Richard Aboulafia: September 2019 Letter

Dear Fellow Fragmented Route Flyers,

Like you, fellow aerophiles, I am surrounded by friends and family who, impossible as it seems, have no contact with, or even interest in, airplanes. On the rare occasion they express interest in the World’s Best Industry, they’ll inquire about the 737MAX, although many of them seem unaware of the distinction between 737 variants. Yet I’d argue that the MAX is not the most important aircraft of 2019. Its problems will be fixed, hopefully lessons will be learned, and I doubt it will be a problem for our industry in twelve months.

The A321 is another story. It’s the plane of the year, in terms of its impact on our business and the market. That’s for better and worse.

First, congratulations, A321neo. Everyone wants you. As of September 1, there were 2,762 orders, with 71 recorded this year, and, thanks to the launch of the A321XLR at Paris, more waiting to be firmed up. 71 sounds light, but it stands out in an incredibly grim orders environment – the worst year in 25+ years, with just ten net orders recorded at Airbus and Boeing through August (95 at Airbus, -85 at Boeing).

That 2,762 number also towers over Boeing’s 737MAX 9/10 total, which, while not provided by Boeing, seems to be around 800, at best. This brings up the tricky subject of Boeing’s New Midsized Airplane (NMA), which is meant to redress Boeing’s difficult mid-market position. replacement market, and emerging medium-range, medium-sized international routes.

The latter market is still addressable by NMA. But the 757 replacement market has clearly been seized by the A321neo (only 1,049 757s were built with ~750 still in service, so 2,762 321neos is more than enough to declare victory here). The A321neo’s triumph as a 757 replacement might have been inevitable since it’s hard for a twin aisle like the NMA to compete with a single aisle, in terms of production costs and operating economics. That reality, coupled with the $8+ billion MAX-related hole in Boeing’s balance sheet (and Boeing’s ongoing shareholder giveaway addiction), now makes NMA a lot less likely than it was a year ago. It’s still in our forecast, but with a 51% likelihood.

So, the A321neo is a carnivorous NMA nemesis? Maybe, but it’s an intra-company carnivore, too. First, the XLR is so good at its job that it makes the A330neo a lot less appealing. In August, Air Asia X reduced its planned 34-unit 330neo buy to just 12, in favor of 30 XLRs. I’m guessing it’s a matter of time before Air Asia X, the biggest 330neo customer by a wide margin, switches more of its backlog to the XLR. Thus, the A321 could make the A330neo the MD-11 of today: an undernourished program that merely extended the life of its predecessor by around a decade.

The A321neo may not be great for Airbus’s engineering department, either. Once, I fervently believed in an A322neo, a 321neo with new composite wings (perhaps related to those on the A220) and new engines. Teal Group is now dropping this concept plane from its forecast. Airbus might resurrect a 322 if NMA really takes off, but otherwise it probably makes sense to just keep selling XLRs. The engineering work for this minimal-change derivative is also minimal, which keeps non-recurring costs very low. The future belongs to cheap.

Absent an A322, what, exactly, will Airbus engineers do for the next five or ten years? Indeed, what are they doing now? There are no plans to grow the A350-1000. They may stretch the A220, but that’s years away (and not exactly a moonshot in terms of engineering). We’re many years out from the start of any notional A320 clean-sheet replacement. Saving money on IR&D sounds appealing (with Airbus copying Boeing and giving the cash back to investors), but the company might wake up in a few years and discover that the remarkable design capability that it had preserved for decades, through thick and thin, had simply withered away.

Boeing’s engineering teams are generally in better shape, since the 777X will keep them busy through 2021 or 2022. But if the NMA doesn’t happen (thanks to the A321neo), they’ll face a new product development gap too. And if both sides suffer from this new product drought, what will happen to all the tribal knowledge in the industry, not just at the primes, but at all the suppliers? Engineer demographics are already an issue, with everyone dreading a wave of retirements. When design begins on the next generation single aisles in seven or ten years, what will have been forgotten? How will primes and suppliers spool up, after the lost years? Or, will China finally have an opportunity it can exploit, since the Western industry will have been cruising on a sea of late-stage capitalism?

Thus, the A321neo is kind of a litmus test for who you are in this industry. If you’re an investor with an A321 angle to play (there must be a few), you’ll do great. Even if you’re just an investor who hopes Airbus can one day spin off cash the way Boeing does, well, the A321neo will help them get there. Airline passengers, even if they don’t like the A321neo any more than they liked the 757 (long tubes aren’t easy to load and unload, and six hours in a single aisle jet is never fun), will like the new routes they help create. Washington Dulles to Nice, here we come!

But if you’re an engineer, or someone who loves this industry for its new aircraft and innovation and new technologies, someone who wants the industry to stay on the cutting edge, the A321neo is the enemy, a profitable McJetliner that gets churned out in large numbers for domestic and international mid-sized routes all over.

Come to think of it, it’s fitting that Airbus is planning to re-purpose the A380 line as another A321 line. I’ve always loathed the A380 business plan, but at least the jet itself was something new and ambitious. Instead, they’ll use its former production facilities to build a jet that’s really just a commodity.

So, the A321neo really is in the drivers’ seat for our industry’s future. Unfortunately, it’s driving in a race to build a commodified industry which doesn’t do anything new for another decade. And perhaps beyond.

Yours, ‘Til The A321neo Is Appointed Airbus CEO,

Richard Aboulafia