* Favours dip in output as manufacturers complete jet revamp
* Re-engined A320neo, 737 MAX make sense at $65 oil or above
* Sees smooth transition if output remains under control
By Tim Hepher
PARIS, Feb 25 Leasing company Avolon urged
Airbus and Boeing Co on Monday to show restraint in
production in coming years to avoid upsetting a crucial balance
in the market for their most popular models.
Challenging plans by the world's dominant planemakers to
maintain record production as Asia powers up transport growth in
emerging markets, Dublin-based Avolon also urged them to lower
output temporarily as they introduce newer fuel-saving versions.
Airbus, a unit of EADS, and Boeing have seen strong
demand for single-aisle medium-haul planes as airlines update
fleets or plan for growth, especially in emerging markets, and
plan to produce 42 such jets a month each by mid-2014. Airbus is
already at that level.
The two manufacturers have notched up particularly strong
sales of fuel-saving versions of those jets due to enter service
from the middle of the decade.
Airbus plans to deliver its first A320neo in 2015 and
Boeing's revamped 737 MAX is due in 2017.
"As we approach a period of transition into the new
aircraft, which coincidentally is about the same as the next
cycle downturn, there are a number of reasons to slow the rate
slightly," said Dick Forsberg, Avolon's head of strategy.
One reason is the normal impact of a downswing in what
remains a cyclical industry - even though Airbus has argued that
delivery peaks and troughs are far less marked than they used to
Another is to leave manufacturers "head room" to allow for
glitches and ease pressure on the supply chain as assembly lines
switch to the new versions, equipped with the latest engines.
"It makes no sense to keep going at 42 (a month) come what
may," Forsberg said.
Neither manufacturer, fierce rivals in a market for such
jets estimated at $2 trillion over 20 years, has given any sign
it is willing to give up any deliveries as they battle to
maintain a roughly equal share of the largest market segment.
However, there has been less talk of driving production to
even higher levels amid growing worries about the supply chain.
John Higgins, president and chief commercial officer of
Avolon, said concerns about overproduction had eased in the past
12 months. Last year saw heated rhetoric over plane sales.
"Sanity and economics have prevailed," he told reporters on
a conference call, adding that after a bout of matching
production forecasts both firms were appearing more pragmatic.
The introduction of fuel-efficient models, led by Airbus in
late 2010 and then Boeing almost a year later, has triggered
intense transatlantic competition.
Their arrival raised concerns among investors that the value
of existing A320 and Boeing 737 models would dwindle as airlines
switch to the new types. But Avolon said it would take more than
eight years for the new types to build a "critical mass" in
However, in a detailed report on the transition between old
and new models, seen as one of the key aerospace industry events
this decade affecting airlines and parts suppliers worldwide,
Avolon said planemakers should keep a lid on production.
"Continued discipline on the part of the (manufacturers)
with respect to production rates is a critical factor in
maintaining the supply and demand balance," the report said.
Airbus, which last year suspended plans to increase
single-aisle output to 44 a month because of pressures on its
suppliers, dismissed a French newsletter report on Monday that
it was now considering increasing production to 46 a month.
Airbus executives have said higher output will be needed as
passenger traffic rises but is not an immediate priority.
The European company, a subsidiary of European aerospace
group EADS, increased production of A320-family aircraft to 42 a
month from its French and German assembly plants in October.
Boeing currently produces 35 737s a month at its Renton
plant near Seattle. It plans to step up to 38 in the second
quarter and 42 in the first half of next year, a spokesman said.
The business cases for the two revamped models of
best-selling jets depend on savings of some 15 percent in fuel
consumption, though each side claims to outperform the other.
Avolon, which recently placed orders for both types that it
plans to rent to airlines, said the performance would not be
known for sure until the aircraft entered service.
But it predicted the economics of the new planes would make
sense as long as oil prices stayed above $65 a barrel. The
current North Sea Brent level is around $114 a barrel.
Avolon is owned by a group of investors including private
equity firms Cinven, CVC Capital Partners and Oak Hill Capital
Partners as well as GIC, the investment arm of Singapore.