Six month delay for 787,  but still looking strong

 

Supply Chain is the word during today's conference call.  Boeing states that they have been engaged with their supply chain and has taken all necessary steps to correct known problems.  Further delays are unlikely, as they now have much better knowledge of what it takes building 787.  The first aircraft and related structural issues have been a great learning, although problematic, experience.  The reschedule announced today is based on dates supplied by customers and not imposed by Boeing.  It also allows for more margins in the flight test program to be able to deal with the unknowns that could materialize and inject some much needed safety margins.

According to Boeing, the integrity of the design is solid, and the company is not seeing anything disjointed between the various partners.  Nothing of that nature has surfaced of late; however, Boeing is experiencing slower resolution of known issues. Getting the supply chain up and going is really the problem, as parts unavailability and production shift to suppliers are creating longer lead times.

Boeing will try to help suppliers get back on schedule and has good visibility in terms of the numbers and penalties it may face for this delays; the net impact remains relatively small according to Boeing.

Most of the problems are tied to the first airplane; challenges emerging from the discovery of out of sequence issues with the number one aircraft and the static test aircraft are significant bottlenecks.  Software has caused some concerns in two to three areas, but it became clear to Boeing that software was nowhere near the problems encountered by structures;  the delays will give more time to test software and give breathing room to allow the software piece to be more mature once it reaches production.

The situation remains somewhat similar to what it was in September. The word from Boeing to suppliers is "stick to the production schedule". Boeing believes that the risk of certification delays is highly mitigated as it does not expect any surprises from an aircraft structural standpoint; the new schedule also now has a restored built-in certification safety margin in anticipation of any FAA related delays.

Boeing’s strategy is simple: execute a much needed correction with the schedule to restore a comfort level more in line with what the company requires for their commercial aircraft programs.    For Boeing, the 787 manufacturing strategy remains sound and, as they work their way through it,  the benefits will emerge even stronger.  We initially believed that Boeing could make it by the summer of 08, however, based on Boeing's comments, this revised schedule is clearly necessary and gives the program greater flexibility over the next year.

 

We will soon examine what EADS/Airbus may soon face because of insider trading allegations.  I guess the 787 delays might pale in comparison to the possible consequences of this new brewing quagmire.  Let's hope for Airbus that this will be limited to a few individuals only, however rumors in the European media are suggesting quite the opposite.  Airbus is having a fantastic year, it would be a shame to have it spoiled that way.

 

Operations tempo, aging aircraft and an ongoing emphasis on expeditionary capabilities boost U.S. Department of Defense spending in maintenance and repair of aircraft structural

It came as little surprise to G2 Solutions that the U.S. DoD would have to increase its outsourced maintenance budgets in light of continued deployment and increasing platform age.  What did surprise us was how much and how fast the DoD ramped up spending in this space.  In a mere matter of four years spending in Federal Supply Code J015, Maintenance and Repair of Aircraft Structural has more than doubled, from about $1.2 billion in FY 2002 to almost $2.4 billion in FY 2006.

Not surprisingly, U.S.-based defense electronics giants are dominant in this space, with 13 companies accounting for $2.2 of the total $2.4 billion spent. There is however, movement and development at the broad, diffused end of this market.  The number of DoD/commercial partnerships is skyrocketing, along with the number of physical contracting locations. In G2’s opinion these changes are borne of necessity, for the DoD is hemmed in between falling active force numbers and an escalation in deployments and maintenance needs.  Small companies who once saw an inconsistent contract in the hundreds of thousands are finding consistent year-over-year work in the low millions of dollars.  Business models built around creative outsourcing of deployed aircraft maintenance and aircraft recapitalization are likely to find greater traction in such a paradigm. 

In a DoD force structure emphasizing expeditionary capability (the USAF is targeting a 72-hour window to join the fight anywhere around the globe) depot level maintenance is seen less as a location, and more as a capability.  Better yet if the service in motion does not have to haul the MRO capability with it. 

These and other factors enumerated in research note AB 075 lead G2 to believe that DoD spending in this segment will remain steady if not slowly increase through 2010.  As the overall DoD maintenance requirement grows, so too does the addressable market for commercial companies, even in spite of the 50/50 rule which states that the DoD shall not contract out more than 50 percent of maintenance capability.

Look for research note AB 75 – DoD Maintenance and Repair of Aircraft Structural” to be available through www.aviationtoday.com in the coming weeks.  

September 2007

 

Highlights from NBAA 2007 

 

A few items caught our attention today in Atlanta.

 

New Aircraft concepts from Embraer: we are particularly impressed with the MSJ concept which is another step in Embraer's strategy to provide complete aircraft solutions to its customers.  Again, we view Embraer's approach as very sound unlike some of the other new entrants at the lower end of the business aircraft market.

 

Another potential game altering product comes from Saab Aerospace and it could have tremendous potential beyond commercial markets.

Saab has developed a low cost, high quality head up display systems with a form factor that would permit its installation in a variety of aircraft ranging from helicopters, military trainers and light jets.  The potential for this product is significant in our opinion, which is shared by Saab, ranging from a few hundred initially to a few thousand per annum if Saab can deliver in terms of performance. We are very impressed with this initial product concept and stated capabilities.  The HUD integrates SVS and EVS and has one of the highest quality imagery we have seen in a HUD since Thales' Digital HUD.

 

 

 

 

Bombardier Q400:  is the SAS accident serious enough to warrant concerns?

 

A Bombardier Q400 aircraft operated by SAS (Scandinavian Airlines System) made an emergency landing yesterday in Aalborg (Denmark). All 73 passengers and crew escaped serious injuries.  The crew had initially reported problems with the nose gear.  However, it is the aircraft's right main landing gear that collapsed immediately after touchdown; the aircraft then abruptly skidded off the runway and came to a halt shortly thereafter.  The airframe was substantially damaged by pieces of the propeller that reportedly penetrated the fuselage in several locations, and by a minor right engine fire.  The crew had planned for this and relocated the passengers immediately seated next to the propellers to other seats. The aircraft could be a write off.

Gear up landings are not uncommon but remain overall rare occurrences;  the Q400 is however somewhat of a regular at this risky sort of exercise since its entry in service in the early 2000s.  SAS, the launch customer, reportedly has had several hundred emergency events since it first received the aircraft in 2000.  Early on, the aircraft was plagued by APU, avionics and hydraulics issues leading to an overall poor dispatch reliability. Bombardier has worked with customers to correct problems and later production models' performance has been improving, especially when compared with the many lemons of the 2000-2002 period.

Over the past few years, the Japanese and Swedish aviation authorities have repeatedly complained to Bombardier about problems with  the aircraft; an ANA Q400 had a nose landing gear incident last march in Japan and a Jeju Air Q400 suffered a left main gear collapse last month in Korea.

The Q400 has enjoyed a strong resurgence of late, primarily driven by the aircraft strong economics on short haul/high density routes compared with similar jet aircraft.  The safety record of the Q400 is also excellent with no hull loss to date.   However, this latest incident  might further damage its reputation with both airlines and passengers. 

Bombardier might also need to do some serious damage control with its customers and provide some immediate guarantees about how it intends to remedy to the repeated landing gear issues that have been all but too common with the Q400.  Bombardier needs this aircraft, so do its airlines customers;  the latter have been giving the Q400 a significant vote of confidence judging by its recent order book.  It is also interesting to note that some airlines appear to be more prone to problems with the aircraft, in particular SAS, Tyrolean and ANA (all large operators).  Maintenance is a significant contributing factor and could play a part in repeated incidents.  Regardless of recent incidents and their origins,  it is also perhaps time for Bombardier to review quality control and customer support issues thoroughly in order to fully alleviate Q400 operators' concerns.

 

Boeing 787:  the fastener issue explained

 

Here is a link to an excellent article describing the fastener problem encountered by Boeing for the 787 program.  The real challenge for this aircraft is not really in the utilization of composite materials as some have insisted (you know who).  The real issue, and risk for Boeing is in the management of a large team of international and domestic suppliers who are expected to deliver very high standards finished products to the assembly line.  Now it seems that the usual suspects,  poor communication and quality control, are back on the global assembly floor.  However, these are not insurmountable problems, and we believe those will be corrected by the time of first delivery to ANA.

 

August 2007

ADS-B: finally a step in the right direction...

The FAA has selected a team led by ITT Corporation to proceed with the nationwide implementation of ADS-B (automatic dependent surveillance-broadcast).  The contract, worth approximately $1.8 billion, will have ITT build the ADS-B ground stations and own and operate the equipment.  The ground infrastructure is to be ready by 2010 and provide coverage over the entire U.S. by 2013. Key ITT Partners include AT&T,Thales, SAIC, PriceWaterhouseCoopers; Aerospace Engineering; Sunhillo; Comsearch; Mission Critical Solution (MCS) of Tampa; Pragmatics; Washington Consulting Group; Aviation Communications and Surveillance Systems (ACSS); NCR Corporation; and L-3 Avionics Systems and Sandia Aerospace

GPS avionics upgrades, increasing product capabilities in a peculiar market

Aircraft owners and pilots are an interesting bunch. Weat G2 solutions have done much to confirm this statement in conversations with avionics manufacturers and installers in the past few weeks.  Our challenge was to define and forecast the retrofit market for North American GPS avionics upgrades.

Our initial hypothesis sought limited revenue growth across the integrated avionics suite, panel mount and handheld market segments.  We based these initial assumptions on year-over-year revenues among market leaders.  True, this was a historical trend, but one few in industry or trade media had openly questioned going forward.  When looking at addressable market – coupled with owner operator behavior – G2 Solutions had some reconciling to do.

Secondary research, an extensive sample size for installed base and conversations with some major installers brought some things into clear focus.

1)     There are about 3,500 aircraft produced per year, and nearly all of these will be forward fit with GPS or a fully integrated avionics suite.  This in essence takes these aircraft out of the retrofit addressable market for at least a decade.  These new aircraft numbers are not active contributors to a GPS retrofit addressable market.

2)     A look at a significant installed base sample tells us that there is a 99 percent GPS install rate among North American Business jets, and an 84 percent GPS install rate among North American General Aviation aircraft.  That 16 percent might be considered a key addressable market, but certain vintage aircraft are not ideal panel mount candidates due to design without a stack in mind.  Furthermore, carving up a beautiful wood panel to make room for a multifunction display can actually decrease the value of certain vintage aircraft – ones whose owners have painstakingly kept in original condition.

3)     Panel mount and handheld devices are continually increasing in capability, but a significant percentage of handheld users will only be familiar with the “go to” function.  In other words, traditional pricing, performance and supply and demand do not necessarily hold true, even at this market’s introductory product price points.  In many cases the hardware is packed with more capability than VFR GA pilots will take the time to use.

4)     Integrated avionics suites, in their purest definition, are not ideal candidates for retrofit within the majority of General Aviation.  This can simply be a function of avioincs upgrade costs versus the value of the aircraft in question.  With an average equipment cost of close to $74,000 the opportunity cost argument rapidly erodes.

In the face of multiple independent inputs G2 Solutions sees a North American GPS retrofit market with fewer opportunities over time.  Revenues of close to $96 million in 2007 are actually a highpoint, with panel mount retrofits representing the largest percentage of revenues through to 2018.  So if the sky is falling, it is doing so in a methodical manner.  High installed base GPS utilization rates, an erosion in addressable market and an emphasis on forward fit will restrict the number of broad-based opportunities.  In such an environment, the industry push to forward-fit is understandable and expected.  Look for more details in AB074 (North American GPS Avionics Retrofit Markets) coming in mid September, just in time for NBAA

Questions?  email Ron Stearns at  rstearns@g2globalsolutions.com

 

 

 

Three items we would like to be right about…

 

The business of market intelligence is often a game of educated guesses.  Not that methodologies, analysis or modeling/forecasting have nothing to do with it; it often comes down to common sense backed up by the art of manipulating numbers. Three items have been catching our attention over the past few years, which should see  elements of resolution within the next months.  The first item is the soap opera called USAF Tanker replacement, the second one is simply called ADS-B and the more recent addition is the overused VLJ acronym  and in particular a company called Eclipse Aviation. Unless you are a fly on the wall somewhere in those buildings in Arlington and Independence Ave SW, or have access to a heavily modified, plutonium powered, Delorean DMC-12, there is a lot of speculation going on about the three items of interest listed above.  While we are not making any final judgments on these items, let’s say that we feel that we have seen some light about the first two.  The last one is a bit like a under aged merlot that needs to spend some time thinking all by itself in a dark room for another five years at least before one pronounces a verdict.

 

USAF Tanker Replacement

 

Following the Darlene Druyun/Mike Sears fiasco, one was tempted to think Boeing only had to offer a strong mea culpa to make amends with DoD on the tanker program.  Then, in order to regain credibility while under pressure from the usual suspects, DoD decided an open competition would ensure transparency in a fair and open competitive bidding process (chuckle).

Why, oh why are we wasting all this money when the deal simply ought to go to Boeing in the first place?  Why is Northrop Grumman thinking an aircraft initially rejected by the Air Force would satisfy their needs five years later?  Let’s be clear, USAF eventually will eventually need new large strategic tankers, but this is not the immediate priority.  The immediate need is to replace senile KC-135s and ensure that the service can deploy significant numbers of booms wherever needed to project airpower. 

The KC-30 cannot do this as it doesn’t fit the requirements of the moment. However, it might be the right aircraft in 10 years.  The Airbus airframe (one needs to be reminded that this is what Congress will mostly complain about and refer to it by) is too big of an aircraft (wingspan in particular) for a precise fit in the existing USAF tanker infrastructure. Its footprint will cause problems and its foreign content, for a strategic asset, is still way too high compared with the KC-767.   However EADS and NGC choose to portray the KC-30, it is still, in crucial areas (avionics, flight control systems, and airframe to name a few) a Franco-German-Spanish-British aircraft. 
While relations have improved with these three somewhat reliable U.S. allies , one needs to think  of long-term strategic implications when it comes to the acquisition of an airframe manufactured outside of the US. This program is not about the acquisition of Falcon 20s for the USCG or light utility helicopters for the US Army.  This program will be a major component in the ability of the US military to project airpower globally for decades to come.

In the past 50 years, if we include the Suez crisis, France and the United States have gone through at least four major diplomatic crises (56-66-86-03) that’s about one every 12.5 years.  Sarkozy and Bush appear to get along well, it is safe to say that POTUS 44 will likely get along with Sarkozy as well; as the latter will need to align himself behind what is expected to be viewed in Europe as a more moderate successor to George W. Bush.

Relations are improving, trade is booming and Freedom fries are off the menu list. However, that does not mean that a decade from now the US and France will not be jousting again about (a) major geopolitical issue(s); it could be over Taiwan, Russia or Turkey that the next point of contention emerges. 

With its increasing trade links with China and Russia, France has not hidden its intention when it comes to the future of its aerospace industry and the growing partnership with China. Fiction is to be handled with care, as always, but France in particular has always been the most reticent of our European allies, and the one most likely to realign itself behind a counterweight to what is often referred to as the U.S. hyperpower. The French do love to be different. 

Now, we think NGC’s strategy for the tanker program is very strong and the company has done an excellent job of selling the KC-30 solution: strong US based team, larger US supplier base, low cost proposition, proven technologies and multirole potential. However, it may fail simply because in the Pentagon corridors, there are still plenty of influential people who are not comfortable with the idea of Franco-German strategic tankers in the USAF inventory with no current operational service anywhere. This is still a big deal, and you can be sure that it will be an even bigger one on the Hill if DoD goes NGC’s way.  Boeing has the political support it needs to win this contract, we think NGC might come short on this issue.

With all the in-house talent that NGC has at its disposal, and these are some of the best people in the industry for sure, we are surprised that they simply have not proposed an in-house designed medium size tanker with some LO characteristic (similar to the LMT design), low cost of operation and that can be easily integrated into the USAF inventory. The upfront R&D cost is significant, no question, but why not give exactly what the customer wants in the first place? If NGC wanted to become a player in the tanker business, it had the resources and talent to do so internally. There is no guarantee they will succeed with the current approach, and let’s also not forget that the KC-767 is not the 1982 version that misinformed PR peons love to refer to as.  It is a very advanced airframe with systems on par or better than the NGC/EADS product.  Basically, NGC chose to propose a me-too solution, based on tried and tested tanker concepts whereas they could have rocked the building with a new approach.  

 

Result: Boeing will win the first batch with a consolation prize perhaps going to NGC later, perhaps.

 

Automatic Dependent Surveillance-Broadcast (ADS-B)

 

“And Now for Something Completely Different”, Vern Raburn's comments during EAA indicating that UAT (Universal Access Transceiver) was "stone dead" has contributed to some level of confusion in our fragile little minds. Marion Blakey will announce the winning bid of the ADS-B program later this month, and the winner will be in charge of technology implementation in the US over the next decades.  Three proposals are on the table, ITT and LMT are both proposing a 1090/UAT approach while Raytheon has (shockingly) opted only for a 1090 approach arguing that items such as weather can be offered via satellite suppliers.  The ground stations and automation should be in place by 2011 with a mandate to follow in 2017.  The first two have already made it clear that if the FAA were to award the contract to Raytheon, a legal battle would ensue probably would extending beyond the useful life of ADS-B (ok, maybe not).  On our side, we still think there is value in UAT. The argument against UAT comes down to cost, interoperability (UAT is more complicated) and the fact that deploying UAT stations will cost a lot more than 1090ES (about 2.5X more unless large scale deployment drives price down). 

However, the arguments in favor of UAT are plentiful. Passenger numbers will nearly triple over the next 20 years with aircraft movements also increasing three-fold, 1090ES will saturate in high-density airspaces and it cannot support FIS. This shortage of available capacity in the VHF spectrum will require alternative broadcast datalink technology and any shortfall in capacity will result in an increase of air traffic and spectrum management. This ultimately will increase ground infrastructure costs, perhaps negating any perceived 1090 long term cost savings.  Raytheon's perspective on the matter might be driven by the global view of ADS-B, meaning that 1090 will "likely" work there in the long run. However, trying to push a single link option in the NAS will raise new challenges that one would not face overseas.  The sizes of the US Business and General Aviation fleets alone warrant a more careful and visionary solution.

 

The question remains:  what technology will support growth?  Dual or single? Fact:  1090ES can't do it alone.  Therefore satcom-based services appear to be, in our opinion, one likely way to complement it and alleviate the risk of saturation. Raytheon and Eclipse are heading that way and this approach is not without merits.  However, there will be another good fight on the general aviation side if Mode S transponders are mandated and it could be an ugly one; the GA community does not like to be told to spend money to update transponders every 20 years or so. Especially those who have operated from inside Class B airspaces. Even if prices are coming down, resistance to a mandate will remain.  Additionally, UAT is already there, it is being used in several locations, from Alaska, Pennsylvania, Oregon to Florida and Colorado, and so far has proven to be an effective solution. We think that either ITT or LMT is in a strong position to win this one with LMT our favorite.

 

Eclipse Aviation

Finally, what is Eclipse thinking?  Perhaps the company is too forward thinking at times. We all know market timing is one of those essential “get it right” things, and for Eclipse being first to market does not guarantee success. Regardless, the new Eclipse single engine light jet was the star and surprise of the recent EAA show.  A nice concept for sure, it resembles the Cirrus Jet and has some particularly impressive design features such as the oversized V tail.  This aircraft demonstrates that Eclipse is a capable company, and is an impressive accomplishment for Eclipse and its partners at a time where competition intensifies and problems are slowly resolved.

 

While we are impressed with Eclipse’s achievement, we are puzzled by the company’s current strategy following years of supplier problems.  Is Eclipse’s goal to put a dent into Cirrus and Diamond’s market shares or does the company really believe the market for personal jets will grow substantially to warrant another entrant?  On the other hand, does Eclipse believe this is the market segment where it will be able to compete most effectively against the competition?  It is our view that this will be a market driven by pricing alone.  Technology and capabilities will be fairly similar from airframe to airframe; it is our judgment that Eclipse believes their cost structure and manufacturing processes can be strong competitive assets if they choose to introduce this concept to market.  Another way to look at it is: a sale for the Eclipse Jet is one taken away from Diamond or Cirrus. 

 

Still, the right way to go would be to support existing and future E500 sales with a bigger airframe enabling clients to expand their service offerings. Vern Raburn is apparently more concerned about the TBM-850 than VLJ competitors judging by his puzzling letter to BC&A last month (interesting isn't it?).  This is no surprise to us, we have always liked the TBM, it is a great design.  The Eclipse on the other hand, we are not sure that anybody would like to spend 4.5 hours inside the cramped and noisy fuselage of an E500 or a TBM for that matter.  These aircraft will be mostly used on routes less than 500NM, and the TBM while more expensive, is a strong challenger.  With a larger airframe, Eclipse would be able to interfere with the now likely emergence of Embraer as the next powerhouse in US business aviation.  Embraer understands this with the Phenom 300 and will likely announce a new airframe at this year’s NBAA convention in Atlanta.  We will be there…

Previous Articles

Sarkozy’s Visit to Libya May Pay Dividends for Rafale.

Impending Franco-Libyan relations normalization and a regional air-superioirity race may provide new export opportunities for French defense companies

Libya's normalization efforts seem to have finally paid off.  For the past few years, an aging Muammar Gaddafi has, under the influence of several advisers, most notably his son, altered the country's foreign policy in an effort to maintain economic & military parity with its neighbors and energize the fledging Libyan economy which now seems back on track for strong growth. The release of the Bulgarian nurses on July 25 has demonstrated Libya 's bargaining position with the EU remained fairly strong since 2004.  This expected release was most likely the result of efforts from the French government over the past three years, together with a significant and  “necessary” financial compensation package for Libya. The Benghazi fund is only part of the payment to Libya, more significant is Qatar's role during the final weeks of negotiations (the Emirate has reportedly paid a significant sum to close this chapter).  Now that the nurses dossier is over, the normalization of Libya's relations with the US and EU is now completed.
The most relevant details will likely not emerge anytime soon, but it appears that France also made several concessions with regards to the pending deal for Rafale fighter aircraft, Tigre combat helicopter and the upgrade of two squadrons of mirage F-1s which have been in service with the Libyan air force since the mid 70s. Following the successful 2005 visit of French Defense minister Michele Alliot Marie in Tripoli, DGA (Direction General de l'Armement) officials have been routinely visiting for the past year or so, with the objective to finalize the details of the French package to the Libyan military. Sarkozy might be able to announce significant deals for France during his visit tomorrow.  French companies will likely benefit greatly with potential deals for Airbus, Dassault and EADS on the table.  French ambitions in the region are clear;  in order to regain traditional customers such as Libya, Morocco and possibly Tunisia, France has now decided to bury its differences and normalize relations to benefit its industrial base. For Rafale and Dassault, success in Libya could be a significant step forward in terms of additional export contracts over the next five years. 
Rafale is still viewed as the likely choice for the Moroccan Air Force (with helpful Saudi financing) and is a very strong contender in Brazil and of course, India.  Theses races are more open than the previous South Korean and Singapore tenders due to the limited influence of US foreign policy in these countries.  However, the Indian deal is wide open between traditional suppliers such as France, Britain and Russia, and the relative newcomers US, Sweden and Israel.  Our guess is that India will try to please everybody to some degree with orders going to Dassault, BAE Systems and possibly Lockheed Martin if F-35 is offered.  Brazil is likely to go Rafale because of the increased levels of partnership between French aerospace suppliers and Embraer.
Further rumors of joint development of a new narrowbody commercial aircraft to replace or complement the A320 replacement will solidify Europe's, and especially France's position in the future. As far as the F-1s are concerned, the upgrade package will likely include updated avionics and radar, new weapon systems and possibly new engines.  The F-1C is still in service with the French Air Force and airframe transfers to Libya are not to be excluded. This is an airframe that can serve the Libyan Air Force well for another decade or so.  With the advanced Sukhois going to Algeria, Egypt's F-16s and the potential Moroccan's Rafales, the arms race in North Africa looks set to continue over the next decade.

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Bombardier C-Series

Other Notes 

 

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