Middle east queuing up for the world's breakthrough aircraft

 Now that the initial variant of the 787 Dreamliner, the 787-8, has been certified, all eyes turn to Boeing’s efforts to ramp up production and get the aircraft to customers as quickly as possible.

And, while no one region is more important than another, the Middle East is eagerly awaiting this revolutionary all-new airliner.

With nine Arabian airlines and lessors from eight countries in the GCC placing combined orders for a total of 125 Boeing 787-8s and 787-9s, this represents just over 15% of Boeing’s entire backlog for the 787 family.

IATA recently reported traffic figures for July 2011 and, yet again, the GCC stood out as the fastest growing region in the world, seeing a 9.7% rise in demand. This far outstripped the 8.9% rise in system-wide capacity and load factors remained resilient at 81%.

In a sign of continued buoyant demand second only to growth in Latin America, the Middle East saw a huge 9.7% rise in year-on-year revenue passenger kilometres flown (RPKs). The Middle East led the world’s growth in freight tonne kilometres (FTKs) with an 8.4% rise year-on-year while IATA noted “airlines in the Asia-Pacific and Africa regions have seen the size of their air freight businesses decline”.

While the woes of the 787’s painful birth have been well documented since its public debut back in July 2007, the effect of the repeated delays on its customer base has been profound.

Delays have been met with compensation, additional new capacity coming in the form of 777s and Airbus aircraft funded through Boeing’s financial redress to airlines.

The focus of the aerospace world now, however, is firmly on how Boeing aims to reach its intended production goal of churning out ten 787s a month by the end of 2013.

Alongside that industrial challenge lies the inauguration of Boeing’s first all-new production facility in Charleston, South Carolina, which plans to build three 787s a month, while the Everett plant in Washington will produce the balance across the main line and a planned surge line in the now vacated section of the 767 factory.

Boeing seems to have turned a corner with the 787 programme in one key way. With certification and flight test efforts now at an end for the Rolls-Royce Trent 1000-powered 787-8 that enters service with All Nippon Airways in October 2011, the airframer is also close to completing certification efforts for the General Electric GEnx-1B engine too.

Of the announced engine selections so far, the majority of the Middle Eastern airlines that have ordered the 787 family have opted for the GEnx-1B engine with only LCAL, the Dubai-based aircraft leasing company, electing to go with the Trent 1000.

Much has been made about the swathes of orders from Arabian airlines over the last decade, with many observers claiming that over-ordering and riding too high on a wave of confidence and unsustainable demand would see Airbus and Boeing eventually lose many jets from their backlogs.

These critics have not only been proven wrong, but their short-sightedness in their analysis of the region underpins just why the 787, in particular, will be a big hit with airlines and passengers alike.

Fundamentally, the Arabian Peninsula stretching from the west horn of Northern Africa to the sands of Oman in the East, is one that is unlike any other region of the world. Where other areas like Europe and the United States, for example, have airlines that continue to operate some of the oldest, least efficient airplanes in the world, irrespective of whether they are wide-body or narrow-body, the Middle East has very few, if any, of such inventory that needs replacing.

Middle East airlines swooped quickly to secure 787 positions primarily because they want to expand and grow their businesses. The litany of orders across the Airbus and Boeing portfolios in recent years is earmarked to cater for the shift of international traffic that is surging through key hubs like Dubai, Abu Dhabi, Manama, Amman and other rapid growing cities for one-stop connections to practically anywhere on the face of the planet.

So why is it that the 787 has found so much success in the region?

Analysing every Arab airline, their requirements and business rationale for procuring the 787 is endless but, in summary, the 787 provides not just the benefit of 20% lower fuel costs and lower maintenance costs, thereby allowing more flying time than spent on the ground in overhaul, but also brings with it the capability to open up routes almost 8,000 nautical miles away.

Those sort of extreme routes have thus far been either relegated to other more expensive airliners like the 777 family, or have involved airlines breaking up the route with stops along the way.

That will be history as the 787 allows Middle Eastern airlines to open up direct non-stop routes to places in the United States across both the Western and Eastern seaboards, while giving passengers higher humidity levels to reduce jet lag and tiredness – all without the need to carry more passengers to make flights profitable.

With the 787-8 optimised to carry between 200-250 passengers and its bigger stablemate, the 787-9, pitched to cater for 250-290 passengers, both models are not only complementary for the mode of operation, they allow Middle Eastern airlines to expand their operational footprint beyond the GCC. For some, expansion beyond GCC will be for the first time in their history – particularly in the case of Iraq.

The other critical element here is the GCC and Arabian region itself. A quick glance at a map and you can see that the region is home to over one third of the Earth’s entire population. A five-hour flight radius from literally any GCC city puts that footprint at almost 2.75 billion people. That’s a massive market in its own right. Critics who suggest Arabian airlines have gone overboard with aircraft orders never seem to grasp the size of the market here.

Many airlines are using the transit-traffic business model to great effect through their key hubs to provide one-stop connections anywhere in the world and this model is highlighted aptly by Emirates, Etihad Airways and Qatar Airways. For the latter two airlines that have 787s, they can use them at very long ranges with far lower seat and trip costs compared to any wide-body in service today.

Of course, the delays to the 787 programme have hurt their expansion plans and their plans to retire and withdraw older aircraft. Qatar Airways, for example, has made no secret of both its frustrations at the 787 being delayed repeatedly and its desire to convert its Airbus A330s into freighters and supplement its growing cargo business (as has recently been witnessed with its sizeable stake in Cargolux, the launch customer for the Boeing 747-8F).

Without singling out any of the airlines, there is one similarity that they all possess with their 787 procurement.

Much of current and planned route network expansion is aimed at leveraging the versatility of the 787 family. Of the two biggest Arab customers, Qatar Airways (30x 787-8s) and Etihad Airways (31x 787-9s), both will be using the types to replace ageing Airbus A330-200s and A330-300s currently deployed on routes to Europe. Both airlines are also customers of the Airbus A380-800, but while they have elected to defer deliveries and have no plans to match Emirates’ orders for 90 A380s, both Qatar Airways and Etihad Airways aim to use the 787s to high yield destinations (such as Manchester or London Heathrow, for example) where they can maximise revenues while slashing costs and still make use of the generous cargo hold to fly freight without the need to buy even more dedicated freighters.

Another aspect of why the 787 stands out for Middle Eastern carriers is their desire to operate fuel efficient aircraft that need less labour-intensive maintenance and overhaul. Carriers like Royal Jordanian Airlines have made the move to join the oneworld alliance, partners in that grouping like British Airways and Qantas also have 787s on order and they hope to hone in on synergies with a common fleet and allow maintenance in other hubs as and when the need arises.

Given that the 787 Dreamliner is such a radical technological departure, being able to synchronise fleet operations with partners makes code-sharing activities and passenger connections that much more fluid and stress free, particularly in an age where the emphasis on security checks at airports always seems to be the one facet of a journey most passengers get delayed by and loathe.

For Boeing, the other aspect of the 787 that makes so much sense is the foray by lessors to step in and acquire such an advanced aircraft. Despite Dubai-based LCAL reducing its 787 orders, it still has five booked and plans to up its commitments once initial deliveries commence.

ALAFCO, however, is a different kettle of fish. Having successfully thrashed out a deal with Kuwait Airways in 2007 only to have the airline drop its planned lease deal, ALAFCO went on to secure a deal with Oman Air for six 787-8s with deliveries due to commence in 2014.

With the advent of Islamic sources of funding taking more of a prominent role in the Middle East as an alternative to non-Sharia-compliant financing, ALAFCO will not be short of takers for the 787 from within the GCC. With its recent expansion plans to market itself as a lessor for other airlines, instead of the usual leasing agents like ILFC and GECAS, ALAFCO can boast the most modern airplanes in its inventory and charge a premium for these too.

Equally, the delays to the 787 over the past three years has forced airlines into rethinking their growth strategies because they won't have as many in service due to the knock-on effects in production. To that end, ALAFCO is poised to find that its early slots for the 787 will quickly disappear as airlines look to lessors to get more capacity. While there may be a degree of reticence from non-GCC airlines to approach ALAFCO to take these 787s, Middle Eastern airlines will not think twice.

In the way that the Middle East region has fewer ageing airplanes to replace, maturity of leasing companies here will take some time. That means opportunities for new players in the lease business. Carriers like Emirates and Egyptair are prime candidates and, while the former has significant orders for the rival Airbus A350XWB family, there is still ample opportunity for Boeing to secure 787 orders with the Dubai-based leviathan – especially if the planned launch of the stretched 787-10 occurs within the next 12 months. Emirates has been pretty vocal about wanting a bigger 787 model in contrast to the 787-9.

For Boeing, the strategic importance of the 787 Dreamliner family cannot be understated. Some airlines waiting for the 787 will end up seeing their deliveries pushed well beyond 2016. With the 787-8 and 787-9 sold out largely until the start of the next decade, Boeing now has other huge hurdles ahead of it.

With the August 26, 2011 formal certification from the FAA and EASA for the Rolls-Royce Trent 1000-powered 787-8, Boeing has yet more to do. Not only does it have to complete certification for the General Electric GEnx-1B engine, it also has to finalise the stretched 787-9, start its assembly and flight-testing and achieve certification by late 2013. In the background the diverse, fractured and troublesome supply chain across the globe has to simultaneously coalesce and converge their manufacturing processes if Boeing aims to achieve its stated goal of producing ten 787s a month.

This would be a record wide-body output for Boeing and, with a backlog of more than 800 aircraft to deliver to some 50-plus customers, demand will not be slowing down anytime soon. If anything, once the first few airlines start using the 787 and see just how fuel efficient it is and how well it performs in routine airline operations, that demand will start to swell again and it is entirely feasible that Boeing has total orders and options for close to 3,000 787s by the end of the decade – there are thousands of 747s, 757s, 767s, early-build 777s, A330s and A340s that need replacing and with fuel costs now making up the bulk of an airline’s cost base, the drive for fuel efficiency as well as lowering operational costs is as urgent as ever.

The numbers for the 787 are mind-boggling but the reality is that it embodies the future, not just for Boeing but also for airlines.

To break the mould of the last 60 years in the way that airliners are made has not come cheap for Boeing. Switching to carbon-composite materials as a primary structure for a commercial airframe was totally unheard of until the 787 emerged. Coupled with three years’ worth of delays and billions of dollars paid out in compensation to airlines as a result of not being able to deploy, Boeing is far from out of the woods.

The programme is laden with production and integration risks, especially as it gears up to increase production across the globe with partners such as Sprit AeroSystems and Alenia. While Boeing never discusses programme costs or break even numbers, the 787 programme teeters perilously close to a forward loss position. In short, Boeing would have to produce more 787s in order for the programme to become profitable.

For now, the cost of the 787 programme, including compensation to customers, is likely to be within the $10 billion-$15 billion bracket, if not more. Taking such costs into account and the near-zero margin deliveries it will assume on early-build 787s, the real turnaround for the programme may not be realised for some years to come – particularly as the costs for the 787-9 have also yet to be factored in as well.

Industry analysts predict that Boeing may have to produce around 1,000 units before the programme breaks even. That estimate has the sentiments of a bearish outlook, on the basis that the 787-9 is significantly delayed and the ten-per-month production target by 2013 is missed by a wide margin.

If Boeing can get close to that monthly target and avoid lengthy delays to the 787-9, there’s no reason why the programme, which carries a higher overall sticker price per unit even after assumed discounts, cannot break even based on the current 827 orders it has amassed to date.

Boeing’s focus now has to be on achieving and then sustaining deliveries. In a duopoly industry powered by itself and Airbus, Middle Eastern airlines do not have a third way.

Their aggressive expansion is limited only by the supply of the aircrafts they need to augment the growth in the businesses and continue to defy those who believe the region is over-committing itself.

The airlines may have had to curtail their expansion plans as a result of the delays to the 787, but it is the 787 itself that that will propel them not just further and wider on to the world stage, but it will put them ahead of other industry rivals that have been slow to adapt to the changing nature of the aviation industry.