After Farnborough

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Includes: BA, BDRBF, EADSF, GE
by: Air Insight

Summary

Fewer orders.

So, a quiet show?

To be honest, there was a lot of action.

Judging by the trade press the recent Farnborough air show was quiet and unexciting. As an attendee I can assure you that despite torrential rain that shut the event down on Monday afternoon, and then the rain Tuesday and Wednesday, there was a lot going on.

The highly visible deals (aircraft orders) were indeed less prominent this year compared to Paris last year or the previous Farnborough show. But the news that emerged was very important.

Two examples explain this.

  1. Air Asia ordered 100 A321neos. This was described as necessary because of growing airport congestion in Asia, where the smaller A320 was not able to move enough people per flight. One might overlook an order for 20 aircraft. But at 100, the message is being shouted. Airport congestion is real and growing. This news links to the decision by Airbus (OTCPK:EADSF) to slow its A380 production due to slow orders. If airport congestion is a "thing," then the need for larger aircraft like the A380 is real. Despite slow sales now, Airbus needs to keep the A380 line going just like Boeing (NYSE: BA) has kept the 747 line ticking over. The market demand will catch up and the A380 is far from dead.
  2. The news that Boeing has modified its 737 MAX7 is important. By keeping the MAX8 wing and making the MAX8 a bit smaller to be called the MAX7 is very clever. Boeing is focused on standardizing its 737 production. This drives down costs by pushing economies of scale. The 737-800 is a best seller and the MAX 8 (its successor) also is selling better than any other MAX model. By focusing on the core MAX8 and tweaking it, Boeing essentially will get three models out of one - MAX7, MAX8 and MAX8-200. This provides Boeing with an ability to blanket the Airbus A320neo offering. It should allow Boeing to thrash Airbus on pricing as it will probably have lower production costs. Furthermore, by revitalizing the MAX7, Boeing has admitted the 130-150 seat market is important. This is a nod to the threat from Bombardier's (OTCQX:BDRBF) CSeries. Bombardier fans should be pleased rather than feel nervous.

Besides these two important items, the other crucial news from the show was best encapsulated by GE's (NYSE: GE) David Joyce. He noted that attendees should stop worrying about orders. The industry is in the midst of delivering new aircraft over the next decade that will replace 30 years of equipment. Think about that for a moment. It is a very important insight.

The follow on to this is to focus on what was happening in the halls at the show. Not on the runway. In the halls were a host of companies that were showing off clever ways to help drive down production costs and speed production. Additive manufacturing is a killer app - many of the firms coming along offering this are unknown and unlisted.

Small firms like Norsk Titanium are attracting attention. Using titanium wire the firm can build up any part overnight. Yes, overnight. I was shown a 787 bracket that holds a 787 galley wall. If Boeing were to order this part by 8 am today, the part can be delivered by 8 am tomorrow. This takes JIT to a new level. There are many small firms like this that will revolutionize the supply chain. The Achille's Heel for the aerospace is the supply chain. Firms like Norsk are fabulous opportunities for bigger firms to acquire - the same for venture capitalists. And there a number of them.

Another firm that has the potential to revolutionize the industry is WheelTug. This firm has developed a method to add electrical power to the nose wheel of an aircraft - that means no more airport tugs are needed. Why is this good? Because airlines waste an inordinate amount of time coming and going from gates and waiting for the few tugs they have - especially when banks of flights come into hubs. An airline minute is worth anywhere between $100 to $150. A typical pushback takes up to 12 minutes. With Wheeltug this can be reduced by 40%. Take five minutes per aircraft over six flights per day and the airline has saved up to $4,500 in one day. Now imagine what American (NASDAQ:AAL), Delta (NYSE: DAL), United (NYSE: UAL) or Southwest (NYSE: LUV) could save over their fleets in a year. Throw in others like JetBlue (NASDAQ:JBLU) and the host of other airlines and the numbers take on the proverbial hockey stick shape. We are talking about billions of dollars.

So while the news from the show made for less exciting headlines, there was plenty of very impressive stuff going on. Commercial aerospace remains a remarkably healthy and exciting industry to follow. We are likely to continue getting interesting news even as orders slow down.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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