Mega-suppliers

THE COMMERCIAL aircraft industry is set to have two mega-suppliers, after Airbus took majority control of the Bombardier C Series (now rebranded the Airbus A220) and Boeing and Embraer teamed up in a new 80/20 joint venture on commercial aircraft.

With the A220-100 (formerly the CS100) and the A220-300 (formerly the CS300), Airbus has strengthened its offering in the 100 to 160 seats market segment where its 140 to 160-seat A319 has performed sluggishly in recent years. (As of early August, the A319ceo backlog was just 19 aircraft and only 56 A319neos had been ordered.)

Likewise, when Boeing starts its joint venture with Embraer – expected to close by the end of 2019 following regulatory clearance – and takes the E-Jets family into its portfolio, the American company will have a stronger presence at the lowercapacity end of the airliner market.

The biggest impact of these developments is that, for the first time, the two major commercial aircraft original equipment manufacturers (OEMs) will have product portfolios that stretch across the entire airliner size, seating and payload spectrum.

For Airbus, the A220 complements its larger A320/A321 single-aisles and A330/A350/A380 twin-aisles, and for Boeing the E-Jets family slots in beneath its 737 single-aisle and 777/787/747 twinaisles. From comparatively dinky A220/E-Jet-sized aircraft, through single-aisles and up to the highestcapacity jets serving the busiest hub airports, the OEMs will offer it all.

This situation, says Richard Aboulafia, Vice-President of Analysis at the Teal Group consultancy, is “another big step towards gigantism”, a trend that has led to a wave of corporate mergers, acquisitions and partnerships worldwide in industries ranging from cars to confectionery.

Why is this significant? It has opened a new flank in the ongoing orders battle between Airbus and Boeing. The competition between these two companies has over the years largely been about singleaisles (A320s-v-737s) and twin-aisles (A330s/A350s-v-777s/787s and, to a lesser extent, A380s-v-747s).

With the latest strategic moves filling previously blank spaces in product portfolios at the lower end of the aircraft size and seating scale, there is now a totally fresh aspect to the contest.

Why have these strategic changes happened at all? Aboulafia’s view is that Bombardier and Embraer found their respective C Series and E-Jets were being compared with Airbus and Boeing single-aisles and that “it was very hard to compete”.

He wrote: “The two big guys kept reducing their prices, in real terms, as they scaled up. Airbus and Boeing are now headed to about 60 single-aisles per month, and perhaps beyond. Embraer and Bombardier’s large jet businesses have been shrinking in relative terms as Airbus and Boeing ramp up.”

Bombardier effectively ceding control of the C Series to Airbus through the C Series Aircraft Limited Partnership, in which Airbus holds a majority 50.01% stake, “meant that Embraer was no longer directly competing with a niche company”, said Aboulafia.

He added: “The [E-Jets] E2 was now up against Airbus, a global monster. That pushed Embraer into Boeing’s arms.”

Beyond matters of product positioning and portfolios, it is in the areas of supply chains and aftermarket services where the biggest impact will be felt. Aboulafia explained: “Suppliers will now deal with exactly two jetliner primes. Those two smaller guys simply didn’t have the muscle, and suppliers enjoyed better terms and higher profits …This transition to just two primes means suppliers now have more reason than ever to consolidate. They need to scale up, partly to push back against Airbus and Boeing’s terms, and partly to gain the economies of scale needed to survive those Airbus and Boeing terms.

“The record-breaking United Technologies/Rockwell Collins/ BE Aerospace double merger is taking place with all of this in the background. Expect to hear lots more supplier consolidation and merger talk.”

Aboulafia also feels “we’re going to see an interesting experiment” in terms of how the aircraft will be marketed. He wrote: “Historically, 100–130-seat jets have been expensive on a per-seat basis compared with larger jets. Now that both the C Series and Embraer’s E-Jets will be built with Airbus and Boeing’s aggressive supply chain management and massive corporate power, that may well stimulate [the] 100–130-seat market as prices fall.”

The analyst believes a further important consequence of Airbus and Boeing’s strategic moves is that barriers to entering the commercial aircraft market will become higher for other players seeking to enter the commercial aircraft market.

Aboulafia explained: “It’s always been somewhat paradoxical: as the market gets bigger, entry barriers get higher, too, because the incumbents are scaling up, and now, with these latest changes, the incumbent primes are getting bigger still.

“Imagine, for example, being Mitsubishi or COMAC. It’s one thing to enter a market defended by Bombardier and Embraer. It’s quite another thing to enter a market defended by Airbus and Boeing, with their massive scale and supplier management power.”

The looming era of megasuppliers looks set to have many impacts.

Embraer has painted E190-E2 test aircraft PR-ZGU (c/n 19020094) with a distinctive shark livery to promote its ‘Profit Hunter’ branding.
Embraer