Airbus targets emerging markets

Airbus is focusing its business efforts increasingly on emerging markets, whose economies are predicted to grow more strongly in coming years. Ian Goold outlines the manufacturer's view of the future, including its plans for an increasingly global footprint.

1st Jun 2010


Developing countries, led by India and China, are the key future commercial air transport markets, according to John Leahy, Airbus’s chief operating officer customers.

Analysing passenger traffic trends by region, he says 54 emerging economies – essentially everywhere outside North America, Western Europe, and Japan – are showing double-digit percentage growth rates. Leahy quotes April 2010 data from aviation intelligence provider OAG, showing a 13.5 percent increase in traffic in these regions compared with the same period a year earlier.

Year-on-year growth in emerging markets has remained positive since before 2007, and was at almost 16 percent in February 2010. This performance compares favourably with the USA and Western Europe, where has been declining since the global recession took hold in the third quarter of 2008, Leahy says. In April, US passenger traffic fell 3.1 percent from a year earlier, while Western Europe was 8.4 percent down.

In contrast, some emerging economies have seen growth of more than 10 percent, with China reporting as much as 20 percent.

“Air transport is still emerging in 85 percent of the world,” according to Leahy. All this should be good news for commercial-aircraft manufacturers, especially since global passenger traffic continues to track broad economic trends.

OAG data, alongside information from several airline trade associations, shows almost identical tracks for trends in global gross domestic product (GDP) and passenger traffic: from about –1 percent in September 2008 to a low of almost –4 percent March 2009. Since then, airline performance has very slightly outstripped global GDP, with both tracks resuming growth after about 12 months. By March 2010, passenger traffic briefly reached 4 percent, about one percentage point above economic trends.

Changing trend

However, it should be noted that, historically, international scheduled-service passenger-traffic trends – whether positive or negative – have tended to exceed those of global GDP by about half. For example, throughout 2007, traffic growth ran generally at about 6 percent, compared with the 4 percent seen in economic trends.

Thus, although Leahy does not highlight this, the coinciding tracks since the beginning of the most recent world economic crisis actually represent a change from previous trends. It is still too early to see if the traditional differential will return as the world’s economies recover. What appeared to be the beginning of a return to historic trends in early 2010 may have been compromised by the short-term impact of the volcanic ash cloud over north-west Europe, particularly in May.

More encouraging have been trends in trade and cargo, with Leahy saying freight traffic is "recovering quickly".

Having run about 5-10 percent below equivalent world-trade trends from early 2007 to mid-2009, cargo traffic has subsequently led economic recovery. In March 2010, it was up 25 percent from a year earlier, more than 15 percentage points above returning trade growth, according to Leahy.

He predicts that over the coming 20 years India and China will see annual economic growth of 8.7 percent and 7.2 percent, respectively (see table). The rest of Asia – excluding India, China and the developed economy in Japan – will grow at 5.9 percent per year.

Looking forward, Leahy sees only growth: his worst-case scenario for this year is that global traffic could remain unchanged, ahead of a 6-7 percent increase in 2011. More optimistically, traffic could grow this year could by almost 5 percent. Indeed, the Airbus global market forecast foresees a doubling of air traffic over the next 15 years and an average worldwide annual growth to 2030 of some 4.7 percent.

Ending the cycle?

What could this mean for aerospace? Will the cycle of relative feast and famine continue?

Leahy says some forecasters had predicted a 30 percent drop in deliveries last year, equivalent to the downturn during the early 2000s' recession (and following a 50% decline in the mid-1990s), but they had been wrong. Now, they say the downturn will happen in 2010 and 2011. “They're still not right,” Leahy insists.

Rather, he argues that in the past five years the European manufacturer and its main competitor, Boeing, have "disengaged" the relationship between order backlog and delivery rates that previously has led to cyclic volatility.

"Airbus deliveries stayed flat during 1999-2004", as the company sought a stable backlog, even while becoming "the leading manufacturer " by market share. In the same period, Boeing deliveries fell dramatically, varying much more than the company’s backlog did.

Comparing deliveries with order backlog, Leahy says Airbus has maintained an even ratio of about 5:1 over the longer 1990-2004 period (meaning that, at any time, the company had about five years' production work in hand). This compares with Boeing's average 3.3 ratio for the same period – although the relationship between the US manufacturer's deliveries and backlog volume was less stable, and so it "caught a cold" as its production rates remained more volatile, according to Leahy.

Now, since 2004, both manufacturers have moderated delivery rates, rather than slavishly following order trends. This may suggest that during a period of relatively easy credit, Airbus and Boeing were careful not to be taken in. For example, both have acknowledged a certain degree of sales "overbooking" in recent years, as they accommodated the potential for order cancellations and delivery deferrals.

Addressing the forecasts of a big delivery downturn, Leahy says: “The current 'cycle' will be flat. Solid sales backlog sustains production through the downturn.”

Stable fleet

In fact, he points out that the world airline fleet has remained relatively very stable in the last three years, despite high production rates supporting 1,927 deliveries in 2008 and in 2009. The in-service fleet of aircraft carrying 100 or more passengers has grown less than 3 percent in the period, from 13,966 to 14,354, according to Airbus statistics.

This reflects the retirement or storage of some 430 old aircraft – models such as the Airbus A300B; Boeing 707, 727, 737-100 and -200, and 747-100 and -200; Lockheed L-1011 TriStar; and McDonnell Douglas DC-8, DC-9 and DC-10. The manufacturer also notes the withdrawal of 830 "mid-generation" machines such as: Airbus A300-600 and A310; Boeing 737-300, -400, and -500, 757, 767, and 747-300; Fokker 100; and McDonnell Douglas MD-80 and -90 and MD-11aircraft. Numbers of "new-generation" designs – Airbus A320 series, A330, and A340; Boeing 717 (MD-95), 737NG, 747-400, and 777; and Embraer ERJ 190 – decreased by almost 280 during 2008-09.

In this past year of apparent fleet consolidation, Airbus claims to have taken the largest market share of gross orders, with announced business covering 310 aircraft (54 percent of 573 total global orders), valued at about US$34.9 billion (55 percent of the global US$63.8 billion market). The European manufacturer claims shares of 54-57 percent in all categories of jetliner, except among very large aircraft – where Boeing's booking of five 747-800 aircraft, compared with four A380s ordered from Airbus, gave the US company 56 percent market share.

Neither company has been able to establish a firm upper hand since their respective shares have oscillated between 45 and 55 percent since Airbus first proved a match for Boeing in the late 1990s.

As for this year, for the period up to the beginning of May, Leahy has claimed a much smaller market share. Airbus had secured announced orders for 67 aircraft (33 percent of 201 total orders) worth US$12 billion (39 percent of a US$31.1 billion market). The company should see some advance on overall market share by order value in 2010, since Leahy expects to increase the gross order forecast for the A380 from ten to 20 aircraft during the course of the year.

2010 milestones

Also in 2010, Airbus can point to several achieved or anticipated "milestones". Already this year, the European manufacturer has delivered its 6,000th aircraft, received certification for the A330-200F cargo aircraft and handed over the first Lufthansa A380. Still scheduled for this year are the introduction of a higher gross weight A330-200, increased production of A320-series jetliner, and a decision on offering a fourth engine option for the single-aisle family.

As Airbus embarks on a newly revealed long-term single-aisle product strategy (see page 24), it is doing so in the broader context of development plans that include a focus on core activities as well as the establishment of additional competencies, according to Ian Dawkins, the manufacturer’s senior vice-president for future programmes and strategy. He says Airbus is looking for new partners that will enable it to move out of “elementary” processes without losing management of the business.

“The long-term strategy is not just off-loading work. We want to keep control and master overall development processes,” Dawkins says.

Dawkins says Airbus intends to integrate all its activities, including the military transport-aircraft business, while continuing to develop its international engineering ‘footprint’ and establishing major aero-structures and cabin-interior suppliers. Part of the footprint expansion plan includes the establishment in the long term of final-assembly capacity in the USA "irrespective of the [US Air Force’s] tanker decision".

While the company already offers aircraft-oriented services, Airbus has ambitions to sell support services “all around the aircraft”, including training, distribution and material management, air-traffic management, and airline "solutions". Accordingly, the company has adopted a strategy involving three approaches, says Dawkins.

These involve: the natural growth of existing business; internal growth and natural organic development; and external growth through business acquisitions in identified key sectors. The natural organic move is expected to see Airbus become involved in activities such as airliner cabin interior and systems upgrades, consultancy, and software development.

In the long term, Airbus’s future strategy will be driven by innovation, says Dawkins. He identifies three areas for such innovation: product policy, industrial organisation, and “services our industry wants”. A key consideration, according to the Airbus official, is to act at the right time: “We do not want to ‘go’ too early.”

[Table]

World air-transport 20-year growth*
Expanding Regions
(2008 population: 5.7 billion people
India +8.7%
China +7.2%
Middle East +6.9%
Eastern Europe +6.3%
Asia** +5.9%
CIS +5.9%
Latin America +5.8%
Africa +5.2%

Developed regions
(2008 population: 1 billion people)
Western Europe +4.3%
North America +2.4%
Japan +2.4%____________
*per year; **Asia excludes India, China and Japan
Source: Airbus

Asian Aviation at a glance