Southwest CEO Gary Kelly spoke about using Baltimore’s airport (Baltimore Washington International – BWI) as a “hub” for international flights some time in the future.  He described it as being a number one consideration during conversations about Southwest going international.

Before anything else, don’t go presuming that Southwest is about to buy trans-Atlantic aircraft and start low cost services to Europe.  They aren’t as there is way too much on their plates right now.  However, it is another logical area to grow into once they are done digesting Airtran in about 3 years and provided the market exists at that time.

Quite a few might question using Baltimore but it does make sense.  It is relatively uncongested and offers the ability to not just draw those in Baltimore to its flights but also from the Washington D.C. and Philadelphia areas as well.  In addition, it connects nicely to all of the cities that Southwest services in the eastern half of the United States.  Furthermore, it is likely that any LCC airline taking on such a venture need not be tied to a major international airport such as JFK or Philadelphia or Washington Dulles.  In fact, they would probably want to avoid such airports because the cost of congestion is far higher than the cost of attracting people to some place like Baltimore.

Potential customers for this kind of airline service won’t be business oriented.  These will be leisure passengers looking for a great deal.  You won’t see business class on these airplanes but I do think you’ll see assigned seating.  (Assigned seating is almost a must for a widebody aircraft, IMHO.)

What kind of aircraft?  It won’t be 757s and I don’t *think* it will be 767s.  Although, it is interesting to contemplate the economics of an all economy 767-300ER new build aircraft for trans-Atlantic flights.  Many have thought that the 767 will remain competitive on such routes vs the 787 and that might be true.  787s?  Maybe but I think Southwest might have missed the train when it comes to advantageous pricing on that aircraft and I don’t think SWA will find used 787s on the marketplace anytime soon.

Airbus A330s almost seem interesting until you consider just how many people you would have in a high density, all economy aircraft like that.  It feels like too many and the same is true for the 777-200 (but I think you could almost make a business case for early build 777-200 “A” models that are starting to be retired by airlines such as United.)   The fact is that the 767-300 or 787-8 fits the size category almost perfectly and size will drive this choice. 

So will dispatch reliability because someone like Southwest needs an aircraft they can push into high utilization for such routes.  Not only would trans-Atlantic service require good load factors but it also requires frequency that uses that aircraft on 2 to 3 segments a day.  It’s doable and it is doable with the 767.

But at the end of the day, it’s all speculative right now and I do not expect SWA to announce anything like this at all until at least 3 years have passed.  In the meantime, they’ll gain experience operating Airtran’s international flights and learn how to deal with foreign travel.  They can buy and/or engineer new IT infrastructure that will meet the needs of such flights.  In short, don’t go planning a family vacation to London quite yet.

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Airbus has committed itself to the A320NEO series recently and Boeing continues to decide to not decide on what it will do with the 737.  All the while hinting at a new aircraft development for a 737 replacement to enter into service around 2019/2020.   Except that Boeing has also hinted from time to time that a re-engine might be in order while also saying that customers don’t want a re-engine. 

In addition, Airbus will be releasing its configuration for the A350-1000 aka 777 killer in the next few weeks.  Boeing doesn’t believe it quite meets the mark without a new wing and Airbus has said nothing about a new wing.  Right now, on paper, the 777-300ER still beats the A350-1000.  Unless Airbus releases a configuration that causes people to pause and gasp, Boeing will most likely not feel too threatened by Airbus for the time being.

And that’s why I say watch Airbus to see what Boeing does.   Boeing knows it can probably win against Airbus with a 737 replacement in the time frame it is talking about while managing to keep customers interested in the current 737 through incremental improvements that should keep the two aircraft competitive.  I’ve felt that Boeing wants to know what Airbus’ move is on the A350-1000 so it knows where to commit its resources.  If the configuration and definition for the A350-1000 moves it into competitive territory with the 777, Boeing knows it needs to get to work on improving the 777 (an exceptional moneymaker for Boeing presently) in order to not lose those customers for the next 2 decades. 

Boeing likely believes it can cover the 777-200ER territory with a 787-10 (and perhaps an incremental improvement to the -10 as an ER model later).  This leaves it free to preserve the 777-300 in its current configuration or find improvements to the existing design or even design a new aircraft family to fit above 787-10 and finish alongside the 747-8i. 

But what Boeing doesn’t want to do is commit to launching 2 new airplane programs simultaneously.  Boeing already knows what will likely happen if it does that.   

With all of that into consideration, I think that once we know the firm definition for the A350-1000, Boeing will know how to sequence its next airplane programs.  It will be either a 737RS first with a 777 replacement kicked off 3 to 4 years later or a 777 replacement first with a 737 re-engine done simulataneously and a 737 replacement coming 10 to 12 years after the re-engine. 

I strongly believe that Boeing wants to do the former sequence (737 replacement / 777 replacement) because it puts Airbus into a corner.  With this strategy, Boeing probably has an all new line of aircraft using the latest technology spanning from 150 seats to 450 seats while Airbus has the A320NEO and A350 series but with a gap between the A320NEO and A350 being filled by what will be quite the aging aircraft:  the A330.   In fact, there already is a gap, although minor, between the A320 series and the A330 series.  And make no mistake:  The A330 will begin to die in another 2 years or so as a result of the A350 and 787 developments. 

My prediction?  I think Airbus will announce nothing that threatens Boeing’s competitiveness in the 777 models.  Sometime late in the fall or early in the winter while riding on an uptick with the deliveries of the 787 and 747-8i to customers, Boeing will announce a 737 replacement program with a big airline order.  Sometime around 2017 or 2018, we’ll see Boeing announce a replacement for the 777 sized  above the 787-10 and right up alongside the 747-8i.

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Evidently, there are rumours that British Airways may be giving the 747-8i a second (third?) look suddenly.   The airline made orders for the A-380 and 777-300ERs instead a few years ago but now there is strong speculation that they are revisiting their fleet plans for the future.

At the time, the A-380 made sense and even today it still does to some degree.  It’s a strong airliner and a proven earner now that we’ve seen several in a variety of fleets.  But British Airways circumstances have changed and I think that might be what is driving these rumours.

British Airways has now “merged” with Iberia and they also have their trans-Atlantic partnership going on with American Airlines and other Oneworld partners as well as a strengthening partnership in Oneworld to the Far East and Australia.  So why does the 747-8i make more sense?

Seats.  The A-380 has an advantage *if* you can fill its seats.  That’s a tougher prospect today.   Even more difficult is the fact that the A-380 doesn’t offer a lot of flexibility on routes it can be deployed on.  In fact, with the new Oneworld frequencies between JFK and London Heathrow, it doesn’t make sense. 

At the same time, nor does the 777-300ER quite fill all the needs either.  It is perfectly adequate for filling the role of older 747 routes but it isn’t quite up to the challenge of providing enough seats (in BA’s configuration anyway) one some of those routes where BA/IB/AA are partnering.  The 747-8i offers enough seats and the promise of a high load factor that makes it potentially more cost efficient to fly.

It’s also a bit more flexibile on what airports it can fly to than the A-380 as well as the fact that it is just plain cheaper to buy and potentially cheaper to maintain.  In the modern airline world, that’s real money to be saved.

Will they re-visit the idea of buying the 747-8i?  I suspect they will at least take another long look at it internally and now is the right time.  The 747-8i is quickly compiling hard data for airlines to look at and the airline will have some hard route data of its own in the near future.   How seriously it will be considered is anyone’s guess. 

Right now, BA is looking at operating the 787 soon, it has the 777-200ER, 777-300ER, 747-400 and orders for the A-380.  That’s a lot of widebodies of varying types and styles.  To add the 747-8i to the mix really, in my mind, requires thinning out that mix by one type. 

So, yes, I wouldn’t be surprised if they took a long, hard look at it internally.  I would, however, be surprised if there was an order in the next 12 to 18 months.  Downright shocked, actually.

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Apparently Boeing is sounding out customers about the much talked about 787-10, a supersized version of the 787-8, for delivery to customers some time around 2016.  Such an aircraft would be roughly comparable to the current 777-200LR in size but a bit hamstrung in range by comparison. 

Airlines are interested.  Some have been interested in this paper aircraft for 4 years and its economics, at least in theory, are very attractive when compared to similar Airbus products in development. 

The aircraft clearly can grow in length and that’s good.  However, with a rough range of about 8000 statute miles, I suspect airlines will be slightly less enthusiastic.  This is an aircraft that will need an LR version capable of 8500+ nautical miles and that, I think, will mean a different wing and bigger, more powerful engines.

It’s certainly possible to fit a bigger wing to that aircraft.  It’s straight forward engineering.  For those of you who grimace, I’ll remind that that is exactly what happened with the 777 when the -200LR and -300ER were developed. 

Engines are purely speculative.  I suspect the GE GEnx engine has a bit of room to grow yet and the Rolls Royce Trent 1000 probably has some room as well.  However, any engine conceived from those two engine families would probably be at its upper limit.  If the weight for such an aircraft could be kept down, that would be fine. 

It’s unlikely that such an aircraft will be formally launched in 2011.  If Boeing goes anywhere with this, it’ll probably be formally offered some time in the first half of 2012.

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Last week, Delta announced that it had agreed to buy 9 Boeing (McDonnell Douglas) MD-90 aircraft from JAL.   After these aircraft are refurbished, they’ll start entering Delta’s fleet next January.  Delta’s President, Ed Bastian, refers to these aircraft as “capital efficient” for Delta and it does simply add to Delta’s existing fleet of 19 aircraft.  In fact, Delta now plans to add a total of 39 MD-90 aircraft going forward.  These will primarily replace aging and inefficient DC-9-50 aircraft.

Capital efficient means that the cost to acquire these aircraft combined with the remaining lifecycle costs including fuel makes them worth operating for Delta.  In addition, these aren’t your grandfather’s DC-9s.  These aircraft have current generation IAE V2500 engines that are fairly fuel efficient compared to brand new aircraft presently.  They also replace fuel guzzlers and represent a net gain going forward as long as fuel prices remain somewhat stable (and by stable I mean out of the $4/gallon territory.)

Delta has so far pursued a strategy of making do with what it has and employing older aircraft longer and this is somewhat in conflict with most other airlines’ strategies.  As fuel has climbed in price over the past 4 years, airlines have, if anything, accelerated their purchases of newer, more efficient aircraft.

Is this the right strategy for Delta?  Well, as an interim strategy, it works.  These aircraft are good for a variety of routes that can largely transit 3 timezones out of 4 in the continental United States.  There are a finite number of them available (only a bit over 100 were ever built) and in the near future I suspect that many won’t be worth buying when considered against a new Boeing or Airbus aircraft.  From a financial standpoint, these are good buys for Delta and should work for them well over the next 4 to 8 years.

Delta’s fleet is pretty varied since its merger with Northwest Airlines a few years ago and while they have made an excellent show of managing this fleet, there are a number of types that could be pared down over time.  Reducing the number of fleet types would allow Delta to be even more flexible with its crew resources and more cost efficient when it comes to maintenance needs.  Remember that every fleet type requires an inventory of parts and employees trained to service that fleet type.

This doesn’t mean that I advocate that Delta buy Boeing only or any other manufacturer exclusively either.  With its fleet size, it could quite rationally settle on both the Airbus A320 and Boeing 737 aircraft and operate them simultaneously.  The same is true for long haul aircraft.   It could probably employ both Embraer and Bombardier regional jets as well.   However, for each category (regional jets / single aisle / medium to long haul aircraft), there should be at most two basic fleet types. 

In fact, by working with multiple manufacturers, it can speed deliveries, fit the most perfect aircraft to a variety of routes and maintain efficiencies in maintenance and repair at the same time.  What I don’t see happening is Delta operating Boeing and Bombardier CSeries as mainline aircraft.  I think Delta will play it smart and use the manufacturers that have proven products in each category. 

I think that over time, we’ll see Delta order Airbus A320NEO aircraft to replace existing aging Airbus A320s.  I think we’ll see an order for Boeing 737 replacement when and if Boeing offers a replacement officially.  I think we’ll see Bombardier CRJ900/1000 aircraft come online to replace older CRJ700/900 aircraft and I think we may well see Embraer E170/190 jets for other areas of the country such as shuttle-like operations.  In the long haul category, it’s not inconceivable to see 787 orders pulled forward again but for a mix of both 787-8 and -9 aircraft.  I think we’ll see them pick either Airbus A350s or 777s for their larger trunk and long haul routes.  I might give the 777 an advantage here to become a single type for that category as Delta could very efficiently operate both 777-200LRs and 777-300ERs in a nice mix.  They’ve already got very new 777-200LRs (and ERs) that are using the same GE engines the -300ER would use.  I’m not sure the Airbus A350 quite fits in as well as one would like it to when it comes to the trunk route / long haul category.   I do believe firmly that the 747s will ultimately go away and not be replaced.

Look for Delta to be making more and more announcements about its fleet over the next 2 years.  I believe its strategy will be incremental rather than huge orders for a particular family of aircraft and it will be done with strong emphasis on preserving its capital going forward into the next few years.

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Boeing has received a tremendous amount of criticism for how it managed outsourcing construction of the 787.  Hindsight is 20/20 but that doesn’t change the fact that it would appear that Boeing hadn’t fully considered the implications behind their decisions in this area.

This was about lowering risk and saving money in the development of the aircraft.  After everything is said and done, Boeing will have likely spent as much or more than if it had done this work itself.   In the early 2000’s, Boeing was ( and to some degree still is) under control of former McDonnel Douglas executives rather than Boeing management and McDonnel Douglas had spent the previous 20 years outsourcing work to save money.  How these executives came to be in control of Boeing still defies my imagination given the business track record McDonnel Douglas had enjoyed prior to being swallowed up by Boeing.

There is nothing wrong with outsourcing.  However, given the complexity of the job involved with designing and building an airliner such as the 787, there was a key ingredient left out of the mix:  close and frequent cooperation.  To be fair, Boeing had never done this kind of thing on a global scale and its primary outsourcing (prior to 787 kickoff) was with Japanese firms.  Firms that, today, are still doing their job with precision and care. 

A better approach would have been to insist that these various firms co-locate with Boeing in the Washington area and to insist that these partners work cooperatively with Boeing workers both on the design and initial production phases.   Other companies more closely associated with global production such as Ford and Volkswagen have already learned that it is important to keep partners close by in the manufacturing process.   Ford’s newest assembly plant in Brazil sees a variety of partners actually co-located in the manufacturing facility working literally right alongside Ford employees. 

Outsourcing doesn’t mean inviting your partners to do what they want when they want.

If anything, outsourcing requires these partners not only to be in close communication with Boeing but also with each other.  Each major sub-assembly that is shipped to Boeing is being made by another partner and in all cases they need to fit together and work together with the same levels of quality.   When you work with global partners, they aren’t just far from you.  They are potentially even farther from the other partners producing items that must fit and work properly with each other’s work. 

Did outsourcing go too far?  In terms of execution, yes.  In terms of risk sharing, perhaps not.  The original Boeing 707 prototype, the Dash 80, cost about $16 million to develop and was an exceptional risk for Boeing to take on.  Today, some are projecting the total costs to Boeing for the 787 nearing $16 billion (with a “B”) and collecting together that kind of cash on one’s own is difficult to do no matter what company you are. 

Going forward, outsourcing for Boeing will have to be done a different model.  Not just to reduce execution risk for Boeing but to also ameliorate the effects that one partner’s tardiness or poor quality might have on another partner.  While a few partners have performed poorly, that effect isn’t just on Boeing.  Every partner with Boeing that is performing well is being affected by the slow development and certification process.  They planned to be selling their parts in high quantities by now and instead they are enjoying the high costs of slow and even sporadic production while they wait for Boeing to get the aircraft going.

Those companies are being severely impacted today and they’ll want better performance on the next Boeing project to realize the fruits of their success earlier.

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Airbus is reaping big orders and a renewed interest in its A330 since Boeing has been unable to deliver the 787 even remotely on time and that is going to hurt Boeing in a few ways.

Delayed by 3 years now and with only some hope of commencing deliveries later this year, Boeing is paying penalty payments for its poor performance and those payments are being walked across the street to Airbus, not Boeing. 

Boeing is being hurt since it hasn’t been able to offer a substitute aircraft to the airlines that the airlines want.  It’s cheaper to build an airplane at cost than it is to pay big dollars in penalty payments that go to the competition. 

What’s worse, Airbus is attracting a long look from traditional Boeing customers who now have little hope of obtaining a 787 any time in the next 5 or 6 years.  That’s great for Airbus but it is a warning to Boeing as well.  A stubborn resistence to the idea that bringing even more control of the 787 supplier network under Boeing’s wings is creating problems that some customers will have to question if they’ll ever be resolved.

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I think just about everyone was at least a little surprised at the announcement of the QANTAS flight between DFW and Brisbane, Australia.   It was a subject that would pop up on the radar now and then but generally dismissed with skepticism of it ever happening.  Particularly with the equipment that QANTAS had for making the flight, namely the 747-400ER.

Flights between the United States and Australia have been the domain of west coast cities such as Los Angeles and San Francisco and the primary equipment has been the 747-400.  The aircraft available to make such a flight has already changed and is due to change a bit more in the future.  The 747 got used more because of its range and ability to haul a passenger load with a strong load of cargo.  Generally, long flights like that work best if there is enough demand for a 747 because seat costs go down.

Now the 777-300 is plying trans-Atlantic routes between the US and Australia and soon will be on routes between the US and New Zealand.  It’s a good aircraft for the trip because of the 777’s ability to fly it non-stop, carry a load of cargo and a fairly large complement of passengers.  We’ll see these West Coast to Down Under flights fracture a bit more in the future when the 787-8/9 come online with airlines.

So why the 747 and DFW?  Well, it’s notable that SFO is losing its flight with QANTAS but that makes sense now.  San Francisco is the domain of United, not American Airlines and QANTAS is partners with AA via Oneworld.  Los Angeles remains and it should remain as a Western US departure point between for Oneworld. 

Until now, Oneworld has had to feed all its traffic from all over the United States to either Los Angeles or San Francisco and while LA is a Oneworld focus city, all other Oneworld focus cities are east of the Rocky Mountains.  They are Dallas/Fort Worth, Chicago, New York and Miami.   In that group, there was only one city that made sense with the aircraft available today:  DFW.

The other thing that has changed is the new anti-trust immune cooperative agreements that are forming in Oneworld.  First there is the trans-Atlantic Oneworld partnerships and second is the trans-Pacific(Japan) Oneworld partnership.  Next is logically AA/QANTAS. 

With DFW and Los Angeles as that “hub”, Oneworld can feed traffic to DFW from points east of the Rocky Mountains and from points in Mexico, Central America and South America all to DFW.  Yes, AA can feed that 747 nicely.  And if they do it well enough, you can bet on seeing an Airbus A380 being switched into that route. 

DFW gets a nice boost from all of this as well.  It’s already started to transition back into a more “international” airport than it has bee in some time.  British Airways is now using a 747 on one of its flights to DFW and AA is using more 777s for its flights to Europe.  It will continue to grow as a Oneworld “hub” both because of its good location (not nearly as affected by weather as other potential hubs) as well as the availability of room to grow. 

I would be completely unsurprised at the addition of another direct route to Tokyo and a direct flight to China in the near future.   Currently AA has 2 flights to Japan via 777s and I think we may see one more or, alternatively, we may see JAL start flying one of those flights with its own 777.  AA has wanted to fly direct to China from DFW (and it should) but has so far been blocked by its pilots over duty time rules that AA wanted a variance for from the union.  The flight they wanted to do ultimately went to Chicago instead.  Expect AA to make another run at such a route.

One thing I don’t think we’ll see is a lot of additional routes from Los Angeles to Oneworld destinations.  It’s a crowded airport with limited room to grow.  Delta/Sky Team has a strong base in Seattle and United/Star Alliance has got strength in San Francisco.   Dallas / Fort Worth offers the growth opportunities now with the ability to fly longer range flights using the 787 and 777 and I think we’ll see more and more long haul flights from DFW.

I have to say that I’m very pleased for DFW and I see this as a very good development for American Airlines as well.  It’s nice to see opportunities created like this within Oneworld and on AA’s part, too.

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It has been reported loudly that Delta is poised to issue an RFP (request for proposal) for as many as 200 jets and this is an order no manufacturer wants to lose.   The rumour comes just days after a record breaking Airbus order from IndiGo of India.

At this point, it’s still rumour but this one strikes me as pretty much dead on.   Delta has a huge fleet (720 aircraft with about 40 orders in place which include the deferred NWA order for the 787) and quite a few of those aircraft need to be replaced now or in the immediate future. 

Delta has the Northwest fleet comprised of the very old DC-9-5o, MD-88, MD-90, 757, 747 and some older Airbus equipment.  The Boeing fleet from Delta’s legacy side isn’t quite as old but there are some 757s and 767s in need of replacement as well.  Considering the widely varying fleet, it would come as no surprise that an replacement order is due.

Oil prices and future fuel prices will also drive the need for this order sooner than later if Delta’s goal of a consistent operating profit is to be realized. 

Pundits think this is Boeing’s to lose and I disagree.  Richard Anderson, CEO of Delta, has much more history with Northwest and he is no Airbus hater.  This will be an extremely heated competition and I will say that if Boeing were to lose this order or a significant portion of it, that will sting Boeing and its product line for years to come.

The prime driver for selection is going to be based on a number of items.  First and foremost, trip costs for aircraft to serve a particular grouping of routes.  We’ll see orders for single aisle aircraft to serve what I would call non-transcontinental routes.  In today’s world, that would be the Airbus A319 and Boeing 737-700.   Having trans-continental capability in the aircraft would be a plus but these aircraft are going to serve the focus cities of the airline with routes stretching out from the cities but not across the country.   The mission that the MD-88s, MD-90s, Airbus A319s and Boeing 737-700/800s are serving today.

The A319s are brand new and so are the Boeing 737-700s/800s.  This is going to be about replacing the McDonnell Douglas fleet.

Then there is a need for the larger trans-continental capable aircraft that remain single aisle serving longer trunk routes that won’t justify a widebody.  Currently, the Airbus A320 and Boeing 757 are serving those routes.  The A320’s arrived in early 1990’s and the 757s date from the early 1980s to the late 1980s.  The options for replacement here are the Airbus A320/321 and the Boeing 737-800 and 737-900ER.    Neither aircraft actually “replaces” a 757 which has great range and great payload.  I don’t think the A320s are going anywhere yet so this will probably involve a 757 replacement and they (Delta) may or may not want it to harmonize with their existing A320s.

Then there are the 767s.  Some are getting old and some are quite new still.  Delta needs an aircraft stretching between what a 757-300 offers and an A330-300 offers.  The 787 fits this and the fact that Delta has deferred its legacy NWA order for these makes me think that these aircraft won’t be candidates for replacement.

The 747s are pretty old and frankly I don’t think these we very well cared for either.  They need to be replaced and I do think we’ll see orders to do this on these aircraft.  None really serve routes that demand 4 engines so I think we’ll see a replacement oriented around 2 engines.

I think it’s anyone’s guess on the single aisle orders.  Airbus will fight like crazy to win this order with their A320NEO options and Boeing may well have to announce a 737 replacement at a great price to win it back.   Boeing should actually have great incentive to get going on the 737 replacement if Delta is truly interested.  With Delta, Southwest and, potentially, Ryanair all wanting a better 737, there is an exceptionally strong business case to get going on this.

If Boeing doesn’t offer a better 737 in this, I think the order goes to Airbus.

As for the 757/767 replacements . . . well, I’d give the edge to Boeing.  I think the 787 *is* a good answer for these aircraft.  They offer the right amount of extra capacity for growth, long haul capability, extremely high efficiency and flexibility.  I do think it possible that an order might be mixed between the A330 and 787 unless Boeing gets off its duff and gets that 787-9 into production.  The 787-9 is the A330 killer.

Since I don’t think the A330s are going anywhere, I don’t see much opp0rtunity for Airbus’ A350 in this mix.  It’s deliveries are too far off and the A330s just don’t need to be replaced for a long time.

I think Delta’s large widebody strategy is likely going to be a mix of 777-200s and the 777-300ER to replace the 747s.  They already have a fleet of 777-200LR with GE engines so I think they’ll order 777-300ERs with GE engines to replace those 747s.  It will do everything the 747 will do only more efficiently.  I do *not* think the 747-8i will enter into this order.  Delta doesn’t need the capacity and the 777-300ER will serve all the routes the 747 is currently serving with no problem.  The A350-1000 is far too far off and its ability to perform is simply way too unknown for this to be serious contender at Delta.

I do not think that Bombardier or Embraer will enter into this order at all.  They just don’t have a product that meets the needs of an airline like Delta very well at all.

Don’t expect an order announcement for about a year.  Delta will let the manufacturers fight it out with best and final offers for quite some time and it will take time itself to do a detailed analysis.   But I can’t wait to hear their decision.

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There have been some truly disappointing revelations about the 787 and its development over the past 2 months.  We have learned that more than 300 aircraft were priced at or below $76 million excluding engines.  A startingly low price for this class of aircraft no matter what it is made of.  We’ve seen just how bad the vendor management has been for this global product and it is highlighted by Boeing buying these facilities to run them themselves to achieve better production rates and quality control.  Finally, we’ve learned that many of the technological approaches involved in this aircraft are going to require a longer period to mature than was originally expected as well.

Richard Aboulafia has referred to this program as a disastrously executed, brilliant vision and that strikes me as real truth at this point in the program.  He also speculates that the 787-8 may well be the “interim” aircraft while the -9 actually ends up meeting the performance needs of airlines in the long run.  That, too, strikes me as real truth.

What hasn’t been considered yet is where the ultimate solutions found for the 787 influence future production.  I continue to believe that Boeing hasn’t laid a complete egg with this aircraft.  I think it will prove to be, in many respects, a legendary airplane over time.  I think it will have a long production run and favorable reviews through its lifetime. 

Once these solutions are found and that oh so necessary experience is, well, experienced, it will have a positive influence on future aircraft development.  Boeing may no longer be poised to earn scads of profit on the 787 but it is well positioned to use its body of knowledge to earn scads of profit on other aircraft it needs to build.  They will have gone through all the pain necessary to know how to apply these new technologies to a 737 replacement or a 777 replacement/enhancement and that will serve them well in the future provided they don’t let lose all those people involved in this program.

The 737 replacement may not use these exact approaches such as CFRP or an all electric architecture but it will use some variation on a theme for that technology and they’ll know how to do it better.  They’ll be past the hump, so to speak.  This speaks well for Boeing in the latter half of the next decade.  Right now, they’re hurting.

But also consider that Airbus hasn’t pushed the envelope nearly so much and they have a great deal of learning to go through still.  And as tough a road as Airbus has in front of them with existing programs, that forecasts still more pain in the future.

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Next up:  World Alliances

There is never that much revolutionary change in alliances.  Last year, there was a fight over JAL between Oneworld and SkyTeam and Oneworld won but they really were destined to.  It made sense for JAL.  The alliances worked a bit to get better access to areas they were deficient in and to a large degree, they were successful.  I don’t expect much change, if any at all, this year.

The Middle East:

Emirates did what Emirates does:  it ordered more aircraft.  I did what I do:  failed to see how they’ll use all those A380s and 777s.  The financial scene in the Middle East and, in particular, the UAE continues to be weakish and while I suspect it will recover somewhat this year, I think the area no longer carries that gleam it once did.  I don’t see any failures in the near future but I don’t see any airlines really blooming either.  Success there is, as is true for most businesses there, fairly dependent upon oil prices.

India:

Nothing astonishing happened there but it was already pretty mucked up.  It remains mucked up and will likely stay mucked up this year.

The Far East:

China did kind of force their airlines into agreeing to buy Chinese aircraft as I predicted.  In fact, Chinese aviation is suddenly acting very Chinese in that it is being required to toe a more obedient line.  Face is everything there and I don’t like it when airline businesses are operating on the basis of “face” rather than good decisions.  It’s notable that in the launch orders for the COMAC C919 aircraft, each airline took up just 5 aircraft orders each.  They don’t want that airliner any more than anyone else.

JAL has done OK for the year.  They’ve made progress with their finances and they did make some hard choices.   They did have to file for bankruptcy protection and no one should have been surprised about that.  The new CEO, Kazuo Inamori, and President, Masaru Onishi, are succeeding and making hard choices.  Frankly, more so than is characteristic of a Japanese company and they deserve credit and support.  This airline isn’t fixed yet but it is on its way.

Oceania:

QANTAS got hit pretty bad by the Rolls Royce failure on its A380.  United Airlines is still on the US-Australia routes but badly needs to upgrade its product and it doesn’t appear positioned very well to do so.  Perhaps Jeff Smisek & Company will address that better this year.  Delta and V Australia didn’t get to form an alliance and they’re trying again.  Someone has to give in this area and it will be either in the form of a codeshare alliance between Delta and V Australia or in the form of an airline withdrawing from the market (United or V Australia).

South America:

LAN, in fact, did continue to succeed in South America.  So much so, they bought TAM to create LATAM and then bought AIRES (a Colombian airline)covering both the east and west coasts of South America.  LAN is, in my opinion, now a SuperLegacy of South America and that’s a bit dangerous for them.  South American governments are more protective of their countries airlines that is the custom in other parts of the world.  

Curiously, LATAM is now operating airlines in two different alliances:  Oneworld and Star Alliance.  While there is speculation that they’ll continue this with LAN brands in Oneworld and TAM brands in Star, I think they’ll have to pick one and this may well mean a big battle among all three alliances.   This is an area where SkyTeam could do well for itself by gearing up for battle now.

Aerolineas Argentinas:  Well, what can I say?   Well, I’ll say exactly the same I did last year. 

This disaster is much like the country itself.  It won’t go away but it won’t perform either.  No outside airline will consider taking it over after what happened with Grupo Marsans’ ownership.   They lack an appropriate fleet for their flying, a strategic plan for stabilizing their revenues and no clear plan for future growth.  But the Argentinian government also won’t let them go away.  It is a matter of national pride.

LAN Argentina is growing in Argentina but somehow I remain skeptical that it will be allowed to succeed too well.  Why?  For one reason, the government of Argentina owns Aerolineas Argentinas and it has a vested interest in that airline earning money.  For another reason, LAN Argentina is owned by the LAN Group of Chile.  Look up how Chileans and Argentinians feel about each other.

Colombia / Central America: 

Avianca TACA is doing fine and I look forward to seeing how they’ll compete against LAN. 

Venezuela:  Bah!

Europe:

British Airways accomplished a few things.  They got into a royal battle with their flight crew that remains unresolved today in part by being petty.  Their flight crew union, Unite, furthered that argument by being petty.  BA did get their merger with Iberia accomplished and after many, many years they have their anti-trust agreement for trans-Atlantic flights between its European Oneworld partners.

Look for the BA/IB union to do OK in its first year and they may even start looking for another partner as soon as possible.  The anti-trust agreement between Oneworld partners should also add to the bottom line.  However, it’s time to settle this fight with Unite and it’s time for Unite to get real.

Lufthansa is moving along and did do something with their BMI purchase.  I don’t think it did them any good when its CEO, Wolfgang Mayrhuber, started complaining about its ability to compete with the likes of Emirates.  Whether or not he had a real point (and he probably did), it also did signal just how hard a job they’re having with the task of competing with the Middle Eastern airlines.

They also still have their A340s and their plans to add the 747-8i.  They got their first A380 and all I see is fat, fuel consuming airplanes.  This is going to be a problem for them if oil prices rise much more and when you consider that much of their competition is flying fuel efficient A330s and 777s, it makes you wonder about their long term strategy.

KLM/Air France:  More of the same.  I think this airline will need to make an order for new widebody aircraft soon.  Because it remains, essentially, a French airline, I see a large order for A350s and a small order for 777s.  I do not see the 787 in Air France’s future.

Airlines will earn profits and even earn great profits throughout the world.  Many will be “record breaking” but as much from inflation as a recovery.  Those profits will soon start to burn a hole in someone pocket and that is when I think we see capacity growth.  I think that capacity growth will start with the Middle East airlines pursuing more revenue lucrative traffic from Europe and North America.  But we’ll see it happen in the United States, too. 

I would dearly like to see the 787 enter into service with someone and I think we will see it do so.  But Boeing has got to get a rein on itself.  The failures in the 787 program are as much about poor management as they are about stretching technology.  There is too much accountancy going on there and not enough visionary leading.  It’s time for them to start winning and they could do so by winning the KC-X tanker program once and for all.  But it is also time to start talking about what’s next. 

The demands of the 787 program *will* decrease as will the demands from the 747-8 program.  Will it be talk of a 737 replacement or an improvement to the 777?  I think the airlines would like to talk about the 737 replacement and that seems sensible.  Rather than play cautiously, reach again, I say.  Push engine manufacturers to come up with something to raise the game and push technologies again.   It’s also time to talk about the 787-10 and I think there are more than a few airlines who would like to be a part of those discussions.

Airbus is going to muddle along denying any real problems with the A350 until the end of this year.  Then we’ll hear about something delaying the entry into service date by a considerable amount.  John Leahy will insult Boeing and claim the A350 will put the 787 to death but it won’t.   Airbus might well buy the KC-X tanker program but I question the wisdom of this in light of their ongoing A380/A400/A350 problems as well as their announcement development of a new engine option for the A320 series.  When do they earn money the proper business way?

It would be nice to see Embraer make a move into the 130 seat market and I think those guys could do it very well.  Bombardier gets bashed by everyone but I still think they have something with their CS series and I think it will be taken up by another airline soon.

I think we’re going to see another round of fees.  Just as soon as airlines can identify what other parts of their service they can de-couple from the basic flight.  I think we’re going to see airlines put a price on early boarding and we’ll probably see fuel surcharges amounting to tens of dollars.

But let’s hope we see an interesting and prosperous year in the airline industry.

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United Airlines CEO Jeff Smisek says that there are too many seats chasing passengers on routes between the United States and Australia presently.  United has had a presence for over 25 years on those routes and its staying power comes from its corporate contracts and loyalty program but it is being challenged presently by lower fares from new entrants on those routes (Delta and V Australia) as well by the fact that its 747 aircraft have a less attractive IFE solution than others.

One of the great ironies for long haul routes such as these is that they have, for the last 40 years, been largely dominated by large widebody aircraft.  Most commonly, the 747.  Filling those aircraft day in and day out is a challenge and one reason why really only two airlines have traditionally succeeded on those routes.  New entrants or weak players usually leave the market because there really are too many seats chasing too few passengers, particularly in hard times.

Right now, QANTAS and United have 747s and A380s on that route.  Delta is using a 777-200LR and V Australia has 777-300s working the route.  Delta is probably right sized but they’ll have to remain committed to the market as a long term investment in order to succeed.  I understand why they want to cooperate with V Australia and I’m not sure that’s a bad thing for either airline but it appears that is going to take some time to work out.

United and QANTAS both are the dominant players but I wonder if they’ll remain so over the long term if Delta and V Australia hold their ground.  It’s anybody’s guess.  It does occur to me that we are about to see aircraft that would allow new entrants to make money on that route and, at the same time, be right sized for the route.  That would be the 787 and A350 aircraft. 

If those two aircraft permit the same profit margins that the larger aircraft offer, not only will those new entrants stick around but we might see more.  Delta isn’t going to have the 787 for 10 years or more.  United will have some and QANTAS should receive some too. 

Right now, the most practical approach is for airlines to depart the west coast of the United States using large widebody long haul aircraft.  What if United was able to start flying from the interior of the United States using 787s (which they are due to receive relatively soon)?  It’s doable and it might be practical. 

This is another great example of why larger and bigger isn’t always better.  The 787 and A350 are going to offer possibilities for long, thinner routes that will ultimately fracture those large capacity trunk routes flown by the 747 and A380 right now.

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All Nippon Airlines (ANA) is lamenting the new delay on Boeing delivering the Dreamliner to one of its launch customers and I don’t blame them.  I don’t think anybody regrets ordering the 787 even at this point but I do marvel somewhat at the patience being displayed by several of the customers.  This was an aircraft that Boeing arguably needed in its product lineup several years ago.

These delays have added up to something well past 2 years now and we don’t know what else may show up causing further delays.  The most disturbing part of these delays, to me, are that many have been caused by quality control issues with manufacturing partners and with problems centered on systems that arguably should have been robustly tested and matured at this point. 

It begs the question as to what the hell were these partners doing during the long delays involving fasteners for instance.  Engines could have been tested more.  There was no high rate production impeding Alenia’s abilty to ensure strict quality control.  Even power panels could have been tested much more in a integrated systems environment.  

Additional testing would have greatly reduced risk in delivering this aircraft and I just don’t get the sense that there was a financial commitment to this.  Certainly quality control problems on horizontal stabilizers shouldn’t have been discovered after so many airframes had already been built. 

This smells like a former aerospace company that used to be based here in the United States:  McDonnell Douglas.  It’s notable that it is former MD people who are largely running the business today and the truly successfuly Boeing people are now elsewhere.   What Boeing needs is an Alan Mullaly and at this point, I don’t think one exists at Boeing anymore.  If he/she does, they’re being kept hidden well. 

Blaming these delays because this airliner is on “the bleeding edge” of technology really doesn’t quite pass the sniff test anymore.  That was OK in 2007 and 2008.  It was even somewhat acceptable in 2009.  But this 2010 and it is about to be 2011.  Agressive and thorough testing should have eliminated most of the risks that are being realized at this moment and that is very disappointing.

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Tim Clark says Emirates wants more range from Airbus and its A350-1000 than it presently offers and it expects more from Boeing’s 777-300ER, too.  The airline is unsatisfied with the inability to serve ultra-long haul routes from Dubai with what it considers adequate payload.  Adequate payload is carrying 350 passengers from Dubai to Los Angeles with a full cargo/baggage load in about 16.5 hours. 

Frankly, that’s expecting a lot from even advanced technology.  We’re getting there but the big problem is how much fuel you have to carry to achieve those distances with those loads.   Those distances begin to require airliners to carry more fuel in order to carry more fuel for range and you can guess how quickly the diminishing returns show up on such a prospect. 

Lighter but stronger aircraft can solve that but we’ve already seen what a challenge  that can be with the 787.   There is no doubt that the manufacturers will figure out how to do it somewhere along the line but my gut tells me that this isn’t a problem solved with a better wing or better engine.  It’ll require re-thinking the large widebody airliner in a way that will require even better composites and other lightweight materials. 

It takes time to develop and test those materials.  It can take a lot of time to even figure out how to ramp up production on these exotic materials.   We still haven’t seen 787 partners prove they can meet production demands for CFRP fuselage barrels.  I think they can but the proof is in the pudding and we haven’t tasted the pudding yet.

My gut tells me we are at least 15 years away from producing a truly revolutionary widebody capable of carrying 40+ tons of payload for those ranges.  We’ll get there and it’s time to start thinking about it but don’t look for such an aircraft in the next 10 years.  It won’t be showing up. 

Besides, it’s a relatively limited market and it’s become clear that the manufacturers need to turn their resources towards producing a better short haul, single aisle airliner.  Frankly, that’s where the real money is at in the next 10 years.

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It’s never good when something bad happens and a manufacturer dribbles information out.  Rolls Royce has a PR problem that is about to get much worse before it gets better.  The latest news is that Rolls has acknowledged the potential for oil fires in their early Trent 900 engines now and it appears there have been a couple of quiet upgrades in the time the engine has been in service.

One wonders why it has taken more than a week for this information to come out and one also wonders what else hasn’t been discussed.  It’s understandable for a company to want public discussion to be about fact rather than speculation but you don’t manage speculation by withholding all the facts.  We see manufacturers do this time and again in all industries.

It never works out and it always has the flavor of deceit whether or not deceit really was a part of the intent.   Full disclosure reassures people and, most importantly, it’s the only right thing to do.

If there are potentially related problems on the Trent 1000 engine for the 787, Rolls Royce would be well advised to start that dicussion now rather than let it lay fallow for months only to have it erupt again.   The public understands a mistake, it doesn’t understand things being covered up.

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Delta Airlines has come to an agreement with Boeing on deferring its order for (18) 787 aircraft until the year 2020 or about 10 years from now.  Delta inherited the order when it merged with Northwest Airlines and there has been talk of this happening for over a year now.   It has also arranged to sell (4) 737-800 to third parties upon delivery from Boeing. 

Delta has new(ish) aircraft and it has really old aircraft.  What it doesn’t have is worn out aircraft that require replacement.  Not in the 787 category anyways. 

What’s going on?  Well, operating airliners is a funny thing.  You can buy new, operate new and sell relatively new.  Your costs to do that are generally worth it because you’re also getting a lot of efficiency and since the aircraft is new, maintenance is far cheaper.  Ryanair does this.  You can also hold on to old aircraft, refurbish them from time to time and while they aren’t very efficient with fuel, the capital costs to operate the aircraft are dirt cheap.   Northwest was in the habit of doing this with 40 year old DC-9 aircraft. 

Delta has been buying up used aircraft that fit its model such as the MD-90 and it is going to hold on to other aircraft that have lots of life in it.  Their 767 fleet will hold up for quite some time yet and there is some evidence that the 767 may be no more costly to operate on routes of about 5000nm or less than the 787 is.   In addition, they have a pretty young A330 fleet that was inherited from Northwest and it definitely won’t require replacement anytime soon either. 

Delta is clearly going to preserve its capital and work towards distributing profits from its revenue streams.  This hasn’t worked for airlines very well in the past but it is the stated intention of Delta CEO Richard Anderson.   Even it becomes necessary to change courses, they can.  Delta is a huge airline now and if it decides it wants to move up deliveries on aircraft or even just order more aircraft for timely delivery, Boeing and/or Airbus will happily accomodate them.  They have some flexibility here.

Is this the right move for every airline?  No, it isn’t.  Delta’s 767 fleet is pretty young with a considerable number of its 767 fleet having been delivered in the late 1990s and very early 2000s.  The A330 aircraft have all been delivered to the airline starting in 2003.  They don’t need to elbow their way to the front of the line to get their hands on aircraft. 

Is this the move for every airline?  No, it isn’t.  Other airlines have the bulk of their fleets being delivered in the 1980’s and early 1990’s and that means they are wearing out and do require replacement.   Each airline has to manage its money and its fleet and it can be a delicate dance.  In today’s airline world, flexibility is the key.

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It’s become more and more clear that airlines are going to likely have 3 or 4 basic categories of aircraft.  First, the 100 to 135 seat category with a range that isn’t transcontinental but which allows a full load fly 3 to 3.5 hours maximum. 

Second, the 150 to 210 category with a range that will include trans-continental routes.  This was previously served by the 757 and 767 but has seen today’s 737 and Airbus 320 families take over. 

Third, the 220 to 280 seat arena which includes flights ranging from trans-continental to trans-oceanic including both the Pacific and Atlantic oceans.  We’ve seen the Airbus A330 and 767 and even the 777 in this area and that’ll continue for a bit longer too.  But it will be owned by the 787, 777 and A350 soon enough.

Finally, the very large aircraft on trunk routes that demand high capacity and high-ish frequency.  The 777-300ER, 747 (-400 and -8i) and A380 are the players here.  In the future, we’ll see more of the 777-300ER and A380 than the 747-8i and I think Boeing will have to come up with an aircraft that fits this area better both in economies as well as seat range. 

Nothing much has changed except that the models from Boeing and Airbus are getting freshened or replaced and their ceding the 100 to 135 seat market to Bombardier and Embraer.  The regional jet manufacturers are invading Boeing and Airbus territory and that’s brought along an interesting development. 

We can ignore the Comac efforts to date.  Their plans for a 150+ seat aircraft are just that, in my opinion, plans.  You don’t enter that arena without a lot of experience building something smaller and generally without experience being a partner on similar efforts for a while.  Those aircraft won’t fly, pun intended.

With a couple of exceptions, regional airlines are bringing those new 100 to 135 seat aircraft with them instead of that flying remaining with the majors.  Scope clauses continue to get revised to include larger aircraft and instead of major airlines adopting new equipment to serve those routes, they’re ceding that area largely to their regional airline partners.

The why involves what it always involves:  labor costs.  They can have it flown cheaper by someone else and earn more money.  As that scope increases, however, I do wonder why you would continue to contract that out to an independent airline instead of owning it and its revenue stream.  Why wouldn’t you want to vertically integrate and own that lower cost structure as well as control the service product?

Instead, we see SuperLegacies prepared to sell off their regional airlines and pretty cheaply at that.  Even new-ish ones with pretty low labor costs. 

At some point, these regional airlines are going to see that they can operate their own networks and while they may choose to remain partnered with majors, they’ll also see they can take on more of the risk and much more of the profit available. 

Yes, it’s been tried already a couple of times and while those efforts sputtered at the 50 seat jet level, they won’t necessarily sputter using 90 to 110 seat jets that are coming on line.  Republic may be the first to do it successfully by buying brands and working to build an integrated network while continuing to service partnerships with major airlines, time will tell.  If they are successful, will they one day leave their partnerships with the majors and become a force to content with on their own?

And where does that leave the SuperLegacies in the future?  Will they continue to walk away from the bottom end of flying when it comes to capacity?  Will they continue to cede that work to partner airlines while working to build their long haul flying?  Can they afford to cede that much control on what, today, feeds their networks for that long haul flying?

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Lufthansa has announced a 48 plane order and while that isn’t all that remarkable compared to many aircraft orders these days, it’s an order that highlights two emerging developments in the airline world.  The Lufthansa order is for all Airbus equipment and it isn’t all for Lufthansa.

Some of this order is for its SWISS subsidiary (A320 family and A330), its Germanwings subsidiary (A320 family) and Lufthansa is getting more of the A320 and A330 family for itself.   The Airbus family concept is clearly allowing Lufthansa to take advantage of greater buying power as well as greater flexilibility amongs its various operations. 

Lufthansa can shift equipment to various subsidiary operations as demands change and can reconfigure that requipment relatively easy to meet the requirements of each subsidiary.  While many already knew and predicted this behaviour, it’s really remarkable in that its now become kind of matter of fact for an airline like Lufthansa.

This isn’t something Boeing really offers.  Not yet.  Boeing offers its 737 family, yes.  But it doesn’t have that type transition flexibility between a narrowbody family and a medium range/ long haul widebody family.  Not quite. 

The 787 and 777 will offer reduced transition times between the two types and that’s a good thing.  But there is no such animal between the 737 and its bigger siblings.  In addition, there is no real such thing between the 787/777 and the new 747-8i either. 

Boeing builds a great airliner and arguably they build a more cost efficient airliner in many respects when considering the aircraft and the trip itself.  What Boeing hasn’t yet instituted is a product line that is friendly across all kinds of operations that a large airline might have. 

It’s a core strength of Airbus and, frankly, a differentiator that, I think, will prove itself more and more valuable over the next two decades. 

The 737 replacement is a good place to start.  This will be a family of aircraft designed to meet the needs of airlines from about 150 seats up to 220 seats where the 787 will take over.  The 787 is advanced enough that making the 737 a baby 787, operationally speaking, could offer some additional value to airlines in the coming years. 

US Airlines haven’t exactly gone for this kind of family concept.  Not yet.  Northwest and United Airlines and US Airways all bought Airbus but they bought them without intending to realize the family concept from narrowbody to widebody.  I think that will change.  As we see SuperLegacy airlines develop, I think we’ll see a desire to harmonize more, not less over time.  More on that tomorrow.

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Video of airliners doing crosswind landings never fail to fascinate me.  They are, in my opinion, one of the best examples of airmanship going on in a commercial airliner.  Here are some videos taken of the 787 doing its tests in Iceland.

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American Airlines CEO Gerard Arpey has hinted that his company may well use their new 787s (when they arrive) for replacing 767’s and that they would make a good fit for flights between New York City and London.   This is in stark contrast to announcements we’ve heard from airlines such as Continental who are planning New Zealand and Africa flights with theirs.

There is no doubt that putting the newest aircraft and one with the amenities that the 787 promises on NYC-London routes certainly will serve the business class customer well.  However, many analysts have already speculated that the 767 may well continue to be an equal performer (or nearly so) on that kind of route.  The 787 is expected to realize its real benefits on routes in excess of 5000nm. 

AA already has a large fleet of 777-200ER aircraft configured for not that many more seats than their 787s and uses them on its long haul routes already.   Given that you would want to use those aircraft for those profitable routes, you have to find a place for the 787 and that means new routes and growth or replacement of existing airframes.  In this case, many of AA’s 767’s are rather old and a 787 replacement will still yield benefits that should be appreciable.

Nonetheless, it’s disappointing that AA’s hints point to replacements on existing routes rather than growth.  It is early days for that kind of speculation and that may well change.  Currently, AA doesn’t even have a new pilot agreement governing that aircraft as of yet.

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