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Written by Richard Aboulafia
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Thursday, 08 July 2010 16:47 |
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Richard Aboulafia
Teal Group
Can’t decide which car to buy? If you’d like a reminder of what life is like if you can’t make basic consumer choices, rent a Trabant, East Germany’s contribution to the Museum of Commie Industrial Atrocities. Today, bad car lovers rejoice, you can rent a vintage Trabant at www.trabi-safari.de. At this year’s ILA, I folded myself into one with fellow Tealies Bill Storey, Phil Finnegan, and Joel Johnson. Bill drove.
It was atrocious, of course. Joel and I had our knees banged with every road bump and crackwe hit. Phil quickly started wheezing, understandable given the fumes from a filthy two-stroke engine. Bill, the most unflappable person I’ve ever known, acquired a facial tic. This too was understandable given the sheer terror of maneuvering in Berlin traffic in a car-sized shipping crate (the Trabant was largely constructed of cotton and glue) powered by a lawnmower engine with a column-mounted gear shift. Exiting the vehicle was the highlight of our day.
The experience reminded me of the evils of industrial policy. The Trabant was part of an East German auto industry development scheme, and it was the only car you could get in the DDR. (East Germany had a national jet too: on its second flight in 1958 the Baade 152 provided a tragic and deadly illustration ofwhatwould have happened if the Trabant had been designed with wings and jets). Very simply, government industrial policy is designed to help the producer, and that hurts the consumer.
This theme is true for military products as well. Creating national military programs and keeping out competition hurts national air forces. Airbus is right about tankers: if the US military market is closed to foreign competitors, the US military will suffer, as anymilitary doeswhen it doesn’t have the freedom to procure weapons globally.
This is one of my favorite themes in the civil aerospace industry too. Government-funded national airplanes hurt national airlines. For decades, governments in Indonesia, India, Russia, and other emerging aviation players have gotten the bright idea of creating national planes, which usually means sealing the borders and forcing local airlines to take them. Heaven help, for example, any Chinese carriers forced to accept ARJ 21s.
A new variation on this theme: Funding a national airplane and subsidizing foreign carriers to take it. Not only are you hurting taxpayers with a subsidized airplane, but you’re hurting your airline industry too. This brings us to the big event at ILA: Emirates’ order for 32 more A380s. This somewhat overhyped event (Airfinance Journal reports that it was compensation for a Dubai Aerospace Enterprise Airbus orders “restructuring”) represents the only significant A380 order in years. It also cements Emirates’ status as the only enthusiastic A380 customer.
The A380 isn’t a Trabant. Having flown on it, it offers a very quiet and comfortable passenger experience. But it’s a commercial disaster. Put aside Emirates’ 90 planes and the latest round of dumb hype (“it takes an A380 to compete with an A380!”), and Airbus has sold a dismal 144 aircraft over 10 years (this month is the 10th anniversary of the commercial launch decision, which was followed by Singapore’s order). Some of those 144 A380 orders are basically dead, andmany others have been deferred.
The only hope for the A380 program, therefore, is Emirates. Like its wannabe colleagues Etihad and Qatar, Emirates is enjoying remarkable growth rates by grabbing other people’s traffic. Airbus tacitly acknowledges this. Their latest Global Market Forecast calls for 6.9% annual Mideast traffic growth. To absorb the current backlog of 90 A380s, 200+ A350XWBs, 200 777s and 787s, and scads of other planes, Emirates and its pals need to grow at a much faster pace than 6.9%. It’s very unlikely that they’ll be able to grow fast enough to absorb all 90 A380s, but they have enjoyed impressive growth. They’ve achieved that by siphoning traffic away from legacy carriers, especially Lufthansa, Air France/KLM, and British Airways (these three very large carriers, by the way, have ordered a combined total of just 39 A380s).
Emirates is an excellent airline that has won that traffic by offering great service at a good price (with some help from its home base). Europe would only hurt its consumers if it kept Emirates out of its air travel markets, and protectionism is a bad idea. But the A380 represents a publically funded way to help Emirates beat up on those European airlines. Europe is subsidizing the aeronautical rope that Emirates is using to hang European airlines in four ways:
1. Export Credit Finance. Many A380s sold to the Mideast enjoy European government export finance, which is particularly important as Dubai’s financial problems affect capital availability. ECA finance, of course, is not available for the European carriers whose traffic is Emirate’s favorite
lunch.
2. Landing Rights. According to many press reports, the latest round of A380 orders was announced in Berlin to curry favor with German authorities. The goal is to gain landing rights for Emirates at Lufthansa’s expense.
3. A380 Development Funding. The A380 itself would have been impossible without billions in taxpayer euros that will never, ever be paid back.
4. A350XWB Development Funding. Airbus might not need public cash for this new plane if it weren’t losing tens of millions on each A380 it delivers. Airbus now says that A380 production won’t turn cash-positive until at least 2015. Until then, losses on each plane delivered to Emirates will effectively be made good by A350XWB launch aid.
In short, from Emirate’s viewpoint, the A380 represents Europe’s fat and vulnerable aviation underbelly. Europe has shown it is quite willing to protect its national plane, even if that means throwing its national airlines under a bus.
After ILA I joinedmy family in Amsterdam.As I landed at Schiphol, it occurred to me that the Netherlands holds a unique distinction. It had a national jet and a national airline, and it let go of both of them. Fokker and KLM were good, but not good enough, or big enough, to be successful global players. Fokker devolved into a components manufacturer, and KLM, of course, was rolled into Air France. The Netherlands has one of the most advanced economies in the world. Perhaps protecting national airplanes and national airlines is merely a phase countries go through as they grow up.
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Written by Marco Caceres
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Thursday, 08 July 2010 16:20 |
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Marco Cáceres
Teal Group
I had never heard of star parties until a friend of mine, who happens to be an amateur astronomer, introduced me to them a couple of years ago. The idea of hundreds of people with their telescopes getting together for a few days to gaze up at the stars immediately appealed to me, and I pulled out my old telescope, determined to finally figure out how to use it properly. I started researching star parties throughout the world, and found out that the biggest one in the US takes place in the Florida Keys each February. There are literally hundreds of these events going on throughout the year.
I've actually been contemplating organizing a star party myself in Copán, Honduras in a couple of years in celebration of the end of the Maya calendar (long count) on December 21, 2012. The date coincides with the Winter Solstice and the aligning of the Earth with the center of our Milky Way galaxy. There's a lot of speculation about the meaning of the end of the calendar, including the end of the world or the beginning of a new spiritual awakening. Who knows. What is certain is that in the past year or so, a new cycle of solar activity has begun. Ground-based telescopes and space-based observatories have detected a marked increase in solar eruptions and massive plasma storms, and NASA expects this to continue and peak around 2013 -- so much so that it and other space agencies are preparing a series of probes to image the Sun's surface more consistently and in greater detail than ever before.
France's Picard solar observation spacecraft was launched on June 15. It will observe the Sun for at least two years. Earlier this year, NASA launched its Solar Dynamics Laboratory (SDO), designed to study the Sun's magnetic field and corona over the course of five years. These and other planned spacecraft will provide information to help us better understand how the new activity on the Sun may affect our planet. There is speculation that solar activity will become so intense during 2012-2013 that it could disrupt power and communications on Earth... kind of like the Y2K we never had. Well, that wouldn't necessarily be the end of the world. In fact, if you ask me... we could use the break from all the noise.
Congratulations to Thales Alenia Space for its contract to build the Eutelsat W6A communications satellite. The satellite will be based on the Spacebus C3 bus and is expected to weigh 5,000 kg. Plans call for launching it sometime in mid-2012. I'd like to note that Orbital Sciences received a $70 million contract from NASA to launch the Orbiting Carbon Observatory replacement satellite in 2013 aboard a Taurus XL rocket. Look for Boeing to soon receive a major order for broadband satellites from Inmarsat... worth perhaps as much as $1 billion.
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Wednesday, 16 June 2010 11:54 |
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Richard Aboulafia
Teal Group
Sometimes two analysts can be twice as wrong. Two years ago on our drive out to Farnborough Aerostrategy’s Kevin Michaels and I discussed the dramatic events of theweek. As a colleague recited a grim litany of headlines covering massive government bank and corporate bailouts, we added up the unbelievable sums. The numbers were on a completely different scale than the ones we work with in the aerospace biz. “One thing’s for sure,”Kevin opined, “we are all in.” I immediately agreed. In poker terms, we had gone all in and we didn’t have any more cash to play with.
We were, of course, a long way from all in. As the crisis worsened much more cash was dumped into the economy through programs like TARP andmany others. Thismade the amountswe discussed that hot English July day seem trivial. Actions taken by the Bush and Obama administrations, and other governments, probably saved the world from economic calamity. But the developed nations were left with extremely serious deficits and a nasty debt hangover. Europe avoided the US’s level of stimulus spending, but the current fiscal crisis induced by Greece and the other wonderfully-named PIGS guarantees an even deeper hole for the EU. In all, it took the developed world longer to get there than we thought, but eventually we really did go all in.
From a narrow and parochial aerospace perspective, this cash avalanche worked wonders. We should have had a dreadful bust cycle. The economic indicators clearly point to a 30+% jetliner production drop. Instead, aggregate aircraft output rose 7%by value last year. Light and medium business jets got hammered, but the much larger jetliner segment expanded by 13.5% (about half of this growth was due to the end of 2008’s Boeing strike). The industry benefited from government largesse in fiveways:
1. The broader economy. Bailouts, stimulus packages, TARP…awhole host of prompt actions by the Bush andObama administrations, along with governmentsworldwide, dumped liquidity into the economy. Some of the individual steps looked dumb and/or wasteful, but as a whole they prevented a serious meltdown that would have crushed travel and freight demand for a much longer period of time.
2. Bank stabilization. Actions taken to stabilize major financial institutions such as AIG, RBS, CIT, and others forestalled massive fire sales of the aircraft. Imagine if AIG needed to force ILFC to dump its portfolio on the market to generate cash. Repeat that with a few other lessors and you’d have seen the mother of all jet gluts.
3. Ex-ImBank and Export Credit Agency finance. The backstop financing they provide is helping out with 35-40% of transactions.
4. Government jetliner finance. In addition to the ECAs, government-owned banks like Bank of China and sovereign wealth funds have confidently gotten into jetliner funding, even as private sector cash got scarce.
5.Heavy defense spending. A few wingnuts decry “Obama’s defense cuts,” but the FY2011 budget is bigger than anywe hadwithGeorgeW. Bush.A$140 billion procurement budget is as good as it gets.
So, with government printing presses in overdrive, the industry is in good shape. Teal Group is no longer forecasting any kind of serious downturn in the next few years. Effectively, the manufacturers bet correctly that traffic numbers would recover before jet demand fell off a cliff, while governments assumed the burden of financial risk and industry overcapacity. Our 2010 jetliner forecast calls for a 4% decline by value from 2009, but this is due solely to a temporary dip in 777 numbers and the transition between the 747-400 and -8.
If everything were sunshine and brightness, well, this wouldn’t be a Teal aircraft letter. What to worry about? Two things. First is the rise of political risk. Political risk happens when politicians control a much broader swath of the economy. Before the crisis, government actions directly affected about 40%of the aero industry (the defense part, plus government procurement of civil helicopters and jets). I can’t tell you what that number is today, but it’s well over 65%. Political risk, unlike market risk or macroeconomic risk, is much less forecastable or quantifiable. Imagine, for example, if TARP had been cancelled due to politicalwhim(perhaps due to a greater Tea Party presence in theUS Congress). You’d have significant trouble in the jet finance business, and there would have been no way to see it coming. (For a superb reviewof the rise of political risk, see James Surowiecki’s May 24th NewYorker
column.)
EADS today is the best example of an aerospace company exposed to massive political risk. The A400M contract and A350 XWB development funding, both crucial to the company’s future, depend on politician’s whims, not onmarket fundamentals. But thanks to the factors listed above all aero companies today have an unaccustomed level of political risk too.
The second risk is that today, we really are all in. Governments can only do this once. Worldwide government action averted financial collapse and prevented any kind of jetliner downturn. But if this European crisis spreads, or if there’s any kind of double-dip recession for whatever reason, there’s not much that governments can do. As the Economist put it, “the scale of sovereign debts has left governments with less room to counter any newdownturn; indeed,many of themare being forced into austerity” (May 27). Or, as Tom Friedman put it, we’re driving down a dangerous road and we’ve already used our spare tire (New York Times, May 23).
Even on the defense side, the growth in government spendingwill end. Earlier thismonth SecDef Robert Gates wisely cautioned that defense spending would be squeezed moving forward, and that the industry needs to live with flat procurement budgets. In Europe, we could see a more serious defense crunch that affects even performing programs like Eurofighter.
It’s been two years since that Farnborough car ride. If in two months I find myself with my colleagues reading headlines as dire as July 2008’s, then I fear the worst. Governments are now playing poker with an empty hand. Itmay seemas though the public sector has prevailed over freemarkets, but markets have a way of asserting their primacy, and hell hath no fury like a business cycle scorned. A double-dip recession would ensure that the jetliner business pays an overdue debt with interest. That means a serious production fall that’s even worse than the typical 30% cut.
But to conclude on an optimistic note, this dire scenario certainly isn’t our forecast. Right now, the US and most developing countries are doing fine. Our baseline forecast scenario calls for a sustainable industry plateau, with organic demand picking up as government spending ramps down.
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Wednesday, 16 June 2010 11:13 |
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Marco Cáceres
Teal Group
I know many of you must be breathing a little easier now that SpaceX's Falcon 9 has been launched successfully. I can imagine the "I told you so's" from skeptics of the Obama administration's decision to cancel Orion/Ares 1 had the Falcon 9/Dragon failed. So much of the new vision for US human spaceflight depends on private industry being able to develop systems like the Falcon 9/Dragon and Taurus 2/Cygnus that can eventually be used to haul cargo and crews to the International Space Station.
There is no question that there's a lot of pressure on industry to perform. Otherwise,the US would be destined to remain dependent on leasing space aboard Russian rocketsto keep US astronauts on ISS supplied and to transport them to orbit and back. But Iam extremely confident that industry can lead in space and create new markets, which is something that NASA is just not equipped to do.
Congratulations to SpaceX, and good luck on the second Falcon 9/Dragon mission later this year. I believe the demonstration flight of Orbital Sciences' Taurus 2/Cygnus is set for sometime next year. If both the SpaceX and Orbital systems proceed without any majorglitches, then they will be in a good position to deliver as many as 16 cargo missions to ISS during 2011-2015. Perhaps sometime before 2015, these systems could be rated to carry humans. This would indeed be a major paradigm shift. Wow... industry leadingthe way. What a novel concept.
Congratulations to the French for winning the contract (over Lockheed Martin Commercial Space Systems) to build the Iridium NEXT satellites for Iridium LLC. A total of 81 small mobile communications satellites will be built by Thales Alenia Space SA. The contract is worth $2.1 billion. A large part of the work will be done in the US. Final assembly and testing of the satellites will be performed in Boulder, CO at Ball Aerospace's facilities.
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Tuesday, 01 June 2010 00:00 |
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Marco Cáceres
Teal Group
Speaking at the Space Foundation’s 26th National Space Symposium in April, the president of Space Exploration Technologies Corp. (SpaceX), Gwynne Shotwell, noted the importance of growing the space launch services market. Ms. Shotwell was part of a panel discussing the “changing paradigm” of how the Pentagon and NASA fulfill their requirements for items such as satellite imagery and human/cargo spaceflight services. The topic was no doubt prompted by the termination of the NASA’s Constellation program in February and the sudden realization that the United States will soon be without a national human spaceflight capability.
Once the Space Shuttle fleet is retired later this year or early next, the US government will no longer be in the business of owning and operating its own piloted space launch vehicle. NASA is preparing to embark on a new operating which will require it to depend initially on the Russians and their Soyuz rocket and Soyuz/Progress capsules, but eventually on US companies such as SpaceX and Orbital Sciences Corp. offering leased capacity on their own commercially marketed space vehicles.
Ms. Shotwell’s comment about the need to grow the market in which her company competes was said in a matter-of-fact sort of way and was so generic and obvious that it failed to illicit a follow-up question from the moderator or to stimulate an exchange with any of the other panelists. This was unfortunate because it missed an opportunity to address a key question for both NASA and the US launch services industry as the paradigm shift in US human spaceflight emerges… “How do you keep the industry from becoming overly dependent on NASA and thereby discourage it from competing for other business and damage its spirit of innovation?”
As the paradigm shifts, we think it would be short-sighted for the US launch services industry to emphasize growth in its volume of business without giving equal or more attention to diversifying its customer base. While it makes sense for NASA, for example, to serve as a guaranteed anchor client that will help SpaceX and Orbital Sciences to lower their financial risk as they develop the Falcon 9/Dragon and Taurus II/Cygnus launch systems, this should be viewed onlyas an initial incentive for these and other launch companies to enter and help expand the market for commercial human/cargo spaceflight services.
We think it would be a huge mistake for companies like SpaceX and Orbital Sciences to view NASA as “the market”, rather than one of many potential customers within many different markets – most of which have yet to be invented. It would be a mistake because it could transform these companies from the hungry and innovative enterprises into conservative and sluggish corporations that prefer maintaining a status quo to taking risks with new technologies and market applications.
The whole point of the Obama administration’s push for a paradigm shift in the way the US does human spaceflight is to energize an industry that has for too long been dominated by and dependent on the US government. While the decision to end Constellation and embark on a new vision for spaceflight was based largely on the fact that NASA cannot afford to develop and operate its own human-rated launch vehicle, the reality is that the policy change represents an historic opportunity for private industry to lead.
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