifications it is seeking.

The increasing role of Chinese banks in aircraft financing – as some European banks retreat in this area – should also be a boost for Comac. “China’s emergence as a major player in aircraft financing increases the likelihood that the C919 will become a credible alternative to the Airbus A320 and Boeing 737,” says John Dowdy, director at McKinsey.

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Given Airbus and Boeing have struggled to launch some of their new aircraft on time, it seems plausible that Comac’s C919 may not reach its first customer by the company’s target date of September 2016.

So Airbus and Boeing will probably not face a proper onslaught to their duopoly until after 2020, by which time they will be edging towards brand new narrow-body aircraft, possibly involving so-called unducted fan engines enabling another major leap in fuel efficiency.

However, such engines will probably be available to Comac as well as to Airbus and Boeing. The challenge will be putting them on aircraft made mainly out of lightweight carbon fibre reinforced plastic rather than aluminium alloy.

Jim Albaugh, until June head of Boeing’s commercial aircraft division, says he would not bet against Comac in the medium to long term because it has the resources to succeed. “Whether [the C919 is] a good aeroplane I don’t know, but eventually they’ll get it right.”