Airbus looks past supplier woes to future output hike

ZHUHAI, China Wed Nov 14, 2012 6:59am IST

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ZHUHAI, China (Reuters) - Airbus EAD.PA has begun studying the feasibility of increasing production later this decade to keep up with anticipated demand, even as it keeps a check on short-term output plans due to worries over its suppliers, a senior company executive said.

The European planemaker is in the midst of lifting production of its best-selling A320 single-aisle airplanes to a record 42 a month, even as the aerospace industry adjusts to demands for fuel savings by revamping its most popular models.

Earlier this year it was forced to postpone plans to aim for 44 a month amid growing concerns over the health of its supply chain. Airbus said last week it was also increasing buffer stocks of components to head off any supply disruption.

Higher output is crucial to clearing a backlog of up to seven years of production for the world's largest jetliner maker and its U.S. rival, Boeing (BA.N), following bumper sales of new fuel-efficient models such as the A320neo and Boeing 737 MAX.

"The first available delivery slots in reasonable quantities are in 2019, but none of this is set in stone," Laurence Barron, president of Airbus China, told Reuters.

"We have talked a lot about increasing production rates to 42 (a month). I don't think we will go further than that for the short term because the supply chain is under pressure, but in the longer term we are thinking about what, at the end of the decade, is an appropriate production rate."

Although the date may seem far off, the prospect of eventual increases in supply can have a bearing much sooner on sales battles between Airbus, Boeing and new entrants like Canada and China because jets are usually sold several years ahead.

Any decision to change output would need to be taken 18 months before deliveries because of industrial lead times.

The rush of demand for upgraded versions of the backbone of many airline fleets has stretched industry order backlogs to unprecedented levels, providing a stable production outlook but raising fears that customers may grow impatient or pick rivals.

"We are studying the ideal rate and then the supply chain: whether it can keep going to the same quality and standards," Barron said in an interview at the China Airshow on Tuesday.

"I don't have an answer to that but if, by the end of the decade, we can envisage higher production rates then that will alleviate the fact that at the moment we have sold a lot."

"With a higher rate you can burn off the backlog more quickly and supply the market more quickly. It is something I know is being studied quite carefully," he said.

Boeing has also expressed concerns that its undelivered order backlog of 737s needs to be whittled down more quickly.

PLANNING CYCLES

So far, Chinese airlines have been relatively cautious in joining a buying spree, led by other Asian airlines, worth hundreds of billions of dollars for the new models.

Analysts say helping China's airlines jump on the industry bandwagon poses particular difficulties because of its adherence to a system of 5-year plans, a timespan that is increasingly seen as mismatched with the aerospace industry's long cycles.

China's 12th five-year plan runs until 2015.

Leasing companies, which tend to bag early delivery slots for new models, may be needed to step into the breach to provide aircraft for rental to meet China's short-term needs.

The dilemma was highlighted when, since it was launched in December 2010, orders for the A320neo family topped the 1,500 mark, with a 40-plane purchase from Mexico on Tuesday.

Boeing has sold more than 900 competing 737 MAX aircraft.

Only a fraction of those sales have gone to China, which faces the prospect of relying on an older generation of jets as it overtakes the United States to become the world's busiest domestic aviation market in the next two decades.

Besides its main European assembly plants in France and Germany, EADS EAD.PA subsidiary Airbus has assembled A320-family aircraft in Tianjin, northern China, since 2009.

Airbus delivered its 100th plane from the Chinese assembly line last month. A contract for a total of 284 aircraft runs until the end of the first quarter of 2016.

Production there is due to peak at four aircraft a month from the end of this year or early next year, Barron said.

Asked whether the Tianjin line would continue at the same pace under a new production agreement, Barron said this had yet to be decided and negotiators aimed for agreement by mid-2013. Airbus and China signed a broad framework deal in September.

(Editing by Paul Tait)

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