AerCap has doubts on Airbus plans to expand production

AerCap is the world’s largest company involved in leasing aircrafts and has a customer base of approximately 90 countries with 1,730 aircrafts that are managed owned or ordered from on its impressive portfolio. It also leases out engines via its sister company AeroTurbine. Listed in the New York Stock Exchange AerCap has sealed its position as the global leader in terms of leasing aircraft and its parts to provide comprehensive fleet solutions to over 200 countries. Its doubts on the plans of Airbus expanding its production capacity have raised several legitimate questions in the minds of every company concerned.

As Airbus plans to ramp up its single aisle production to the sixties, AerCap was hesitant to support this decision. Aengus Kelly, CEO of AerCap said that Airbus should be prudent with its plans and can always scale back production without risking bankruptcy of their carriers by enforcing deliveries. After Airbus’ rise in production rate from 42 to 60 per month, Boeing has followed suit and increased its own rate to that of 52 per month tentatively, liable to increase more with time.

Aircraft lessors such as AerCap are usually in favor of a shortage in demand and supply since this is where they feature- they fill the crunch faced by companies while production is on the line. This move by Airbus will definitely have a significant change in AerCap’s market position. This planned output has also raised questions from other lessors and they all seem confident that Airbus will soon realize that sixty is too high a number to aim for each month.

With competition rising as steadily as the temperature, Boeing will not allow Airbus to dominate the narrow-body aircraft market for too long, which in itself should be a warning sign for Airbus to slow down its production lest it falls flat on its face. The A320Neo did help Airbus to establish its monopoly in the early stages but the situation is in a flux and will change sooner than later. Companies are not shedding off old aircraft much to AerCap’s liking and leasing out 17-20 year old bodies and extending their leases for 3-4 more years. This, coupled with a threatened additional supply might spell doom for AerCap’s market. The one production line that doesn’t worry AerCap is that of the A330. They say that since there is a vast user base for that model, the increased production will be a welcome inflow of machinery. The situation is different for the 777s since the initial market space for that size and utility has already been taken over by the 777x. There are so many variations in that series, including alterations in engine capacity, which AerCap is finding it difficult to maintain leasing them out.

The story is different for the A350, which has a significantly lower user base, in turn, reducing its leasing ability. Kelly feels that the demand for this version will not exceed over a thousand- further strengthening his belief that Airbus will have to scale down their ambitions of increasing production.

The biennial Paris Air Show was witness to this landmark decision made by Airbus and Boeing but received severe pushbacks from the supporting companies such as engine manufacturers like General Electric (partnered by Saffron). These companies claimed that to support Airbus’ decision to scale up production, their company would have to make a significant rise in manufacturing rates as well, which may still be insufficient to meet up with Airbus’ requirements. Airbus will also have to determine how they would deal with the smaller players- suppliers of smaller parts. Many of such suppliers will have to double their production while facing a huge cash crunch. Airbus will have to ‘pay to play’ and this might just turn out to be the game-changer.

Airbus went one step ahead and claimed that it is already at a better production position than its competitor Boeing, because it has the backing of two engine suppliers. They even went on to say that it would be unfortunate if one of the suppliers chose to not grow with them. This hinted at a possible discourse but nothing can be claimed as finality until an official release is made.

AerCap can only hypothesize while Airbus has much to prove in terms of the ability to keep up their word to meet production rates; and ensure maintenance of the demand- supply chain. Their top position in the aircraft manufacturing industry could be in question. Even though Airbus raked up the orders at the Air Show, the move to ramp up production has many stress tests to endure before the critics can rest assured about the correctness of their plans. If everything lines up and all suppliers agree to the conditions that Airbus will list, the plan can proceed without hiccups, but we must watch and wait.