Airline Weekly - March 1, 2011

Cover Story

Narrow Passage: Airlines navigate a fast-changing market for single-aisle aircraft

Giant ultra-jumbos like the A380 and sleek new globetrotters like the B787 get all the glitz and glamour. But the airline industry of the next 20 years will be shaped at least as much by developments in single aisle aircraft. Narrowbodies, after all, account for roughly three quarters of all airplanes flying today.

As Airbus sales maestro John Leahy likes to say, there’s an A320 taking off or landing somewhere in the world every three seconds. B737s are even more prevalent, and out-of-production narrowbodies like B757s, B717s, MD-80s and MD-90s still play an important role for more than a few carriers. At the smaller end of the single-aisle range of products, meanwhile, are popular E190/95s and a range of products with fewer than 100 seats, a segment dominated by Bombardier and Embraer.

It’s this mix of narrowbody types—and the mix of narrowbody products on offer to airlines—that’s set to change dramatically just in the next few years. Most prominently, Bombardier will directly take on Boeing and Airbus in their long-duopolistic space for the first time. The Canadian manufacturer is now marketing a new CSeries family of planes featuring two models, the CS100, seating 100 to 125 passengers and a larger CS300, seating 120 to 145. That puts it in competition with smaller versions of the A320 family like the little-used A318 but also the highly popular A319. Also in that size range are Boeing’s out-of-production B717s and unloved B737-600s but also highly successful B737-700s. CS100s are expected to debut just two years from now, with CS300s a year after that. Bombardier is promising a “step change” in technology thanks to next-generation geared turbofan engines from Pratt & Whitney and heavy use of advanced materials for the airframe. It’s impossible to know for sure how economical this new approach will be until the aircraft actually flies, but Bombardier is touting a 20% fuel burn advantage versus similarly-sized, current-generation planes. And fuel burn is naturally on every airline executive’s mind these days.

Bombardier isn’t alone in challenging the Airbus-Boeing narrowbody duopoly. China’s state-owned Comac is hoping to enter the market on the larger end, building a new C919 family with 150-190 seats, pitting it against A320s, A321s, B737-800s and B737-900s. It will use CFM’s next-generation Leap-X engines and aim to enter service in 2016, now just five years away. That same year, Russia’s Irkut hopes to debut its MS-21, which is similar in size to the C919 but will feature the same PW1000G engines that Bombardier is using for the CSeries.

Will these new challengers give the two incumbents a run for their money? The Chinese and Russian planes are still a long way off from making an impact, though a privileged position in their large home markets makes some impact likely in the long run. Boeing and Airbus, after all, sell a lot of B737s and A320s in China and Russia today. The CSeries, by contrast, poses a... (501 of 2,005 words)

Also Inside this Issue:

There is a silver lining to rising oil prices. Yields usually rise as airlines react by cutting seats and raising fares. And markets with big oil industries boom. But it’d be hard to find any airlines happy about the sudden 14% surge in WTI oil prices last week. The shock, linked to turmoil in Libya, sank every single airline stock tracked by Airline Weekly (see pages 10-11). That’s something that didn’t even happen when Lehman Brothers collapsed.

The spike has airlines scrambling to raise fares, in some cases without much difficulty (Copa, for example) and in others less successfully (i.e., airlines competing with Ryanair). The whole industry, however, is wondering at what point fare hikes start to break demand. And at what point, for that matter, expensive oil starts to break the world economy.

In earnings news, the newly merged BA/Iberia reported a modestly profitable off-peak fourth quarter. Take out the impact from strikes and snowstorms, moreover, and Q4 operating margins were similar to those earned by U.S. rivals United and Delta. The BA side of the business, however, seems to be doing considerably better than the Iberia side.

It’s still another few weeks before Lufthansa reports earnings. But the German giant did make news last week by proposing a joint venture with Japan’s All Nippon. It marks yet another example of airlines in the developed world hitting back at emerging market challengers by teaming up. If they’ve got lower costs, so the thinking goes, we’ll collaborate to inflate revenues.

Emerging market airlines, of course, are in some cases teaming up too. Think of TAM, which reports earnings today.

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