737NG and MAX – What is the market telling us?

The 737 is a legendary aircraft, the best seller in commercial aviation to date. Essentially a fifty-year-old design that is still doing yeoman work moving people and cargo. The MAX has stumbled. There is no doubt among those who understand the industry that Boeing will fix the MAX, cover the pain its customers are enduring, and work through the challenges. You don't get to be a one-hundred-year-old company without having the ability to recover from anything. Yes, anything. This MAX stumble was not the first for Boeing. Perhaps the first major challenge for this generation of engineers who previously faced a 787 battery fire as their most serious problems. Earlier engineering generations overcame the 727 crashes, recovered and turned that aircraft into its "best in class" product of its era. This generation can and will recover to save the MAX. So much for the good news. What does the market suggest is happening though? In earlier times, Boeing faced off against Douglas and then McDonnell Douglas. Boeing ignored Airbus until one day, there they were, splitting the market. Boeing's engineers may be as good as the best there are, but Boeing management is not superhuman. Boeing's management has shown itself capable of making mistakes. Although the 737 is a fifty-year-old aircraft program, let's focus on the latest two variants, the NG and the MAX. Here we have the NG orders and deliveries to date. Notice that they do not match exactly. Airlines and lessors may order one thing, but take delivery of another. There are two obvious reasons: order a small variant and pay a lower deposit on a cheaper model, or order is placed and by the time your order starts being made the market has shifted. It is actually a great thing that there is a good amount of time between order placement and delivery because this gives Boeing and its customer's flexibility. Even though the variants don't match closely the slices look about the same size. What we see is that the initial interest in the -700 grew between orders and deliveries. This suggests that the market for a smaller (~130-seat) model was there. The largest -700 customer has been Southwest, and the airline took delivery of many -700s from the second-hand market long after it stopped buying the -700 as a new delivery. This is important because Southwest is the most important 737 customer and that makes it highly influential. For example, Southwest helped define and perhaps limit the way the NG flight deck appears. This decision was driven by wanting to ensure its pilots could quickly adapt to the NG from earlier models. A subtle but crucial item to store in your mind because these decisions have far-reaching ramifications. Boeing also wants minimal changes because it wants any variant to be able to make use of the original certification as this saves a lot of money and time. These decisions demonstrate more than mere financial impacts. The industry is one of making deliberate steps because of the overriding issue of safety. Operational safety is the cornerstone of commercial aviation - literally, every decision and tradeoff is limited and influenced by that. The goal is, always, 100% safety. And that goal is only achieved by having all the necessary information to hand. The problem is, of course, that nobody ever has all the information immediately. No flight test program gets to every corner of the flight envelope because they cannot cover ever weather type in every circumstance. Only airline operations achieve this- and sometimes these operations uncover a circumstance that wasn't expected. The lessons learned from that experience can be incorporated into the program. Ideally, the lessons learned come about without any fatalities. Ideally, but not always. Which brings us to the MAX. We are of the view that the MAX was born of something like a shotgun marriage. In 2011 when Boeing was pitching for American's 400 single-aisle order, their first offer was the NG. The Boeing sales team (read management) felt their NG was still a better performer than the Airbus A320neo. They were wrong, actually very wrong. Boeing nearly lost that order. Boeing recovered by offering the MAX - a design and definition that took a year to produce. American bought an undefined and unspecified airplane. Al they knew was that the MAX was also going to offer 15% better fuel burn and that it would carry the same payload a little further than its -800s in service. On that basis of that promise, American bought more -800s and 130 MAXs. Once American gave the program the necessary crucial first order, other big names stepped up to also buy the MAX. Airlines and lessors were equally part of this shotgun marriage because they did not want Airbus to step forward unchallenged with A320neo - airlines and lessors need the duopoly to be about in balance. So MAX has a clear but dubious parentage. The program is new, by 737 standards, but we have some data that points us in a direction even at this early stage. The MAX family already shows a quite different order pattern to the NG. The core model for both families is the -800/-8. But we see the move has been from 79% of orders to 52%. The MAX number will change, but let's work with where we are now. The MAX order pattern shows a distinct switch from smaller to lager models. The -7 has nowhere near the level of interest the -700 saw. It is true a large number of undefined orders could increase -7 interest, but the odds are the undefined interest moves towards larger models. Another interesting item is that the -9 interest is also low compared to the -900. The -10 has far more support. Both the -9 and -10 are trailing the A321 competitor by a large margin. Although the MAX has substantial support for these large models, in market terms this is small and focused on a few customers. In terms of deliveries, we see that the MAX8 has had the market to itself. The MAX9 is just coming to market now. Clearly, once deliveries start again, the chart will also change. But it seems that the market has sent some signals we can interpret. Boeing's MAX is probably the end of the 737 line. The MAX8 is the optimal model and a worthy replacement for the very successful -800. The MAX9 and MAX10 will surpass the -900, but that is not the metric to use as a measure of success. These larger MAX models are doing poorly compared to their competitor. Even as Boeing works to get the MAX program back on track, it is crucial for Boeing to push forward with the 797 to solve the competitor problems it faces. Specifically the A321neo and A321LR. Fixing MAX is, at best, a band-aid. An important one given the financial benefits it brings. But still a band-aid.

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