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ANALYSIS-Airbus production plans expose strategy rift with engine makers

Fri 30th July, 2021 5:50pm
By Tim Hepher
    PARIS, July 30 (Reuters) - A rift between Airbus  AIR.PA 
and engine makers over plans for higher jet output blotted
strong aerospace earnings this week, with worries over the
supply chain's industrial capacity masking a deeper tug of war
over contrasting business strategies.
    With travel demand snapping back in key U.S. and Chinese
markets, Airbus wants to almost double jet production in a few
years as it capitalises on a bulging order book for new jets and
the recent woes of embattled U.S. rival Boeing  BA.N .
    In May, it issued a mix of firm targets and scenarios that
could lift narrowbody output to 75 jets a month by 2025 from 40
now, and 60 before the COVID pandemic.  urn:newsml:reuters.com:*:nL2N2NE0FV
    That has rattled engine makers and others who fear the
world's largest planemaker will upset their own recovery by
flooding markets with new jets too quickly, forcing existing
ones straight into retirement rather than their repair shops.
    "The engine makers look at the production plans and see them
displacing older airplanes that are still profitable for them,"
said Teal Group analyst Richard Aboulafia.
    The standoff could accelerate efforts by engine makers to
adapt their service-dependent business models by charging more
upfront for their engines, Aboulafia said. 
    Doing so is potentially risky since planemakers also eye a
bigger slice of their suppliers' service revenues. 
    Public differences over production can unsettle the whole
supply chain, reducing the appetite for risk, suppliers say.
    Few quibble with a smooth return towards pre-crisis levels
for in-demand narrowbody jets, through Boeing remains more
cautious as it emerges from a separate crisis over its 737 MAX.
    "They (planemakers) can feel the momentum coming back," the
head of the world's largest engine maker GE Aviation, John
Slattery, told a Eurocontrol podcast, while pledging to support
a return to pre-crisis levels by early 2023 for narrowbodies.
    But industry sources say GE's French engine partner Safran
 SAF.PA  was speaking for many suppliers when it questioned
plans to take output swiftly beyond that to uncharted levels.
    "I have to say we are not sure that the market has the
appetite for such rates and that rates well above 60 can be
sustainable," Safran CEO Olivier Andries told analysts on
Wednesday, echoing previous warnings against over-production.
    Also speaking to analysts at mid-year results, Greg Hayes,
CEO of Pratt & Whitney parent Raytheon Technologies  RTX.N ,
expressed surprise at "pretty aggressive" Airbus output plans.
    Airbus Chief Executive Guillaume Faury defended the plans, 
saying he was ready to "do the math" with suppliers based on 
solid orders. "I'm really disappointed to see that some usual
partners are still challenging the rates," he told analysts.
    In public, the debate revolves around the resilience of both
demand and a weakened supply chain.
    Behind the scenes, the argument aggravates differences that
have been simmering for years, some industry sources said.
    "There is a legitimate point to make about the industrial
worries and appetite for risk among lower-tier suppliers. But it
is also legitimate to say that engine makers have to get work
out of airplanes already in service," one industry source said.
    
    SPLIT BUSINESS MODELS
    Both jetmakers and engine makers have reaped a bonanza from
demand for popular narrowbodies used by low-cost carriers, but
the way they recoup their investments is generally different.
    While planemakers get paid on delivery of new jets, allowing
them to absorb fixed costs fairly quickly, engine makers rely on
servicing older jets and have to wait years to make money back.
    Until now, a strong economy left room for both models and
supported record new jet orders while keeping older planes
flying long enough to generate lucrative service visits.
    But Airbus' plans have triggered disagreement over how the
burden of the crisis should be shared. Engine makers already
face delays in future parts revenues, because the maintenance
clock has paused on thousands of jets idled during the crisis.
    "It is rather surprising to see production going to the
highest levels ever seen while the number of stored airplanes is
also at the highest level ever seen," one industry source said.
    CFM, a GE-Safran  GE.N  venture which powers all Boeing and
some Airbus narrowbody jets, and Pratt & Whitney  RTX.N , which
competes with CFM on Airbus jets, have voiced private concerns
over the long-term impact of the plans, industry sources said.
    CFM, Pratt & Whitney and Airbus declined to comment.
    As sole supplier on the 737 MAX, which was hit by a recent
safety crisis, CFM will also be wary of the signal it sends to
the U.S. company if it helps Airbus assume too flamboyant a lead
in the market with its A320neo family, one industry source said.
    Planemakers say they are the primary risk takers and argue
the whole industry has feasted off demand for their products. 
    They argue that although engine makers see their margins
diluted in the short-term by delivering engines for little or no
immediate cash, they reap high margins on later repairs.
    Tensions over production are just one threat to a fragile
balance between business models in the $150 billion jet sector.
    Airlines are also under pressure to retire jets sooner for
environmental reasons, sometimes in return for COVID bailouts.
That too could reduce the number of prized engine overhauls.
    A trend towards shorter lifespans was revealed in recent
climate reports from Airbus and Boeing, calculating emissions
from their jets based on a life around 22 years.  urn:newsml:reuters.com:*:nL1N2P30I5
    That's lower than the mantra of 25 years underpinning a
growing air finance industry and has potential implications for
aircraft prices, leasing profits and future airplane orders.
    "The market is going to dictate how many engines the engine
makers will produce," Airbus Chief Commercial Officer Christian
Scherer said in a recent interview.
    "Ultimately I think you are seeing a convergence in the
number of engines and airframes being produced."

 (Reporting by Tim Hepher. Editing by Jane Merriman)
 ((tim.hepher@thomsonreuters.com; +33 1 49 49 54 52; Reuters
Messaging: tim.hepher.thomsonreuters@reuters.net))
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