Opinion: Five Key Industry Points From 2017 Paris Air Show

The war of attrition that is the Paris Air Show is over for this year. Although attendance appeared light on the first day of the air show, it was back to the usual mob scene on Day 2, with a notably larger military presence. The order announcement tally from Airbus and Boeing beat expectations, though the lower quality of the announcements has been noted. Having drunk from the firehose of numerous aerospace and defense meetings and countless other conversations, we will attempt to distill some key industry points from this year’s show. 

Boeing and the Aftermarket  At nearly every supplier meeting that we attended at Le Bourget, there was discussion of what Boeing’s aftermarket push could mean for the aerospace supply chain. The unofficial consensus view appears to be that if a supplier has the intellectual property, then not much is going to change on its aftermarket sales, though there could be more sales to the airlines via Boeing’s systems rather than through distributors or aggregators. If a supplier does build-to-print work, or has a limited license on a part that it sells into the aftermarket, then there is a higher risk of Boeing taking this work back in-house.
One supplier noted that any reduction in its aftermarket business case would have to be offset elsewhere, potentially in the pricing of the original equipment. In the medium term, not much is expected to change on current-generation aircraft that are under contract, and in the short term (2017), suppliers are rather positive on the chances of the aftermarket’s upside given strong year-to-date airline traffic growth.

The New Midsize Airplane  Although Boeing has not announced whether or not it will launch a midmarket aircraft, which it has dubbed the New Midsize Airplane (NMA), its press briefing suggested that it is going ahead, and every supplier, and Airbus, are pretty certain that it will be launched and enter service around 2025. However, many questions remain as to the exact range and capacity of this aircraft as well as whether there is sufficient demand for the business case and what the key technologies are likely to be, most notably the engines. 

In our view, Rolls-Royce and Pratt & Whitney seem keener than GE to power the plane, as GE has historically been wary of investing in an engine that competes with existing platforms (such as the Leap on the Airbus A321neo). But perhaps the most interesting NMA story that we heard in Paris is that Boeing wants to shorten the development time frame and the ramp-up to full-rate production. Given the experience of the 787, this would appear rash, but Boeing should know better than anyone what can go wrong when development is rushed—and hopefully it can avoid the pitfalls of the past.

Supply Chain Strain  The specter looming behind the production ramp of the reengined narrowbodies—and smaller aircraft programs such as the Embraer E2 or the Bombardier Global 7000—is whether the supply chain can keep up. On the engine front, Pratt & Whitney revealed that it had recently experienced a quality escape, and as a result, it has had to go to a second source and retest the batch of parts in which the fault was found. Safran experienced a similar issue with a Leap engine disk a month or so ago, which briefly held up delivery of the first 737 MAX. 

While the system spotted these problem parts before they got on the aircraft being delivered, these and other issues have occurred relatively early in the production phase, when we are a long way from maximum pressure on the supply chain. Although there is buffer stock in the system, some suppliers suggested that it was not as great as it should be. The consensus was that supply chain strain is likely to increase over the next couple of years, and as we have seen with Zodiac Aerospace and P&W so far, things can and do go wrong. In the meantime, the OEMs continue to turn the screws on supplier pricing, with Boeing’s Partnering For Success basically becoming a way of life.

Bizjet Market Improvements  Although Paris is not a bizjet show, we met with a couple of business aviation OEMs and suppliers at the show, and the tone was better than the universal doom and gloom of the past. Embraer and Bombardier were both positive about their new products such as the Legacy and the Global 7000, and both also noted an improved demand environment in Europe, along with generally better pricing on the new models. Aerospace suppliers also experienced a pick up in the bizjet aftermarket in the first quarter of this year, with both discretionary and nondiscretionary sales seeing improved growth. However, no one is calling this a return to the good times—if these improving pricing and orders trends continue, OEMs may see underlying delivery growth in 2019, but they are in no rush.

Military Optimism There was a marked increase in the number of military delegations attending the show, including from the U.S. One defense company that we met with confirmed it had been a very busy show, with over 200 meetings on the first day. Almost all the companies we met with were also very keen to talk about defense, even if unprompted, at what is usually a very commercial-aerospace-focused event. The tone on the military market was universally positive, and in perhaps a reverse of the general view, there appeared to be more optimism about exports than about the U.S. domestic market. Nevertheless, the passage of a fiscal 2017 budget has been welcomed and could help U.S. short-cycle sales in the second half. 

Also notable by its absence from the list of hot topics at the show was the state of the aerospace cycle. There appeared to be very little concern over issues such as Middle Eastern airlines slowing or China’s lowered credit rating, with most aerospace companies being content with the strong growth in revenue per seat mile so far this year, continued strength in narrowbody demand and the positive impact on airline profits from another dip in crude oil prices.

Robert Stallard is a Global Aerospace and Defense analyst with Vertical Research Partners LLC (VRP).

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