Airbus released its Global Market Forecast a few weeks ago.  And, true to form, trying to compare it with Boeing’s Commercial Market Outlook is not easy. The two firms define the segments differently.  This requires some editing liberty on the part of analysts.

Here’s how the two OEMs define the period from 2012 to 2031.  They have a significant difference in their projections of the total number of aircraft to be delivered, with a nearly 6,000 aircraft difference, primarily in single aisle aircraft.  At $75 million per aircraft, there is a difference of about $450 billion between the two companies’ forecasts.  Who is more accurate is the half a trillion dollar question?

There is an important item to note – Airbus does not report on regional jets under 100 seats whereas Boeing does. Airbus responded “…we focus our results and publications on the markets that we are involved in (≥100 seat aircraft)”.  We assembled our own view on these two outlooks as follows:

Airbus estimates the VLA market (over 400 seats) to be more than twice as large as Boeing, which has been the case since at least 2000.  Airbus believes in the need for the A380 to serve crowded hubs, while Boeing has touted smaller aircraft and route dispersion.   The difference in forecasts to some degree reflects their market intelligence and competitive positioning resulting from those forecasts.

When we adjust the numbers to be comparable, we produced the following table for freighters.  But even then the 9.5% difference is clearly more subtle when you look at the breakdown.  Boeing includes both 777 and 747-8F in the “large freighter” category and the A330 freighter in the other category.  Once again, the forecasts appear to reflect the company’s product lines and competitive positioning within each segment.

Boeing estimates the VLA freighter market 55% bigger than Airbus.  But Airbus sees the smaller freighter market 58% bigger than Boeing estimates.   Perhaps the absence on an A380 freighter is likely why Airbus large freighter market assessment is so much smaller than Boeing’s — or because the 747-8F is doing far better than the 747-8i passenger version, Boeing emphasizes that sector.
In the single aisle category – which is by far the biggest commercial segment (69% of Airbus’ total and 68% of Boeing’s total) – the two OEMs are 19% apart.   They are much closer on the twin aisle segment with only an 11% difference.

Even if the explanations for the differences are definitional, the overall market difference remains more than 20% apart, which is substantial.  The differences are substantial when one realizes that Airbus estimates the market at $4 trillion and this is the lower of the two estimates.  Removing the regional jet component from Boeing’s numbers the difference shrinks to 11.9% in airplane numbers – which is still substantial.

The question is whether the forecasts are colored by the product lines of each OEM, or whether the product lines have been developed from different forecasting methodologies and assumptions about the marketplace.  Is Airbus gung ho on the 400+ seat market because their A380 is showing strength in the market and they foresee good times, whereas Boeing’s 747-8i is struggling and therefore they are of the view that market is more limited?

Airbus’ VLA-passenger forecast of 1,330 requires orders of 67 per year (747-8i and A380). In the Rolls-Royce-Pratt & Whitney lawsuit, Rolls’ filing revealed Airbus expects to deliver ~650 A380s over 20 years. That is half the amount needed to match its forecast, but matches Airbus’ contention that it will capture 50% of the VLA forecast.  But Airbus does make a compelling case that we are likely to see continued growth in air travel between mega cities.  Currently there are 42 cities (i.e. New York, Tokyo, London, Paris, Frankfurt, etc.) that handle more than 10,000 long haul passengers per day and Airbus expects over 90 by 2031. The A380 is right in the sweet spot to serve such traffic at airports with fixed slots.

In the twin aisle market (250 and 400 seats) both OEMs are closer in market estimates.  This is the area where the A330 and A350 battle the 787 and 777.  For most airlines these aircraft are their primary long range tools and both OEMs make a lot of money in the segment.  Airbus has a highly developed product in the A330 which is delivering better results than probably either OEM expected.  A350 development continues apace and it appears Boeing is biding its time on a 777 update.  But, as experience has shown, (most recently neo vs MAX) dithering on development can bite.  Despite unsettling comments from airlines in the Gulf, Cathay voted for the A350 over waiting for updated 777.  The 11% difference between forecasts for this segment, while relatively small, appears to indicate both OEMs will continue to fight over every order.

The backup information both firms provide does not give an indication of precisely how they develop their forecasts.  Clearly the methodologies are not going to be shared publicly. The table below is a guide we find somewhat comparable. The table on the left comes from Boeing while the two charts on the right are from Airbus.  Both make it clear the future lies in the Asia market.  Boeing shows its results for estimating airplanes by market – but Airbus does not.

Airbus sees a global passenger fleet growth between 2012 and 2031 at 109% compared to Boeing’s 100%.  But Airbus says the 2011 passenger fleet was 15,560 while Boeing says it was 19,890 – so they differ by 28% before they even get to 2012.  Perhaps this is because Boeing includes regional jets in its analysis, and Airbus does not. But the net result is that differing by 21% in 20 years’ time brings them closer rather than farther apart.

Airbus says that 2/3 of the passenger fleet flying today will need to be replaced by 2031 (10,350 aircraft out of the 15,560 in service). Boeing says that 70% of the fleet will be replaced by 2031 (14,110 out of 19,890 in service today).

Even as they disagree on definitions and therefore overall numbers, there are a few things they agree on:

• Emerging markets are where the growth will be
• Growing middle class drives travel demand
  • Particularly in Asia
• Fuel costs are manageable
  • Boeing sees rising supplies
  • Both OEMs cite rising efficiency of new airplanes
• The biggest growth segment will be single aisle fleets at more than two-thirds  of orders
  • This will be driven by LCC growth
  • Boeing believes LCCs will account for 19% market share by 2031

John Newhouse, of the New Yorker magazine, in his 1982 book The Sporty Game, described the “bet the company” decisions involved in developing commercial aircraft.  In recent years, with the difficulties with the A380 and 787, his analyses once again resonated through the industry.  As we look at the industry 30 years later, and the game of leapfrog between Boeing and Airbus, the decisions of that era are long past, but decisions being made today will dramatically impact the future of the industry.

With the Boeing 787 now in service, and the backlog of aircraft in Everett that require rework slowly starting to show improvement, we can conclude that the 787 program has turned the corner.  Now, the 787-10 and 777-X are the next targets as Boeing readies its 737 Max series to compete with the A320 neo family.  But Boeing, which had favorable reactions to information on both new wide-body models after discussion with airlines, appears to be waffling from previous, unofficial commitments to launch these programs in 2012, after the change in CEOs at Boeing Commercial Aircraft.  Former CEO Jim Albaugh appeared ready to take recommendations to the Board of Directors by year-end. His successor, Ray Conner, will only say the recommendation will go to the Board when it’s “ready,” but still vows an EIS by the end of the decade.

With two new models that could bracket the A350XWB in the marketplace, industry pundits are speculating on why Boeing appears to be nebulous.

Has Boeing Lost its Edge?
Apparently, Boeing is now undecided more than ever before whether a major make-over In the form of  the 777X is the best course or a minor makeover of the 777-300ER will be as good as the A350-1000. From media reports, and inference from Conner’s own statement, a recommendation won’t be going to the board for approval in 2012.

Boeing is apparently still considering different alternatives for the 777 replacement aircraft, including (from our sourcing) an all new airplane in addition to the current proposal with new engines, a new composite wing, and aluminum-lithium alloys replacing the current aluminum fuselage.  Boeing’s customers, in the meantime, are clamoring for a new aircraft sooner, rather than later. We believe that an all-new aircraft, rather than a re-engining and major overhaul, may be needed to compete effectively with the new technology A350XWB.
We believe the market has begun to agree, with Cathay Pacific, a 777-300ER operator ordering 26 A350-1000 models. Reaction in the industry to Boeing’s  indecision has been negative, including some very frank comments by Tim Clark at Emirates.

Our perception is that Boeing appears to be stuck in a risk-averse mode, and by failing to execute its original product development strategy has ceded market leadership in key segments to Airbus, despite having them “on the ropes” just a few years ago.

Airbus has made the “leapfrog” investment in A350XWB, and will have a far more economical and superior product than today’s 777. Even Boeing’s own analysis concludes the A350-1000 has much better trip costs.

Boeing needs to rapidly have a competitive answer, having lost a key customer to the competition, but appears to have its finger in the air trying to figure out which way the winds are blowing. The delay in the 777-X and 787-10 launch, both of which are still under consideration at Boeing, indicates that some second thoughts about whether the new model will eclipse the competition have arisen, and whether the proposed offering is differentiated enough to find long-term market success.

Our independent economic analysis of wide body models, as shown in the chart below, illustrates the need for 777-X, as 787 and A350XWB are in a different class of economic performance, largely because of the lower weight of their composite structure designs.

When two major customers question whether the company has confidence enough in a new design to launch it, and likes what they’ve already been shown enough to place an order, it begs the question of Boeing’s confidence in its ability to deliver on multiple programs.  With a shortage in engineering talent, some as a result of previous downturns and employees lay-offs, can Boeing rebound and handle multiple developments at once? Has the 737 Max, which will be a tough development to meet its design goals, taken top priority? Has the experience of robbing the 747-8 development team to support the 787 exposed a resource constraint forcing management into a more risk-averse position?

What’s Gone Wrong in Seattle
The failures can be traced to senior leadership and Boeing’s board, which has been exceptionally risk averse and dramatically cut spending on product development.  When Alan Mulally wanted the 787 program, the board refused to fund the program internally as it had in the past, and he was forced to fundamentally change Boeing’s strategy to include risk-sharing from suppliers to get the program approved.  Unfortunately, we now know how an initial risk-shared development and an engineering team ill-equipped to coordinate such efforts led to a three and a half year delay, and a financial disaster for the company.  While cash flow is starting to turn, program profitability is still some years away for the 787, and the order book continues to languish below its initial peak prior to cancellations due to program delays.  With late deliveries, Boeing is continuing to pay for the recalcitrance of its risk averse board in penalties to airline customers still waiting for aircraft that should have been delivered three years ago.

Has Boeing learned a lesson, and will they make the investment necessary to develop these new airplanes internally, as they know how to do, or are Boeing financials such that it may not be able to afford new development, particularly in light of forthcoming defense cuts that will impact the military side of the business.  We have previously commented on how the McDonnell Douglas acquisition changed the culture of the organization, and it appears that the defense business may once again be pulling down opportunities to leapfrog their competitors commercially.

Reacting to Competitors is Not Market Leadership
Boeing management today appears reactive rather than pro-active, as demonstrated by the launch of the 737 Max.  Jim Albaugh, former CEO of Boeing Commercial, was leaning towards an all new narrow-body, for obvious reasons, as the 737 fuselage and basic design was derived from the 707 program in the 1950s.

The 737 Max was launched quickly, as an emergency reaction to the American Airlines decision to order Airbus A320neo aircraft rather than the 737NG.  American has been a key Boeing customer for many years, and is also an existing 737-800 customer.  That order was not simply a wake-up call, but a nuclear bomb.  Boeing wasn’t ready to offer their customers what they needed, and Airbus took advantage of its more recent design to press a short-term advantage in the market rather than launch its own new aircraft, since after the A380, A400M and A340-500/600 expenditures, the company was suffering cash flow issues.

The 737 has been a venerable airplane for Boeing, and remains the best selling model in history.  But introduced in 1967 with low bypass cigar shaped engines, the 737 lacks the ground clearance necessary for today’s new technology engines with larger fan sizes.  The difference between the 78 and 81 inch fan engines offered on neo and 69 inch fan on Max is significant to engine performance.  Even the 737 classic series needed to flatten the bottom of the nacelle of the CFM-56 to fit, and the 7 inch cabin width differential of the A320 was providing a competitive advantage in seat size and aisles.  While the NG series refresh in the late 1990s kept the aircraft competitive and slightly better economically than A320, Boeing was looking squarely at their competition introducing an A320 replacement by 2020, and focused on a new aircraft to match.

When Airbus moved more quickly to re-engine the A320, recognizing the threat of the Bombardier CSeries, Boeing was left without a competitive offering in the narrow-body space.  Forced to scramble to win a portion of the American order, Boeing rapidly launched the 737Max, with claims of economic equivalency to the A320neo family.  But given the dated design of the 737, it will require many more changes than the A320neo required to reach equivalent performance levels because of engine size restrictions, the need to lengthen landing gear, and aerodynamic improvement required to optimize the new configuration. As a result, it will be more expensive to develop than A320neo, which is 95% parts compatible with the current A320 – and Airbus will aggressively compete on price – as Boeing management has complained about this year.  Boo-hoo, that’s called competition.

Leadership Lost
With the 787 issues behind it, Boeing appears to be poised to regain the leadership position in commercial aircraft deliveries it lost to Airbus over the last decade, but at the risk of a bubble in the narrow-body market with increased production rates. But even this recovery is nowhere near where Boeing should be today.

What Could, and Should Have Been
Let’s examine where Boeing might be if it executed its original strategy and the Board had decided to fund product development at historic rather than the current anemic level back in 2002, and examine whether the strategy developed by Alan Mulally would have succeeded?

The 787 was one of three critical aircraft families that Boeing has identified in their strategic plan early last decade as Yellowstone or Y2, with Y1 being a 737 replacement and Y3 a 777 replacement aircraft.  In 2002, when planners assumed four years from go ahead to entry into service for a new aircraft, the strategy appeared to be as follows:

In 2002, Airbus was wounded.  The A380 was consuming cash at an incredible rate, and Airbus was throwing massive resources at a market niche that Boeing correctly believed to be small niche in a world of route dispersion and hub avoidance.

Had the 787 have been on time, Boeing would have achieved a strategic advantage over Airbus that it could have exploited for decades to come.  Early in the decade, Airbus was struggling with delays to its A380 program, and proposed an A350 make-over of the A330 that airlines and leasing companies flatly rejected as not competitive with 787, causing a trip back to the drawing board.  The company was perfectly positioned to introduce the 787 and then attack the Airbus cash cow, the A320 family.

Had Boeing succeeded in bringing the 787 to market on time and on budget, a 797 would be flying today and making the A320neo family economically obsolete, and forced Airbus to react. With the 797 in place, Boeing would then have turned to the large twin market to replace the aging 777 with a new technology model that would have matched or eclipsed the Airbus A350XWB.

While one can’t cry over spilled milk, Boeing had a strategy to take market leadership in small wide bodies (which it is finally achieving), narrow-bodies (which at best may now be a tie with or slight disadvantage to Airbus, as our independent analysis indicates that Boeing’s claim of 8% better economics is unlikely to match reality, with further threats from Bombardier, COMAC and Irkut forthcoming), and large wide body twins (777 today is not competitive with A350XWB).  One for three might be good in baseball, but not for a company attempting to regain the mantle of industry leadership. In the Sporty Game, leapfrog is essential, and jumping to the same stone isn’t good enough.