The Airbus (OTCPK:EADSF) A320neo, competing with Boeing's (NYSE:BA) 737MAX, entered commercial service in January 2016. Despite the Airbus A320neo having the advantage of an early offering to customers and commercial service entry, the program has been running into some teething problems lately.
Image Courtesy of Flug Revue
The Airbus A320neo is Airbus' best seller, succeeding the Airbus A320ceo and accumulating over 4,100 orders. Boeing waited over 270 days to launch its Boeing 737MAX, giving the Airbus A320neo a head start. Whereas COMAC had been coping with delays and Boeing had a late product launch, the Airbus A320neo seemed to be having no issues at all.
For Airbus, the internal roadmap towards service entry for the Airbus A320neo seemed to be smooth, with Airbus advancing the maiden flight of the Airbus A320neo. So it seemed that advantage had been on Airbus' side. With an early offering, higher order inflow and smooth road towards service entry, things looked bright for the Airbus A320neo… until a few months before the first delivery.
Service entry and teething problems
The service entry had been scheduled for late 2015, with Qatar Airways being the launch customer. However, Qatar Airways refused to take delivery of the aircraft over the engine performance. Instead, Lufthansa (OTCQX:DLAKF) took delivery of the first Airbus A320neo and the delivery slipped into 2016.
The engine issues on the Pratt & Whitney (NYSE:UTX) PW1100G were caused by asymmetric cooling, which resulted in thermal deformation in the turbofan. Additionally, there also were some software bugs that needed to be fixed. This was countered by a software fix and a software update that increases cooling times. A definite fix includes a combination of hardware and software updates, which will be implemented in the production process from February and onwards. This should incrementally reduce the startup times for the engine in the coming months.
Lufthansa took delivery of 2 Airbus A320neos, but refuses to take any more A320neos in the fleet stating that engines issues are slowly improving. The airline is receiving compensation from Airbus as it can only operate the A320neo on airports where the company has enough mechanics. Also, Qatar Airways, the initial launch customer, has been looking for compensations following engine damage in hot-weather conditions during test flights and is wary of the current cooling problems.
While the problems are caused by the Pratt & Whitney geared turbofans, and it is likely that PW will (partly) pay for any compensations that is being given, it is up to Airbus to resolve these issues. The maiden flight of the Airbus A321neo is now scheduled to be using CFM LEAP engines instead of the PW turbofans.
Despite the engine issues being typical teething problems, for Airbus the current issues are painful and caused a delay in deliveries. Given the advanced maiden flight and flight testing, the company should have had enough time to iron out most of them before service entry. Airbus is currently running about 2 months behind on schedule, which for airlines is inconvenient.
While the current problems might make Airbus look clumsy and are causing a delay in deliveries, this certainly is not the end of the world. It is important to note that the airframe is meeting its fuel burn targets and the company will ramp up deliveries starting from June. The ramp up in deliveries and higher delivery target should reflect in Airbus' full-year performance. Given the fact that the backlog for the neo exceeds 4,000 units and current issues will be fixed in the coming months, Airbus' shares are attractive for the long term.
Disclosure: I am/we are long BA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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