European aero major Airbus (EADSY, Financial) is thinking of ramping up the production rate of its much popular A320 on the back of robust demand for narrow bodies. The company is in talks with its suppliers regarding the possibility of a production hike as early as 2017. Thanks to lower expenditure on fuel, consumers have more disposable income which they are using to fund air travels. Even airlines are booking better profits. All these things have come together to boost air travel like never before. Let’s analyze this latest development to understand why it’s important to Airbus and how this might impact it in the long run.
Airbus A320neo, Picture from Airbus
Why Airbus needed a production hike for the A320?
The primary motive for Airbus to increase the production rate is to continue to give Boeing (BA, Financial) tougher competition. Airbus is the leader in the narrow body segment. However, its American rival has been eating up its market share slowly thanks to its 737 aircraft. Boeing is also working on the next generation 737MAX jets that will compete with Airbus’ A320neos. Increased production can help Airbus deliver the jets faster, ensuring it converts all of its backlogs to billings.
Boeing presently rolls out 42 planes a month from its facility. As demand is increasing, the company decided to boost its production level to 47 a month in 2017, and further to 52 a month in 2018. And now there are talks that Boeing is in discussions with component makers on the possibility of eventually handling 58 aircraft a month. Such a huge pressure from Boeing is making it mandatory for Airbus, too, to lift its production capacity. Otherwise, it’s bandwidth to take more orders and delivery them faster would be compromised. The move will help Airbus to maintain its dominance in the narrow body segment.
What’s Airbus planning to do?
The aircraft manufacturer is looking to pull up the A320 production rate to 50 a month in 2017, according to a senior industry source. In this regard, Airbus has conveyed its suppliers to gradually expand their capacity to 48 planes a month in 2016, and then 50 a month in 2017. According to reports, Airbus would ideally want the production rate to increase to 46 a month, up from current 42, by the second quarter of next year. A month back Airbus’ airplane division’s CEO Fabrice Bregier said that the company’s supply chain was running smoothly, which hinted at production hike possibilities. However, he also pointed out that there were difference in opinion between the production and sales team regarding the timing of the hike.
Hiking production rate is a no-brainer
There have been doubts regarding the backlog of the plane makers as several analysts believe that it’s a bubble which would burst in the future. The industry could see lots of cancellation, especially from growth markets such as Asia and the Middle East. But neither Boeing nor Airbus feel so and are rather confident about the demand.
An industry source said that increasing production rate is a no-brainer, it’s a must for the plane maker. But the question here is ‘when’ to increase the output. Narrow body aircraft are the key revenue and profit driver of both Boeing and Airbus. The A320 and 737 make for the maximum portion of the deliveries and generate cash. Both the aircraft manufacturers are presently busy in building the reengineered versions of their respective narrow bodies.
As the demand for fuel efficient planes goes up, it’s important for Airbus to be able to capitalize on the prospect. Unless it increases its production rate, its customers would have to see a long waiting time before getting their deliveries. In such a case some airlines might prefer placing order with Boeing instead of Airbus. A production rate hike, therefore, becomes imperative for the aerospace behemoth.
