Airbus examines strategy as new markets emerge
Airbus is mulling a fourth A320 engine option as a tactic in its single-aisle product strategy, which is expected to lead to an all-new design for service entry in 2025 or soon after. The European manufacturer’s deliberations are taking place in the broader context of company-wide plans to focus on core competencies and to establish additional avenues of interest, according to future programs and strategy senior vice president Ian Dawkins, speaking before he took a new position last month as chief executive of OnAir, the Airbus/SITA cabin communications joint venture.
Dawkins told a press briefing in early May that Airbus is seeking partners to drive a move away from Airbus handling “elementary” processes, while retaining overall business management. “Our long-term strategy is not just off-loading work,” he explained. “We want to keep control and master overall development processes.”
The company intends to integrate all activities, including its military business, while establishing major aerostructures and cabin interior suppliers as it extends its international engineering footprint. This global expansion involves setting up U.S. final assembly capacity “irrespective of the [U.S. Air Force] tanker decision.”
Beyond current aircraft related services, Airbus aspires to offer support capacity “all around the aircraft,” in areas such as air traffic management, airline solutions and training, as well as distribution and material management. The company’s strategy in this direction comprises three approaches: expansion of its existing business, external growth through acquisitions in key sectors, as well as internal and natural organic growth. The last would see Airbus branching out into sectors such as cabin interior and system upgrades, consulting activities and software interests.
Innovation will drive long-term strategy in three areas, according to Dawkins: industrial organization, product policy and services required by the industry. He said a key factor in working out the manufacturer’s future will be acting at the right time. “We do not want to ‘go’ too early,” he said.
This does not mean Airbus is not thinking about tomorrow. Looking at the immediate future, John Leahy, chief operating officer for customers, was characteristically optimistic, seeing–at worst–zero change in international passenger traffic trends this year, followed by 6- to 7-percent growth next year. A best-case scenario allows for nearly a 5-percent increase this year. In the longer, 15-year term, the manufacturer’s market forecast predicts that traffic will double and that global growth over 30 years will average 4.7 percent.
But whatever the average trend, are manufacturers facing the familiar rollercoaster as deliveries chase economic cycles? Leahy suggested this is not the case. Rather he foresees greater stability, a point missed by some forecasters who mistakenly predicted 2009 shipments would fall dramatically, echoing the downturn that followed the recession in the early 2000s. Now, according to Leahy, doomsayers see a delayed fall occurring this year or in 2011. But, “they’re still not right,” he said.
Leahy claimed that Airbus and Boeing have learned from the past and have disengaged from the cycle that tied delivery rates to economic trends. He said Airbus deliveries stayed flat during the period 1999-2004 as the company sought a stable backlog, compared with Boeing shipments that followed volatile economic trends– first rising steeply before declining. The U.S. manufacturer has since followed Airbus’s model.
Deliveries vs. Backlog
Analysis of deliveries versus order backlog shows Airbus with a 1:5 ratio in the 15-year period 1990-2004, which gave it about five years’ work in hand at any given time. For Boeing, the relationship was 1:3.3, albeit with somewhat less stability, according to Leahy.
Now, the past five years have seen more moderate delivery trends. Although airlines remained keen to order large numbers of aircraft in a prolonged shopping binge, the two manufacturers acknowledge a practice of “overbooking” that accommodates prospective cancellations or deferred deliveries. Accordingly, Leahy concluded, “The current cycle will be flat. Solid sales backlog sustains production through the downturn.”
The Airbus executive pointed out that in spite of high production rates that saw more than 1,900 deliveries in the past two years, airlines have been retiring or otherwise withdrawing aircraft, with the result that the overall fleet has grown much less. The 2008-09 deliveries were equivalent to almost 14 percent of the existing fleet of aircraft carrying 100 or more passengers. In-service aircraft grew in number by less than 3 percent, according to Leahy. The differential is accounted for by the retirement or storage of almost 1,550 aircraft. According to Airbus data, these comprised 430 “old” designs, 830 “mid-generation” aircraft and 279 “new-
generation” units [see box].
The disengagement of new aircraft deliveries from order backlogs may not be the only established link that is being broken. Using industry data and information from airlines, Leahy pointed out that passenger traffic developments have been tracking global GDP trends through the recent recession–from about minus 1 percent in September 2008 down to nearly minus 4 percent in March last year.
Historically, movements in international scheduled-service passenger traffic have followed world economic developments, but usually by a multiple of 1.5–that is, at the peaks and troughs traffic trends have been 50 percent greater than trends in GDP. During 2007, growth in passenger traffic was around 6 percent against a 4-percent increase in GDP.
Since March 2009, traffic trends started to exceed the economic cycle, with both showing increases after about a year of continual decline. By the end of 2010’s first quarter, passenger traffic growth was 4 percent, around one percentage point above GDP growth.
Leahy also declared he is encouraged by cargo and trade developments, with freight traffic “recovering quickly.” The air cargo business established pattern of leading general economic trends saw that segment decline in early 2008 and finishing that year well over 20 percent down on late 2007. Likewise, it picked up earlier than overall global trade and was back in the black about nine months ago, followed three months later by world GDP. This year freight traffic has performed well, beginning April one quarter up on levels 12 months earlier, according to Leahy.
Expansion in the East
Looking forward, he said India and China, ahead of other developing nations, will lead commercial airline expansion. Breaking down the passenger market by region, Leahy reported that, taken together, more than 50 “emerging economies” (comprising all areas except Japan, North America and Western Europe) are enjoying double-digit growth. He said April 2010 OAG data indicates passenger traffic in these markets was up 13.5 percent over the equivalent figure a year earlier.
Indeed, year-on-year growth in these economies was not always positive through the recent world recession, but it boasted almost 16-percent growth in February 2010. This compares with U.S. and Western Europe markets that in April 2010 had seen negative growth for more than 20 straight months. Immediately after this, international passenger traffic operations were hit by the effects of volcanic ash over the North Atlantic and Europe.
Finally, Leahy said that over the coming 20 years India and China will see annual economic growth of 8.7 percent and 7.2 percent, respectively (see charts on page 26). The rest of Asia (minus those two countries and the developed economy in Japan) will grow at 5.9 percent a year, he said. “Air transport is still emerging in 85 percent of the world,” concluded the Airbus executive.