To say that it is wet at the Paris air show would be an understatement in the extreme – the reality is that it is raining so hard that the twenty million dollar-plus Airbus chalet is leaking through the light sockets. Beware all who enter as the lights are still on, maybe it is a cunning plan to get shot of some pesky reporters before the show is out.

The highlight of the show so far is the Doric Lease Corp MoU for the purchase of 20 A380s. The move makes the A380 more accessible to both new and existing A380 operators. Doric is of course already the third largest wide-body lessor worldwide by value, and the world’s largest asset manager of leased A380s with about a $6bn aircraft portfolio under management, including 18 A380s acquired through sale-leaseback arrangements.

Well we have known about it for three months and we gave you all a running chance to get to the facts by dropping so many markers and hints in Airline Economics issues that in the event we ran a close line on giving this one away. As the cover story of Airline Economics attests – this show is all about four engine aircraft and the need to fill then order books. This is very good timing for Doric and it should have been able to pinch a good price from Airbus. Attention now turns to the 747-8I. If Boeing does not announce an order for the 747-8I soon then Doric Leasing will be on a real winner not only filling a market need for leasing the A380 but also seeing some good gains on the value of its portfolio.

Meanwhile GECAS gave kick start to the 787-10X, which in the end is to their benefit, given that it has GE engines on wing. This order can be described as somewhat speculative at this time given that there are so many caveats in the LOI with Boeing. 

ILFC was also closing out a deal for the A320Neo with an exercised option for 50 of the type. ILFC also signed an MOU for 25 E190 E2s and 25 E195 E2s.

But the big news of the day thus far is that AIG Capital Corp a wholly-owned direct subsidiary of AIG and the sole shareholder of International Lease Finance Corporation entered into an amendment to the Share Purchase Agreement relating to the sale of up to 90.0% of ILFC’s common stock to Jumbo. The amendment extends by one and a half months, to July 31, 2013, the date on which AIG may terminate the Share Purchase Agreement if the closing of the deal has not yet occurred. Under the Amendment, AIG may pursue other offers for ILFC and may continue to pursue the alternative of a public offering. Under the amendment, AIG may also terminate the Share Purchase Agreement prior to July 31, 2013 if AIG reasonably determines in good faith that closing conditions relating to regulatory matters would not be satisfied by July 31, 2013. The Amendment also amends to July 15, 2013 the date by which the Purchaser may deliver the Option Notice to AIG.

Given the current market conditions and the strength of ILFC finances, which continue to rapidly improve, an IPO would be a great option for AIG.

So in short I am as things stand, going to be calling in a few bets – You know who you are.

I have stayed away from this story this week for the sheer fact that the A350 has taken so very long to get to this point that I thought that something would crop-up and the aircraft would not fly this morning, but it has indeed flown for the first time today. I have been scathing of the A350 program over the best part of the past decade but today is the time to give Airbus the thumbs-up and here is hoping that the aircraft’s progress is swift and smooth from this point on, we are watching.

Yesterday I ran a piece on four engine aircraft, which was based in part on an article on the subject carried in the latest issue of Airline Economics. As suspected I was bombarded with emails from investors in and operators of the 747-400/8 and A380. I was surprised that most of the comments were in total agreement, however. Some of the notes, particularly from highly experienced investors, are well worth an airing here. They point out the flipside to the argument that large two engine aircraft such as the 777 and A330 do indeed have their own shortcomings. One highly-respected player was spot on when he pointed out that very few people in the market are willing to address the running costs of the twin engine giants when comparing the types to the four engine offerings.

“Have you seen [the] invoices for the refurbishment of one of these large engines on the twins? RR, GE or PW, it makes no difference which. These invoices can run to $7m or $8m per engine per shop visit!” Now fact is that all of the top-tier carriers that have ordered these aircraft are protected from these high costs through their power by the hour arrangements with the engine OEMs – But what of the secondary market? Where will the second or third tier carrier that currently flies a B767-300ER or A330 find $7m for one single engine overhaul? By comparison the current average invoicing for a B747-400 engine is probably around $3.5m or maybe $4m.

Also it is well worth noting that the current operators of the large twin-engine aircraft are flying on long routes, and as such, have no exposure to the life limited parts (LLPs) running out of cycles. What happens when some of these aircraft come out of a carrier that has been flying shorter routes? Someone somewhere is most certainly going to be exposed to a shop visit where the LLPs have to be replaced and will cop an invoice for between $10m to $12m. It is fair to state that large twin-engine aircraft economics are dependent on power-by-the-hour agreements that keep their maintenance costs low.

Large twin-engine aircraft investors are at this time kicking the can down the road – So I ask you – is it not the case that an A380 or 747-8 has better secondary market economics than an A330, 767 or dare I say it a 777?

I leave you with a quote from one respondent – “someday, the airlines may be longing for those four engine planes”.

Look out for the July/August issue of Airline Economics to be published in four weeks where I anticipate this subject being the cover story as a follow-on to the Paris Air Show issue. If our assumption that Paris is all about four engines is correct, this should be a big feature.

Also remember that Virgin A340 that Airbus took-back last year – looks like Airbus is negotiating to sell the plane to a Maltese leasing company for less than $20 million. Well done to that lessor on a good deal – No prizes for guessing who they are though. Maybe we should take bets on how long it will take for Airbus or Boeing to take the A340s off of the hands of Qatar Airways as part of an aircraft deal again.

There is no value in the aircraft if it has RR engines on wing – on older aircraft the value is the engine and if that engine has no market then that aircraft has little value. I argue that the A340 situation is in part at least a taster of what is to come with the engine OEMs totally controlling the aftermarket.

In any event I foresee that Airbus is out on a limb with the A340 on the asset value guarantee front. European banks, more than most, have been badly burned on the A340 and they are pressing Airbus to compensate them for losses on A340 deals or do more to find homes for the types. The banks have a point. As we printed last year, Airbus has a conflict of interest on this one having been manufacturer, financier and remarketer on the A340 – remember though that Boeing has been one of the largest traders in the type.

We have done the A340 saga to death over the past three years but if anything changes we will be sure to put it in Airline Economics for you.

Best regards and safe travels for Paris if you are heading there this weekend.

One thing is for sure, Paris next week is all about four engine aircraft. Demand for four engine aircraft has been thin during 2013, and the launch of the 777X is expected to further dent demand for the 747-8 and the A380. In such an uncertain economic environment you have to ask – are two engines better than four? Well no according to Emirates who have just replaced 777-300ERs with A380s on their DUB/LAX route. Emirates is doing well and is an exception to the norm at this time. Boeing and Airbus have four engine aircraft on the mind this summer as they both try to keep their large passenger aircraft programs rolling forward through the economic downturn to gain on the other side.
The Boeing 747-8 seats 467 passengers in a three-class configuration and has a list price of $352 million. While the Airbus A380, carries 525 passengers in a three-class configuration and has a price tag of nearly $390 million. These two models represent the only remaining in-production four engine passenger aircraft. The oil price boom and the financial crisis and its continuing impact on economic growth has shifted the playing field completely and airlines are reticent to take a gamble on trying to fill these large aircraft when they can hedge their bets with smaller, more cost-effective two-engine aircraft that are easier to finance and fill. That said, spending over $300 million on an aircraft is hardly a short-term bet and those ordering the A380 and/or 747-8 are looking at long-term growth on prime, constrained routes.
It is not just passenger demand that has seen airlines drawing back from very large aircraft, it is the significant fall and flat-lining of cargo demand that has tipped the scales in favour of smaller aircraft. 2012/13 was a particularly bad year for the A380 and 747-8. Virgin Atlantic Airways again delayed its order for six A380 on account of weak global economic conditions, and Turkish Airlines reduced its estimated order number for the A380 to six from the earlier indicated fifteen. In early 2013, Boeing lost an order for five 747-8 freighters from DAE Capital and has deferred deliveries to other customers leaving Boeing with just 59 unfilled orders for the 747-8 program. But even those orders are uncertain as airlines just don’t want to take the planes right now. Boeing, at the time of writing, had at least one whitetail 747-8F sitting on the tarmac at Everett waiting for a buyer after Atlas cancelled its order and there are three other 747-8s de-registered from their owners sitting in the Arizona desert at the Marana Pinal Airpark following negotiated deferred deliveries with Volga-Dnepr, Nippon Cargo, and Korean Airlines. Korean Airlines has already indicated that it will defer its next two 747-8Fs until post April 2014These aircraft remain assets on the books of Boeing until delivery.
The 747-8 has been hit particularly hard by the general global stagnation in the air cargo sector and this has led Boeing to reduce production to 1.75 aircraft per month. But even that rate may prove too swift as the program needs to order parts some two years in advance and this means production slots need to be sold quickly for 2014-build aircraft to avoid more whitetails of the type.
The far more successful A380 has now found itself in the same situation, however. Harald Wilhelm, CFO of Airbus, reiterated recently that he expects to deliver 25 A380s in 2012 but that there are still some slots to be booked from 2015. Airbus brought in only four new orders for the A380 last year, compared with a target of 30, and the company hasn’t booked a purchase for the A380 this year, on a goal of 25 contracts. The company has cut back output plans as it works through changing the wing structure. Given that the A380 program also orders in parts two years in advance of delivery, Airbus is now fast approaching a juncture where it too will have to either slow the output of A380s or risk whitetails on the tarmac.

Boeing is currently working with GE on flight tests to improve the fuel efficiency of the 747-8 by 1.8% and thus bring the aircraft within range of the performance promised at the time of the program launch. At the same time the US manufacturer is looking to test design changes that should allow airlines to reactivate the fuel tank in the horizontal tail, increasing the range. This tank has not been allowed to carry fuel since 2012 when the FAA ruled that vibrations could lead to safety issues. Even so, launch customer Lufthansa is confirming in the market that it has every intention of taking delivery of all 19 747-8s on order that are yet to be delivered.
In total, Boeing’s 747-8 has collected 111 orders since its 2005 launch and of this number 27 deliveries have been made so far. Meanwhile, the A380 has received a total of 251 orders since its 2001 launch with 81 deliveries so far.
In trying to fill the slots Airbus will inevitably have to consider the thin yellow line. In the hangers of Toulouse where the A380 is assembled there has been a yellow line marked on the floor since day one marking the point where a larger version of the A380 will one day reach. The credit crisis no doubt delayed all thoughts of a stretched A380 but Airbus could be approaching the time to offer existing A380 customers something new to look at. One thing is for sure, even though the A380 seemingly has no secondary market, it does have a core customer base, sound trip economics and a developing specialist lessor for the type.
The 747-8 on the other hand currently has none of these things, mainly due to its later launch. The program is also relying on the freighter version with cargo customers that cannot fill the aircraft they have in the skies now let alone spending on larger types in these hard times. The opening of the nose on the 747-8F has been its saving grace and if not for this ability to load unusual cargo at speed the type may well have bombed already.
The 747-8 and A380 programmes will do well and have a bright future but much hangs on orders next week – Refer to Airline Economics Paris Air Show issue for more colour on this matter which occupies the attention. Click here for the digital version
http://viewer.zmags.co.uk/publication/79c873e3

The European Commission (EC) has finally started to act on the Single European Sky issue (SES) after years of trying to let individual states manage the gradual integration, which has proved fruitless in the extreme.

The EC proposals include an independent Performance Review Body, the unbundling of support services, greater independence and competence for Civil Aviation Authorities, and the need for more consultation by Air Navigation Service Providers on capital expenditure. All steps in the right direction but hardly getting tough by any stretch.

As governments across the EU and the EC criticises the aviation sector for its emissions and taxes the hell out of the same, maybe it is time the EC put to work some of those taxes and got the SES moving. The fact is that SES would create a bonanza for investment in quality European airlines that have heavy intra-continent routes as they would save a huge amount on fuel costs. This would of course benefit the low-cost carriers most – investors must keep one eye on the progress of SES. As the SES program begins to get to a point of becoming reality, which might take some time yet, then it is time to invest.

But will benefits like the SES come in time for the likes of LOT?

LOT remains on the table with the recent Polish government vote allowing for a majority stake to be sold in the flag carrier starting to attract interest from other airlines. As reported here many months ago, Rothschild remains in place as LOT’s privatisation adviser and progress is being made. All credit to the Polish government for taking the required and advised action. But if you delve into the figures at LOT it is immediately clear that the airline will require another injection of funds before too long on top of the government “loan” that was approved by the EU the other month. Because of this fact any business looking to invest would be wise to wait it out for another “loan” before moving for the airline or indeed at the very least making such a cash injection a pre-condition of sale. But the flip-side to this is that if LOT were let to collapse then the remnants would indeed be most attractive for investment with everything in place to re-hire staff and re-structure the business on a low cost platform and lease new aircraft from there in the short term.

Taking this point of view it is clear that the Polish government, like the Italians before, has in many ways made a miss-calculation in propping-up its flag carrier.  There is no escaping the fact that LOT competes with the mighty low costs on 88% of its total capacity and its 737 fleet needs to be replaced. You could argue that LOT has 787s operating on routes that have little competition, which is where the value lies, but it is hard to see any airline other than Aeroflot seeing synergies to work with there, and its Eastern European ambitions are well documented. Could it be that Poland has sleepwalked into allowing Aeroflot to control its skies once again? This could be a political hot potato for the Polish government in the coming months and for that reason the government will be working hard with other airlines to get a deal done fast.

Management tension is threatening to derail a budget-airline venture between AirAsia Bhd. and the parent company of All Nippon Airways, indicating the challenges of operating a carrier in Japan.
AirAsia Japan, the JV between ANA with 67% and AirAsia with 33%, looks to be in trouble at this time as the boardroom is, according to sources, not a cohesive environment with which to move the airline forward. This is a surprise given that all knew the problems from the outset with marrying a low-cost operation with the high price of Japanese fees and labour costs coupled with the fact that AirAsia Japan is based at Tokyo’s Narita airport and competes with ANA-owned low-cost airline Peach, which is based at the less expensive and busy Kansai International Airport.
One ANA statement yesterday read: “We are looking for the best ways for the future growth of AirAsia Japan, and that includes possible dissolution”. From the other side of the JV fence, Tony Fernandez at AirAsia told the press: “The problem is not with the model, it’s with management…” Fernandez is convinced that AirAsia Japan will be a success: “But it’s got to be run as a low-cost airline. The difficulties right now…are that we just have different styles of running it,” he stated. The Nikkei newspaper reported earlier on Monday that ANA will acquire AirAsia’s stake in AirAsia Japan.
Meanwhile AirAsia X, published its initial public offering prospectus on Monday, seeking to raise up to $426 million. This will be the largest aviation IPO in the APAC region since Japan Airlines. It is also likely to be one of the largest listings on Bursa Malaysia Securities this year. AirAsia X Bhd is slated to be floated on July 10. Chief executive officer Azran Osman Rani said: “We’ve been talking about it for two years and we feel right now is the most suitable time for this move.”

The IPO is offering up to 790.12 million 15 sen shares at RM1.45 each — with existing shareholders making an offer for sale of up to 197.53 million units and a public issue of 592.59 million new shares. About 75% of the total shares offered are primary shares. The remaining secondary shares are from the existing shareholders. About a third of the total or 252.11 million units will be for retail investors.

Co-founder Tan Sri Tony Fernandes said: “The rationale for offering such a large number of shares for retailers is that we feel we are a retail company and wish to give the retailers a chance.” The retail offering comprises 52.11 units for eligible staff and partners, 50 million shares for eligible passengers and 150 million units for the Malaysian public. The institutional offering will consist up to 538.01 million shares with 197.53 million for Malaysian institutional and selected investors plus 260.74 million units for bumiputra institutional and selected investors.

The airline is looking to raise RM1.1 billion to RM1.3 billion with the IPO with the primary shares raising up to RM859.3 million and secondary up to RM286.4 million.

A third of the funds raised with the primary shares will be used to repay debt, 32.6% for aircraft deliveries, most likely five A330s on order, with 29.7% as working capital.

AirAsia X has its sights on the Australian market along with seemingly everyone else at the moment and aims to open a new route to Adelaide.
AirAsia X is sure to do well but if ANA does indeed buyout AirAsia from AirAsia Japan then can ANA really operate that airline in competition with its Peach in the long term? The AirAsia Japan venture is a bit of a mess – the question is why given that all around the boardroom table know what to do. Peach worked and thus logic would suggest that ANA should be left to get on with it.

As is traditional during the week before an air show, the news announcements have dried up somewhat. However, the just-as-traditional, pre-airshow predications are starting to emerge. The team at Wells Fargo expect more orders to be announced and derivative aircraft launches to be officially announced, specifically the 787-10 with a firm order from SIA (although SIA’s commitment for the aircraft type was announced last week). They do not expect the 777-X to be formally launched at the show.

There have been so many order during this past month that we in the Airline Economics office wonders how many new orders (eg not only confirmations of previously announced orders) there are likely to be next week. But, we should expect a few surprises to have been kept back for the show.

Aircastle sells 15.25% common shares to Marubeni
On June 6, Aircastle entered into a definitive agreement with Marubeni Corporation for the issuance of approximately 15.25% of the lessor’s common shares, after giving effect to the issuance, at a price of $17.00 per share, for gross proceeds of approximately $209 million. The closing of the issuance is expected to occur during the second or third quarter of 2013, subject to customary closing conditions.
DVB acted as advisor to Marubeni, while Goldman Sachs advised Aircastle.
Ron Wainshal, CEO of Aircastle, says: “We are delighted to welcome Marubeni, one of Japan’s leading trading companies, as a strategic, long-term oriented shareholder. With this equity investment, Aircastle will be well positioned to take advantage of exciting growth opportunities and to leverage Marubeni’s global presence and network to expand into new markets, business opportunities and funding sources.”
In connection with the transaction, Aircastle and Marubeni also entered into a shareholder agreement that will become effective upon the completion of the issuance. At such time, Marubeni will have the right to designate two directors for appointment to Aircastle’s board of directors. The shareholder agreement also contains certain provisions relating to Marubeni’s and its affiliates’ ability to transfer and acquire Aircastle’s securities.

The proceeds of the sale are likely to be used for Aircastle to fund more aircraft using purchase and leaseback products.

This is a great deal for Aircastle since it represents a primary capital that is at a premium to its last trade, which is usually sold at a discount.

The size of the Aircastle common stock sale is also significant. Since the average size of a common stock sale is usually judged on its average trading volume, for a company like Aircastle with a $2bn market capitalisation, issuing $200 million of common stock is a substantial achievement, especially since it was sold at a premium.

From a macro perspective for the aviation sector, the deal shows that there continues to be very strong momentum from the RBS Aviation sale to SMBC in terms of Asian interest.

The current state of play in the global airline market
Airline share prices have risen 15% so far this year, outperforming world equity markets. Q1 financial results show operating profits are continuing to improve across most regions while jet fuel prices were flat at $115/b range in May. Passenger travel continues to expand but air freight volumes show no signs of growth. Business confidence has flattened off in 2013 while passenger capacity has been expanding in April/May as aircraft are brought out of storage; we know this as there was a dip in new deliveries during April and May. Capacity growth remains broadly in line with demand growth though with load factors high, close to record levels in fact, but freight loads are slipping further during calendar H1 2013. Passenger yields have stopped growing in local currency terms, but remain close to recent highs.
IATA has increased its forecast for 2013 industry net profits from $10.6bn to $12.7bn. It says that the main reason for the upgrade is further evidence that there has been a structural improvement in airline financial performance. This is set against a backdrop of GDP growth that has been revised down to 2.2%; oil prices remain high but have been revised lower to $108/b, which is seeing shares increase. The largest improvements in the IATA forecast are in North America and Europe, where airlines have benefited from recent changes. Asia-Pacific airlines continue to generate the highest margins and largest profits, but have deteriorated since 2011 and continue to suffer as cargo markets weaken.

And what about Fastjet?
After posting a $56m-odd loss this week, many critics have stated that their business plan is in trouble with the key shares held in Fly540 Tanzania and Ghana, that is of course unless current investors are willing to take on the burden. The business plan was and remains a pioneering one but there seems to be a distinct problem with the fact that the airline is based in Gatwick in the UK and not on the ground in the countries of operation. Of course hiring the right people would be a terrible pain and dealing with local authorities would be a joke but at least then the airline would not be seen as another outside operator. This of course lends itself to Fastjet having to partner-up with other local airlines/flag carriers in order to expand.

Azul, the Brazilian airline founded by JetBlue founder David Neeleman, confirmed yesterday that it had filed with the SEC to raise up to $100m in an initial public offering and list on the NYSE. There is no doubt that the $100 million figure is just a placeholder at this time and sources state the IPO is likely to actually be in the $500m range. Goldman Sachs, Morgan Stanley, Itau BBA, Santander and Banco do Brasil SA are the joint bookrunners on the deal.
Aeroflot has been given the nod from the very top that it should acquire other Russian private carriers in a move that looks, on the face of it at least, to be a wish from the President’s office to boost Aeroflot before the 2016 IPO. It is widely reported that Transaero, UTair, and/or Sibir are targets with the latter seen as the first easy prey. The question is whether any deals be low-cash offers coupled with political pressure or will they be fair prices paid? The world is watching. But this news does mean that the two current bids for Sibir from parent S7 group and another from its subsidiary, Globus could be put into the long grass with the President’s office decreeing that any offer for a 25.5% stake in Sibir is too low and the sale should be handed over to a state company such as Aeroflot or Rostech. Alfa Bank is understood to be broking on behalf of Aeroflot offering Sibir a price of $35 million (1.1 billion roubles).
The owners of S7, the Filyevs, have already stated in the Russian press that the sale is a form of state blackmail and the decision of the Federal Property Agency of moving the sale date from April to May was one that favoured Aeroflt and the Russian state.
The Russian government may sell Aeroflot shares this year as part of a plan to raise 427 billion roubles ($13.5 billion) through state asset sales to help balance the budget and reduce its role in the economy. The government is also selling off VTB and Rosneft shares.
The Russian state is increasing ownership of all aviation assets across the board and plans to build them up fast and sell them off at a good profit for the state but even as it prepares to sell off Aeroflot shares everyone knows who will always call the shots at the airline.
Meanwhile China Southern has released a $720 return economy fare from Australia to China for flights on the route that will from October be served by the A380. The fare, announced yesterday, applies not only to the A380 flights but also to the airline’s A330-200/300 flights out of Melbourne, Brisbane and Perth to Beijing and Shanghai.
In a worrying turn for Qantas and others premium fares have also been slashed, with return business class offered from $2,380 from $3,800 and first class at $3,800 from $6,000.
China Southern is not stopping there, it knows that a barrier for many will be language and as such it is hiring 400 English-speaking cabin crew across its network, including its Australian routes.
The price war on all routes across and out of Australia continues to gather pace and we have to ask – Can the key market players handle it?
Qantas has in the past had some very low fares in the market on the Australia to Shanghai route from as low as $838 economy and $3,838 and the impact from that decision did not do the airline much good at all.
Qantas needs to speed its reform into a low cost carrier especially on domestic routes if it is to maintain margins in the face of tough competition. Qantas management have a good window at this time to sit staff, government and the public down and show clearly that with current levels of competition unless more action is taken the airline will start on a downward spiral. At the same time it can highlight the obvious savings to the public through a deeper cost cutting drive.

Flybe has sold its 25 Gatwick slot pairs to easyJet for £20m ending 22 years of flying from the London airport. Jim French, chief executive of Flybe, stated that landing costs have increased at the airport by 100% over five years. Flybe services from London Gatwick will cease on 29 March 2014. The airline is also deferring its E175 deliveries until 2017/19.
It remains to be seen if these actions will save Flybe from continued decline however one thing is absolutely certain, these are the very best measures that Flybe could have taken and it is sure to go down well with investors.
I, along with many others, would like to see Flybe sort itself out and then move into the far superior London City airport where it should do well with the fleet it has.
And yet in all of this clueless UK politicians have raised concerns over the future of the Gatwick-Inverness route. UK Transport Minister Keith Brown said he had been in contact with Easyjet to ensure the timings on the route were kept, saying that the whole thing was “deeply worrying and I have requested an urgent meeting with Easyjet to ensure capacity is maintained”. Well we are very surprised at Mr Brown’s concern given that he was totally silent over the introduction and increase in UK Air Passenger Duty and that to date he along with UK government colleges have shown nothing but contempt for the aviation sector – I would expect both EasyJet and Flybe to jump all over the UK transport minister over this “concern”.

As we move into the final weeks before Paris and wonder where on earth our car passes have got to, how long the traffic jams will be and just how wet we are going to get this time, it is worth taking note of the big story of the show – It is of course the task of filling A380 and 747-8 delivery slots. John Leahy at Airbus needs to fill A380 delivery slots for 2015 so parts can be ordered this year without worry of a whitetail and of course for Boeing they already have a 747-8 whitetail and could do without any more. See more on that in the bumper Airline Economics Issue 14 at the show.

But Paris 2013 is no time to be having a go at Boeing and Airbus – It is however time to start asking serious questions of Chinese regulators, COMAC and AVIC:

Senior aviation figures are coming forward to Airline Economics stating that there is distressing news coming out of China on the C919 program. Sources state that there will now not be a Chinese engine on the C919 in the timeline stated as they simply will not have their act together in time to assemble a LeapX engine or to stick another Chinese engine on the same. The Chinese side involved at AVIC have proven themselves to date to be more than difficult to deal with and many at Safran have been left banging their heads against the wall.
An important element of this is Chinese requirement for Chinese pre-registration of anything that is built in China. Up until now Western aviation companies have produced goods in China on the basis that the Chinese facilities are off shoots of the main factory and they are operating under the company’s global quality standards procedures. The Safran quality system and anything that comes out of that factory is approved by EASA with a European production sticker. Now the Chinese are saying that they want the Chinese Production Sticker, which means that the Chinese factory has to respond to Chinese laws of production – that have not been defined yet – and need to be approved in accordance with a Chinese quality control systems – that do not even exist. So at this time if this goes ahead nothing will be able to come of out China until this system is completed and ratified by Beijing.
At the moment the Chinese are working well with the FAA to align standards but the EASA has had convoluted contact on agreeing standards because China has been stalling talks over the EU ETS issue. Something, which from the ICAO talks last week, looks like it is going to get worse before it gets better.
The fact is that a senior Chinese government official woke up one day and just decided that from now on everything has to have a Chinese stamp on without realising the consequences of that decision. Now they are realising that they have to put all the requirements in place fast and they have no idea of how to do it, thus ruining their own system and delaying everything. This will either set the whole Chinese Aviation industry back a decade or someone will have to climb down and recognise defeat on the issue.
So it is time to ask: With labour rates rising fast and the new requirements hindering operations, were the big aviation manufacturers too quick to jump into China? And given that the C919 will not be ready on time as things stand, were Bombardier, Boeing and Airbus too quick to launch their latest narrow-body offerings in reply?
Given that all three offerings are based on new engines with little by way of design change I think the answer is yes. They were two years too soon and in the event the engines will require a string of updates and tech insertions. One senior figure in the industry points to the new GE engine for the 777X as an example – ceramics are being used throughout the engine and this technology should now be applied to the LeapX and GTF. So given that upgrades are the order of the day are we finding ourselves in the same situation as say the V2500 A1 Vs the V2500 A5 in the late 1980s/early 90s? Best make sure your Neo or Max engine is not an A1!
The full story will appear in the Paris Air Show issue of Airline Economics.
To ensure you receive your own copy, subscribe today by emailing John Pennington at john@aviationnews-online.com. An annual subscription (six issues of Airline Economics per year) costs just £149 (UK/EMEA/US and Canada) and £189 (Rest of the world), which also includes various additional supplements and aircraft/maintenance guides published throughout the year.