The Allplane Podcast #2 - AirInsight's Addison Schonland: how the crisis affects aircraft makers
Airliner procurement often involves thinking 20 years in the future. Is this still possible? With the aviation industry in complete turmoil, we wanted to find out how the different aircraft manufacturers and aircraft programmes around the world…
Addison Schonland is the co-founder of AirInsight, a consultancy and media business (with whom I have had the chance to collaborate on several occasions) and someone that knows the aviation inside out.
It is always interesting to speak with him to get the pulse of the industry and this is exactly what I’ve done in this second episode of the Allplane podcast…
In this episode we talk about:
-How Boeing and Airbus are facing the Covid-19 crisis
-What is the situation in the aircraft market right now
-Is there going to be a commercial aircraft glut?
-State-owned airlines and how this affects competition
-What are the prospects for other aircraft manufacturers in Japan, China and Russia
Resources
This is the small South African Airline Addison mentions during our conversation, CemAir
AirInsight’s analysis of Delta’s B777 retirement
My report for AirInsight of the first commercial Embraer E2 delivery flight
My chronicle of the MC-21 presentation, another aircraft programme mentioned in the conversation
Podcast Music: Five Armies by Kevin MacLeod
Link: https://incompetech.filmmusic.io/song/3762-five-armies
License: http://creativecommons.org/licenses/by/4.0/
Full Transcript - Interview with Addison Schnonland (AirInsight)
Hello and welcome to the Allplane podcast!
Today we have here as a guest someone that knows the dynamics of the aviation industry inside out. When it comes to the business of aircraft-making few people are as knowledgeable as Addison Schonland.
He is the co-founder, together with business partner Ernie Arvai, of AirInsight, an aviation consultancy and media company that monitors closely the commercial aviation industry
I have known Addison already for quite some time and have had the chance to collaborate with him and with AirInsight as a contributor a number of times. You can find these writings as well as many other reports, analysis and news about the aviation industry on AirInsight.com.
So, at a time in which the commercial aviation faces what is possibly the most cataclysmic crisis in its history, I thought it would be a good idea to reach out to Addison, in Maryland, in the US, where he is based, in order to get some of his insights about the current state of the aviation manufacturing industry and his thoughts about its future
So, without further ado, let me introduce our guest today...
-Hello, Addison, how are you?
-Great. Thank you, Miquel. Thank you for inviting me.
-Those are strange times, aren't they?
-Yeah, I think that this has to be, for the people of what I describe as the “aviation silo”, the commercial aviation silo. I think this is going to be the worst experience. Anybody has had, you know...we've had previous shocks before like, you know, in HNH1, you've had SARS. We've had 9/11. There have been shocks to the system, but it's never been uniform and global at once. Yes, this is a perfect storm. And it's horrible.
-Indeed, and for some industry players, it's just compounding some existing issues. Right? So, thinking about Boeing and the 737 MAX debacle.
-That's interesting. It's interesting you say that, because I think, in a way, this is very helpful, because it gives Boeing time to work on the MAX. Their customers are not screaming for deliveries now, in fact, hundreds of orders have been cancelled. So Boeing is a very special case, I should say, for what we're experiencing right now. Particularly in the MAX.
-Yeah, I was thinking about this the other day, this situation, obviously is terrible. But for some people that were in trouble before it started, it actually puts things in the freezer. Thinking about Alitalia, for example, that under different circumstances, it would have been much harder to get government support.
-Yeah, I think that, for those of us who watch this industry, we all shake our heads when we hear the word “Alitalia”. You know, a cat has nine lives. Alitalia has probably got 99.
-True!
-Unbelievable how the company continues to exist. It's, amazing to me because quite honestly, without government support, they've got nothing. That means that as a business, the company doesn't have what it needs to, to perform. It's just a company that is structurally so damaged. And of course, I think when we look throughout the industry from one side to the other in the airline world, certainly state owned airlines generally fail. The exceptions are obviously the Gulf, the three big Gulf carriers, which are special cases, but you've seen it in South Africa. You see it all across Africa. You've seen this in you know, in Greece, we've seen it in several places, state owned airlines, that are used as a place to put friends And you know, it becomes a place to park people that are your friends.
- I was surprised actually that South Africa let South African Airways fall. I mean, you're originally from South Africa. right?
-Right.
-How would you see the whole situation? I mean, it's South Africa going to be left without the “national airline”, quote and quote.
-I hope so. I hope so. The situation in South Africa is clearly when I was living there, it was the previous regime, shall we say? I left in 1987. But what you have in now is a government that doesn't seem to be able to get much right. And running an airline is a complicated thing. And Covid just makes it so much worse. In the South African Airways case. There was also political interference, and quite frankly, incompetence from the top down. So the company has been very poorly managed, and it's been mostly by political talent rather than intellectual talent, who understand the airline business, it's not to say that there aren't people here that understand the airline business they are. But you see when you have a situation and South Africa is probably a good example. I had a conversation with a man who runs CEM Air, “C” “E” “M” Air if anybody who's listening to this wants to take a look at that video. It's on the AirInsight.com site. He makes an interesting point, you know, he's trying to run a private company, a private airline, privately funded, and he's competitive. He's stayed out. And every time they make a mistake, the state will take care of it. You know, they have a bank that for whom the checks don't bounce. All of a sudden the government I think, in South Africa realizes you've got to stop the bleeding. It's insane. We can't afford this because every time we put money into the airline, everybody else that has a state corporation puts the handouts as well. “What about me?” And there's no government in the world that can keep writing checks just doesn't work. And of course, that leads us to this whole COVID thing and how the infinite quantitative easing in economies we, I would say, most people do not remember what inflation was like.
-True.
-Yeah, they are about to rediscover the monster of inflation, because you cannot keep pouring money into a global economy and there's no demand. It's too much. As a classic example, the language that I learned when I was doing economics, too much money chasing too few goods, the value of money is going to collapse. And it's going to cause even the cure is going to be for COVID might well be worse than COVID itself in economic terms. And that should be terrifying for most people when they see the damage that's happening now with just worrying about COVID we haven't even thought about it. You know, you come out of covert and now you've got massive inflation. And you can't afford to pay anything.
-And talking about supply and demand, talking about aircraft manufacturing...Are there going to be enough buyers for all jets that Airbus and Boeing are producing?
-The short answer is no. And the reason is twofold. Firstly, there is no demand for travel. You know, the Chinese started rebuilding their schedules, but they don't have the traffic. People are afraid to travel. It's going to be the same outside of China. Everybody keeps talking about a V recovery and that there's this pent up demand for travel. Well, maybe but if you look at, you know, the US as for the TSA daily count, we're still down open well around, let's say an average of 95% less traffic than we had a year ago. And they're trying to open up for people to fly again, but people are scared because you know what COVID can kill you. And if it doesn't kill you could kill someone who you come into contact with, you might just have a sneeze or a headache. But that this particular virus can do terrible things to people that you run into in your families, you know, how urgent is it to travel? You and I are doing something now on this using zoom technology. I think that when we see how much we can accomplish using technology like this, business, travel strings, big time now if you take business travelers out of the travel equation, remember 80% of the money for an airline come from 20% of the customers that know the old 80/20 rule. And then 80% of the revenue coming from business travelers, when people decide I'm going to do 10% 20% 30% less business travel than I used to do because I can use technology. What this disease does to the airline business is terrible, it is a terrible outcome. The next thing is you've got very cheap oil, and it doesn't look like we're going to have expensive oil for a long time so all those old planes that are gas guzzlers...Greta might not like this...But the fact is cheap oil means old planes, you don't need new ones that aren't fuel efficient. Why would you buy them?
-We are seeing many airlines withdrawing from service planes that are actually still quite serviceable and quite new. Right? So how do you see the industry going from here, especially two main players, Boeing and Airbus?
-The first thing is that when we look at airlines like Delta...and we've seen it is not only Delta, we've seen and obviously British Airways, international airlines that have lots of long haul flying, for which there is zero demand. You don't need long haul airplanes...You just don't need them. And the pilots that fly them, by the way, are senior so they're very expensive, you know that they're making top dollar, so Delta's decision to talk it's 777s, there's only 18 of them in their whole fleet. So it's not a big impact in terms of the number of airplanes. However, Delta has 15 pilots per airplane on average, you can figure out you know, 18 planes times 15 pilots each. That'll give you an idea of how many senior pilots are going to be also parked, in a way. So British Airways is parking their 747s. Even Emirates is parking their 380s until we can form bubbles. I guess you've heard I know you do a lot of travel stuff. Miquel, have you heard of this concept of bubbles? Travel bubbles?
-Yes, like so now, safe areas between two or more countries. Between Australia and New Zealand and last week, the Baltics announced also not a bubble between Estonia, Latvia and Lithuania.
-So until we have a bubble between Let's say the United States and I don't know pick a country, the United Kingdom or the EU in general, yes, once a bubble like that exists, then you will see long haul flying, be reintroduced, but very very careful. Everyone will not see 777s...what you will see is 321s single aisle across the Atlantic, because here's the thing. airlines are bleeding cash. So the number one priority at every single airline is conserve money. So anything that means money out the door is held back. If you're a supplier to an airline right now or a supplier to somebody in this whole silo, you're not going to get a check for a while. You just have to sit and wait for your money because you know what, no one has any. As one of the people I've been speaking to explains to me that if you imagine the commercial aviation silo as a funnel, at the top of the funnel is where the money comes from, that sustains this industry is from passengers and from people who buy or require freight. There's no money coming in at the top of the funnel. So everybody down that funnel and of course, the further down the funnel you are, the worse it is. You're getting no money, no water, none...nothing...nothing is coming down that funnel.
-So, I just wanted to ask about how this situation would affect the airlines. Already some airlines have this efficient single aisle relatively long range aircraft like the A321. Are they, then, better positioned for this post pandemic world? And also, how does this affect Boeing's longer term plans because Boeing...they now have the 777X undergoing tests and they recently announced that they might be dropping this NMA concept as a new plane, but they might be considering a revamp of the 757 to compete with A321. How do you feel this evolving over the next few years or this whole situation in this space?
-All right to answer your first question about those airlines that have the A321 they have the right tool to be able to fly the right size capacity, meaning it's a capacity that they could sell it's low risk. For example, in the US we see Delta as not part one of it's A220 110 seater. They parked almost everything else but the A220 is an airplane that they can make work in the current economic environment. as a whole. The airline is losing money, a lot of money probably $15 million a day. But there are certainly tools that just work really well. Another tool that would work in that kind of size for service would be the Embraer E-Jets, American has only 20 of them. And as part of that, because 20 doesn't really help them. Delta has about 30 A220s, which is something that's working for them. So the decision at American is a little bit odd. In terms of Boeing, they clearly have missed a step by not replacing the 757 on time with the NMA. The NMA solution had been up to now a family with two sizes. And they've taken so long to figure out what they want to do that they've kind of missed the boat. And you'll see people like United and American, and Delta that were all big Boeing customers, they've all flipped over to the A321. And these are 20 year decisions, you don't make a decision like that for, you know, five years, it's a 20 year commitment. And once you train pilots, you train mechanics, everybody involved in the very complicated business of running an airline becomes oriented towards this airplane, because that's the one they're going to be working on for the next 20 years, which a lot of people could be an entire career in this industry. It's a very fundamental shift. It's a very bad situation for Boeing also that the MAX -9 and -10 cannot fly, because that would have been their attempt to try and have a product that could compete we were not there
-Right, about the B777X, what perspective so you see, for this plane in this environment?
-So yeah, that's a difficulty. That's a difficulty because the 777X really is, you know it a good sized airplane in a very much of a niche market. Once you get over 400 seats, it seems that that market has shrunk quite a lot. There are very few customers for the 777X and it's probably going to stay that way for some time. So Boeing doesn't have any option they deep into the project, they have to finish it and get certified. But we've seen, for example, there's almost no interest in the -8, only there's interest in the -9 and the -8 interest is very specific. They are very likely a handful of airlines that are looking at it. It's too early to tell because again, if we look back, there's very little in our history that can teach us how we're going to come out of the spent me through every day, saying to somebody yesterday that everything that you were thinking about commercial aviation in January in February, in March, it totally turned upside down. And what we have today is questions are all the same. No one's asking different questions. Everybody has the same question, but the answers change day to day, week to week, depending on circumstances. At the same time, oil prices collapsed. Imagine if oil prices collapsed in January, February how much money the airlines would have been making. It didn't happen then it happened now. It's a perfect storm I want to be careful about not using language that sounds like overused, you know, people in the pandemic have all been looking for these huge, you know, overused words, but then we're in uncharted waters here. I hate to use that term as well. There is no other way to describe it. Who can you turn to? They can give you 100% confident guidance in this situation.
-What sense does this whole Embraer thing make? I'm not totally sure I understood what's going on here. I mean, I remember we were in Toulouse some time ago and that deal between Airbus and Bombardier was announced for what is now the A220 and you told me that was a great deal for Airbus and that Boeing had been caught off guard, so I guess the Embraer thing was kind of a rushed response to this. We have now seen them break up. Do you have any theories about this?
-Oh, theories. Yeah. Theories for sure. Yeah. Okay, so firstly, we know that Embraer and Boeing have been friends for a long time before they did anything. And I'll tell you one of the little clues that would point this out. If you look at the new wing on the E2 to look at the shape at the end of it when it looks just like you would see on a triple seven or a 787. They look like they came from the same parents. If Boeing didn't like Embraer, there would have been a lawsuit for sure about some sort of a patent, but, you know...Nothing happened. It was for some of us. That was known that something was going on that they were more friendly than they did appeared publicly after Airbus got what I would call the finest deal in the history of commercial aviation, buying 51% of a program for one Canadian dollar. I still think about that, you know, it's an incredible incredible deal, but Airbus moved quickly and they got what in this particular case first mover advantage. Now, let's let's dial forward to where we are with Embraer. Embraer had to make this thing work. To be able to make the idea of Boeing Brazil work, Embraer had to literally tear itself apart. The commercial aviation part of the company had to separate from the defense and the other technologies that they have under this one Corporation. A lot of money. You know, people had to decide which side you're going to be on. And they split themselves and they and they did what they had to do, according to them. Boeing says “well, they didn't live up to what was required for them to do”. Obviously, they're subject to a lawsuit now or arbitration. And both sides feel that they're entitled. The thing is, from the outside it's very important that this is a theory from the outside that I mentioned right now, it doesn't really look like people believe Boeing. You know, Boeing, unfortunately, has done some strange things that people don't quite trust what they hear from Boeing anymore. The MAX thing has done the company terrible damage. And also you look at what Embraer put itself through, you know, the bride got herself new clothes, got her hair done. Beautiful, ready to go. Then the groom decides now, you know, I've changed my mind. It changed your mind at the last minute. It is incredibly destructive. You can imagine the consternation and the frustration and the anguish in Brazil because, as I've heard, people at Embraer tell me time and again, it's very hard for them to compete with Airbus. When they try to sell an E2, they have to sell against Airbus. And the example here is JetBlue. JetBlue had been an Embraer customer for a long time. And they were very, very close to buying the E2 to replace their E190s. Then at the last minute, Airbus came along and said, you know, you've got all these A320neos on order. Let's modify that deal. We will convert those to A321neos, which are going to be the better airplane for you because you want to fly across the Atlantic. And we'll make you a deal...and, oh! by the way, as part of this deal, you take the A220 instead of the E2. Well, how does Embraer compete with it? They don't have a big product. The E195 is good. Airbus, on the other hand, can offer a whole family of solutions to JetBlue. So if you're JetBlue, what are you going to do? Of course, you're going to go with the Airbus solution, because they come with a left foot, right foot, left hand right hand solution, and Embraer only got one hand or one foot offer. It's impossible for me to compete against.
-Two thoughts here. What about competition issues? And if Airbus all the sudden becomes sort of monopolistic in this segment...and the other one is, actually, the production capacity, how long did airlines, maybe these will change now, have to wait to get airplanes if there's only one supplier producing them? Wouldn't this be an issue?
-I don't know. Firstly, I don't think that Airbus will take a monopolistic view on anything. It's a very dangerous game to play. Both Airbus and Boeing have long started off at the beginning of the year with seven years backlogs, those backlogs have obviously been cut big time. We also know that the backlog is not only going to be cut because people don't need planes like they thought they would. But there's a lot of airplanes in the desert that you can pull out and now use. If you and I were running an airline right now we would take the existing fleet we have and we would fly it literally until they break. We will wear out the airplane because you know what? It's gonna be cheaper. We don't care what fuel costs are because fuel is not what we're terrified about right now as we need to get revenue. And the only way an airline gets revenue is it sells flying hours, whether it's to passengers or to freight, they've got to sell flying hours, and you want to produce a flying hour as cheaply as possible. A new plane is not a way to do as cheaply as possible if you feel it is where it is today. So the first issue is I don't think Airbus will take a monopolistic view. However, when you look at something Like a 321 compared to, let's say, Max -9 or -10, that you would think that there is price competition, but in fact, it's very hard for Boeing to make any kind of deals because the customer is going to say, “when can I get delivery?” and Boeing will say “I don't know, because we have to get the plane certified again”. Yeah. So on the other hand, has probably got a better timeline that I can give you for delivery. But this is a remember, Miquel, this is a long term business 20 years at the time, you don't want to irritate people and break relationships that are going to be necessary for 20 years over a deal around a pandemic like this, the pandemic will come to an end. It may take a year, it may take more than a year or two…out of 20. You don't want to be that guy that people will remember as taking advantage. These are long term relationships.
-And what's the role for the other competitors? I think about Japan or China, Russia, each of them have also their own emerging manufacturing industries that want to get out of the cake...Yeah, commercially they face some challenges here, but do you think they get some size some some part of the market with their own respective offerings?
-Right. If there are three players that we can go through, the first one is Japan. Japan has one product available or one product in formation called the Mitsubishi Spacejet. That program has a delay, after delay, after delay and quite honestly, it has a credibility problem. And no one knows actually when they're going to get one. If you bought it in the US airlines that ordered that airplane. One of the airlines has now gone bankrupt and closed down. The other one SkyWest is a huge company and they are probably going to just wait and see Mesa came through and put in an order. But it's a case again, wait and see because the airplane that Mesa wants to take delivery of, now appears may not even be built. So the Japanese are, shall we say, not especially credible as a supplier right now. And since 70 plus percent of the world's regional jets fly within the United States, if you build a regional jet that is not able to be used in the United States. In a word, you're crazy, because the rest of the market is just too small.
-What's the value of the Bombardier they acquire that one by the CRJ program? What value do you see them getting out of this deal?
-Well, the saving thing for Spacejet is probably the talent that they're getting at the CRJ program, there are people that have certified, sold, delivered and provided support to airlines. Mitsubishi has never done that. And so the team at Mitsubishi have never done that. There may be people that used to be working for Bombardier or Boeing or whatever. But the fact is, that team has not ever done the things that the new team in Montreal has done and continues to do. So it's going to be a substantial maturing of the team at Spacejet. And we have to wait and see because at the end of the month, that is when the deal closes, and then we start to see how the thing shakes out. And the big thing to watch there is the people: who is going to go where and do what, which roles are there going to be in the future, because that's going to tell us how space the Spacejet program evolves and whether we can be more, you know, more confident in any of their schedule information that they publish. The other market we want to talk about...yes...China. Now, what's interesting is the first market in the world to ground the Max was China. The Chinese have the most rigorous airline safety regulations in the world. They have a very strong safety culture. What we see though, is because of that safety culture, they are very deliberate in building commercial passenger airplanes, the ARJ21, which is for most people a copy of the 717. With more modern engines is what?...I think...14 years late...14 years! It's like a half a generation now in an airplane's life.
-Yeah
-Then we have the C 919, which has gone much better, but it's also going quite slowly in terms of progress. By the time that airplane comes into the market, like the ARJ21, it's going to be dated. Now, again, that's logic from January, February...the new logic is starting this year, this last month or two, we don't know what the new logic is going to look like. Do people really worry about the most modern fuel efficiency or do they just mean they want something that's low cost, and reliable? We don't know. The Chinese see our mind CR929 we're not quite sure how that's gonna play out too. It's too early to tell. The Chinese are playing the long game. And, unfortunately, in the commercial airline world, they don't really have a long game because as you can see when a pandemic comes, the margins to stay in this business successfully are so low The capital costs are so high, it's enormously risky. So playing the long game in an airline business is hard. You need to keep generating cash to keep the business going. So for the Chinese, it's hard to tell with how this is actually going to play out. Will it work out eventually? Yes, but it may take 20 years, in which case everything that they have now is going to be irrelevant other than as a learning tool. The Russians with the MC21. Now, that is a very interesting product...Firstly, the technology, much of the technology is Western but they are able to learn from what they're doing with the Superjet. The Superjet was a good program, but didn't work out very well because of things like product support. You know, Superjet doesn't have the wherewithal to do support for those that have bought it, for the guys in, for example, Mexico, they had the same thing in Europe with Cityjet The plane should have worked. It's effective. It's low cost. It should have worked. But in the end, what does an airline do? They sell schedules. If they can't deliver as scheduled, passengers get irritated, they don't fly with that airline. And then everybody loses money. It's back to that funnel. You have to offer a funnel that is reliable, so that people will pour money into it. The MC21, it looks to us to be a much more thought out program. The technologies on that airplane are state of the art. Sukhoi, that is the you know, the designers and the builders behind the plane, are as good as anybody in the world in terms of the design and functioning of an airplane. That airplane is going to be really great. But again, do the Russians have the industrialization in terms of the ability to build that great support? There are concerns because, again, it's an unknown, they haven't, you know, the Russians can be building the most superb airplane. But if they can't industrialize the program, it becomes difficult. You look at, for example, the Su-57. That is a state of the art airplane in many ways, but it's, it's taken a long time to get into service. So if you, Boeing and Airbus, and Embraer, you look at the world out there and you say, “Okay, I'm not really worried right now. Because the guys that are at the margin at the edges trying to get into the game, then they don't. They don't have this stuff ready. So not a concern for certainly not another 10 years”.
-Well, we'll see...so many unknowns at the moment. Correct? We will all have to wait for the next six months...how things evolve. And then, basically, do the planning based on that and, I guess, many analysts will be redrawing and redrafting all the analysis of the last few years based on on the outcome of this pandemic...So we'll be looking forward to continue reading your reports and your analysis or on AirInsight.com! And, yeah, hopefully, we'll be able to comment on the fast evolving situation sometime soon and see how things are going…
-Absolutely! Thank you so much for having me!
-Thanks so much for being here today, on the podcast, and, hopefully, speak to you soon!
-Looking forward!
-Stay safe!