Airbus (OTCPK:EADSY) and Boeing (NYSE:BA), reacting to the Bombardier (OTCQX:BDRAF) C Series, decided to re-engine their workhorse models. It was a predictable and excellent move. At the time, the world was looking at rising oil prices. Airlines and aircraft lessors were desperate for aircraft with 15% or better improved fuel burn. The solution that helped turn this around was the development of the Pratt & Whitney geared turbofan (GTF).
Mitsubishi was the first OEM to select the engine. But its new MRJ was so far off into the future that nobody was concerned. Meanwhile, Bombardier had struggled with a new design and the concept married very well with this new engine. The C Series came into its own with the GTF. It promised better than 15% improved fuel burn, much lower air pollution, and the quietest aircraft footprint.
With so many of the boxes checked, airlines and lessors were intrigued. There was doubt -- after all, Bombardier had no experience developing such an aircraft. But if Pratt & Whitney was prepared to take the bet, and the aircraft was viewed seriously. It was taken especially seriously in Toulouse, where Airbus saw the C Series as a threat to its A318 and A319. Airbus started to talk down Bombardier and its aircraft. Boeing was far quieter about the threat to their smaller 737s. The early Republic Airways order was sufficient to move the C Series from amusing to threatening.
Since then, a lot has happened. Bombardier fumbled its C Series program again and again, just as some expected (here in 2005, again in 2011, and again in 2015). But, more importantly, these fumbles came at the worst possible time. Had the C Series not been delayed, it would have entered the market as the oil price spiked. The naysayers would have egg on their faces. As Bombardier fumbled, Airbus and Boeing -- well-experienced in aircraft program development -- pulled off their re-engining programs to offer the A320neo and 737MAX.
However, now we see fuel at less than $1.00 per gallon for Jet A. Bombardier's C Series is about to start deliveries by Q2 2016. Airbus should deliver its first two A320neos to Lufthansa in February. Boeing's 737MAX is about to have its first flight in February. Suddenly, all the fuel-efficient aircraft are coming onstream.
Airbus and Boeing have built fabulous backlogs for these new aircraft. Airlines jumped at fuel efficiency all through last summer. Oil prices did not look like they would ever drop. And then they did --precipitously.
Looking at the new supply coming on stream from Iran, with current daily over production at 1M barrels, it certainly points to even lower fuel prices for aircraft operators. Consequently, the premiums Airbus, Boeing and even Bombardier want to charge for their new aircraft are no longer viable. Why pay a premium for lower fuel burn when fuel costs have collapsed?
Airlines and lessors -- along with the OEMs -- are going to make the case that nobody makes fleet decisions based on current oil prices. Fair point. But Delta Air Lines (NYSE:DAL) did just that, betting against the market and now looks brilliant. Moreover, we expect to see more airlines and lessors start to delay deliveries of the new fuel-efficient aircraft. What's the rush to deploy them if the principal justification has disappeared? The premium pricing on the new aircraft will take years to achieve ROI at low fuel prices. Better to move these deliveries further out, if possible, and see where oil prices go.
As oil producers keep producing to protect their market share, we cannot see supply slowing. Hence, lower oil prices are likely to stay -- possibly for five years, maybe more. Even if OPEC's current high production forces the U.S. fracking industry out of business, these producers won't disappear. As oil prices rise they will come back again. We don't see high oil prices for a long time with pent up production looking for way to the market.
Is the uncertain future going to hurt the three OEMs equally? Maybe not. The existing Airbus and Boeing single-aisle fleets are relatively modern. Both firms have been very successful ensuring their customers stay updated.
But there is an area both these firms have been less successful in, and that is the replacement of the many Fokkers, British Aerospace and McDonnell Douglas that are aging and need to be replaced. These aircraft are smaller than those Airbus and Boeing primarily focus on. Even cheaper fuel does not make these aircraft attractive, as they are wearing out and are reaching high-cost maintenance checks.
This is the market where Bombardier can still shine. But it must execute the C Series production without hitches. Failure to do this ensures success for its main rival, Embraer (NYSE:ERJ), whose own new jet is coming in 2018. Bombardier has a second chance. It dares not fumble again.
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