Aircraft production issues are straining airline attempts to assemble next-generation fleets. Route development is suffering and cost structures are shifting. Doug McArthur reports on what lies ahead for a sector under pressureManaging a fleet of aircraft is not easy at the best of times. But with the global economy so unpredictable, and manufacturing delays to new aircraft, it has become more of an art than a science.

Aircraft utilization has dropped, yet parked aircraft are being rolled out again. At the same time, next-generation planes have been delayed and airlines are finding it difficult to find financing to purchase new aircraft. And all this must be considered against a background of record orders in previous years.

The delays are arguably causing the biggest headaches. Rob Fyfe, CEO of Air New Zealand, has called the Boeing 787 delays the industry’s “biggest challenge.” The airline is having to review lease agreements and route development plans as well as adjust its cost structure due to higher maintenance, repair and overhaul costs and the need to retain older aircraft.

Although the 787 flew successfully late in 2009, Continental Airlines is typical of carriers that have had to adjust projections because of the new production realities. “We expect the first of our 25 Boeing 787 aircraft to be delivered in 2011 instead of the first half of 2009 as originally scheduled,” the carrier states in its 2008 annual report. “As a result, our anticipated mainline capacity in 2010 and thereafter may be reduced, particularly if we are unable to make alternative arrangements to acquire long-range aircraft on commercially acceptable terms.” To provide flexibility for its widebody aircraft needs, the carrier ordered eight new Boeing 777s, the report states.

All Nippon Airways (ANA) has also had to make alternate plans because of delays with its order of 55 787s. To meet its capacity needs and continue its expansion plans, ANA ordered four
767-300ERs, says the airline’s public relations manager Yoshifumi Miyake. ANA has also been notified of a production delay with Mitsubishi’s 92-seat MRJ90, for which it is the launch customer. Since delivery is four years off, ANA says it does not expect any significant effect on its business.

Capacity curse

However, as the delays have hit during a crisis, carriers may have been afforded some relief. After all, airlines have been delaying and cancelling orders anyway because of the dire economic situation.
Now, planes should start arriving as the economy recovers, ready for the good times ahead. Usually, this is when airlines order, perversely receiving their purchases as the business cycle dips.

But aviation analyst Chris Tarry believes this will not help the situation a great deal. Instead he insists the real secret lies in managing capacity. History is doomed to repeat itself, he suggests, citing the fact that an additional 1,300 aircraft are due for delivery in 2010, which will contribute to 2.8% global capacity growth.

“Aircraft have been under-utilized during the economic crisis—down 6% according to IATA figures—which means it is very easy to ‘turn the tap on’ again without recourse to new aircraft,” he comments. “And if you increase capacity then you increase price pressure, and it will be very hard for airlines to improve yields.”

Tarry highlights the short-haul sector as the biggest concern, given that delivery rates here have been, and will be, largely unaffected by production problems. Even low-cost carriers have voiced doubts about the potential for growth in such a depressed market.

“All in all, I don’t see the delays as helping the airlines,” he says. “This is a very weak market and capacity is still being added because any growth will have to come from taking market share from somebody else.”

Financing

Tarry notes that manufacturers also have cash flow challenges, giving them a strong incentive to push new aircraft and further adding to the capacity problem. “The new aircraft may be cheaper to run because they’re more efficient, but there’s never been any correlation between high fuel prices and aircraft orders. This isn’t why airlines buy aircraft. They buy to add capacity.”

He says manufacturers have become involved with the financing of aircraft, acting as agents or guarantors in order to keep selling.

For their part, manufacturers are not admitting to price cuts. Airbus, Embraer and Bombardier all say prices are being held firm, although Bombardier adds that list prices can be adjusted to keep up with the market cost of materials. Boeing vice-president of marketing Randy Tinseth says prices are dictated by “the competition and the needs of our customers.” Boeing has had only 10% of its backlog deferred or cancelled, compared to 40% during the last crisis in 2002-2003.

However, airlines may see long-term gains, as all four manufacturers say they have adopted new production techniques to cut costs and avoid delays. Airbus introduced Power 8, a cost-cutting system, in 2007. In addition, it says it has already built and tested the carbon fibre fuselage barrel test demonstrators for its A350 XWB.

Boeing, meanwhile, adopted the lean automotive methods used in Japan to switch from a static to a moving assembly for the 737 and 777. Building a 737 once took 22 days; with the new system it is down to 10.

As for Bombardier, it recently broke ground on a Complete Integrated Aircraft Systems Test Area designed to proof systems and software for CSeries aircraft a year before the first test flight, says Poutissou.

Embraer is experiencing good results with its P3E (Embraer Air Entrepreneurship Excellence) program, says Kern. P3E combines lean manufacturing techniques with continuous improvement throughout the company. Embraer also continues to invest in automation.

Lead times

Ultimately this may lead to improved delivery times, which may allow airlines to better gauge market needs and the capacity situation. Of course, whether carriers will ever be able to place an order and expect delivery within one or two years remains to be seen.

The OEMs say their build-time per aircraft gets constantly shorter thanks to new lean production methods, increased automation and earlier testing of component parts, but make no promises.
All manufacturers will still require a long lead time to negotiate a ramp-up with suppliers. Boeing’s Tinseth states it plainly: “It takes longer to increase production rates than it does to decrease them.”

Adjusting production Airbus No layoffs in 2009 but the company opened discussions with employee associations about possible work-hour adjustments. There have been no changes to A380-800 orders but overall Airbus had 22 cancellations in 2009.  Airbus reduced A320 production to 34 a month from 36. Parts producation for the A350 XWB has started and the A330-200 has started flight testing. Production targets for 2010 will be down from those originally planned. A320 production will drop by 15%, the A330 and A340 by 20% and the A380 by 28%. Boeing The Commercial Airplanes unit announced 4,500 layoffs in January 2009. The 787 successfully made its first test flight on 15 December and the first delivery is now set for the fourth quarter of 2010.  Overall, since the start of the downturn, Boeing has had about 300 deferrals and more than 100 cancellations. 777 production in 2010 has been cut to five a month from seven, while plans to increase 767 and 747 production have been shelved. 737 production will hold steady at 31 a month. Bombardier aerospace Approximately 5,000 lay-offs. All of its planes were on schedule in late 2009. Bombardier is reviewing a software upgrade on the CRJ1000 that could affect the date of certification. Eight deferrals, but no cancellations for the Q400.  Bombardier has reduced its CRJ production rates. But increases in Q400 production mean the manufacturer’s output will rise by 10% in 2010. Embraer Laid off 4,000 workers in February 2009. There was one cancellation of 25 ERJ 145s at Embraer’s plant in China. Production of commercial airplanes in 2009 was down 25-30% from the year before.

Source: IATA