Plane Talk at the Paris Air Show

We survived the scorching temperatures at the Paris Air Show last week.

This compares with 326 orders and commitments for Airbus, which stands at 301 if we back out 15 A320ceo to neo conversions and 10 previously unidentified A350 orders now allocated to Ethiopian Airlines. After controlling for conversions, the activity didn’t match that at the 2015 Paris Air Show, but sales were up relative to the Farnborough International Airshow last year.

As we anticipated, the show didn’t feature significant wide-body orders. Airbus booked only 10 new wide-body orders, while Boeing registered 56 wide-body deals. We do think the 787 had a more than respectable level of interest with 50 orders and commitments, including 38 from lessors AerCap (30) and CDB (8). Order sizes were smaller than at the 2015 Paris Air Show with only GECAS, Avalon, and an unidentified customer placing fresh orders (not conversions) of more than 50 for a specific aircraft type. The Asia-Pacific region had the most orders and commitments with more than 200 aircraft deals announced, according to Flightglobal’s order tracker.

We also learned a bit more about Boeing’s new midsize aircraft, which has been unofficially dubbed the 797. Boeing has already talked with more than 55 customers about the aircraft, and based on our conversations with suppliers, the company is running simulations on what the aircraft design could look like. Boeing thinks the market for the 797 stands at about 4,000 aircraft over the next two decades, a figure we believe is too high by at least 1,000. However, designing the aircraft for Boeing to capture a disproportional share of services relative to previous aircraft it has developed and manufactured may create a compelling business case. If the business case adds up, then we think Boeing is 12-18 months away from a formal 797 launch. The company pegs 2025 for entry into service.

From a technical standpoint, Boeing is trying to achieve narrow-body per-seat operating economics with a twin-aisle aircraft, which is no easy task. We think it plans to do this not only by using carbon fiber for the wings and fuselage, but also through a hybrid fuselage design that uses a typical wide-body layout for the passenger deck but mimics a narrow body for the cargo compartment. Given the heavy investment in facilities to produce the 777X wing, we find it highly likely that Boeing will keep the 797 wings in house and might plausibly insource the fuselage as well.

Taking a broader perspective, we think the MAX 10 and the 787 are Boeing’s response to address its weak position vis-a-vis Airbus in the high end of the narrow-body market and the low end of the wide-body market. Airbus predictably dismissed the MAX 10 and the 797 at the air show. We didn’t hear any talk of a stretched derivative of the A321--an aircraft that some have dubbed the A322--at the air show, but we believe such an aircraft is technically feasible to develop and manufacture. We think Airbus management is taking a wait-and-see approach to Boeing’s new products and will react with derivatives of existing aircraft, if need be, and we currently don’t envision Airbus developing an all-new aircraft in response.

Airbus did announce studies around the A380 that feature winglets and an optimized cabin. These improvements could deliver double-digit efficiency gains for the aircraft. However, we’re skeptical that these potential investments will turn around the lackluster sales we’ve seen recently for the A380. On the other hand, even if Airbus invests in these improvements, the price tag will probably be a couple of hundred million euros of research and development; we think the company has flexibility in its R&D envelope to absorb these incremental costs without breaking the bank. As such, we maintain our stance that capital expenditures and to a lesser extent R&D will continue to fall at Airbus, helping boost cash flow. Management is focused on the possibility of doubling EBIT by 2020, which implies roughly EUR 8 billion of operating profit. We forecast EUR 7 billion in EBIT by 2020.