19 February 2019 - Business Case for NMA Remains Weak

News Several industry observers remain uncertain as to whether Boeing will be able to successfully launch the 797 to compete effectively against the A321LR and potential A322 competition in the middle of the market. In a recent story, Jon Ostrower of The Air Current indicated that Rolls Royce may be willing to share aftermarket revenues on future engine programs with Boeing, a break with tradition. That could shift aftermarket revenues and potentially provide the additional revenue Boeing needs to pursue the airplane. But a fundamental problem remains. Analysis A wide-body aircraft tends to cost more than a narrow-body aircraft, and have higher seat-mile costs based on its larger design and increased space for an additional aisle that is not present in a single-aisle aircraft. The result is that the aircraft must have a more dramatic cost improvement than a typical increment over a prior generation aircraft, as the twin-aisle 797 would compete against a single-aisle A321/A322. The second element is that Boeing will need to cut production costs to meet similar acquisition costs per seat for its customers, which means even more pressure on an already stretched supply chain. Insight The go-no go decision at Boeing will hinge on a number of factors. One is the aftermarket and growth of Boeing services. Boeing would love nothing better than to provide cradle to grave service for its new aircraft, but for airlines with existing and entrenched mechanics unions, this may not be feasible. Obtaining additional services revenue appears critical to the potential success of the program. A second is cost and the level of vertical integration that Boeing can incorporate in its supply chain. From building almost everything internally at the outset of the jet age to now outsourcing components to a global supply chain, the pendulum appears to be swinging back from the extreme towards the center. How far this can go, and how cost-effectively Boeing can produce the aircraft, will be key factors in their business case. But today, suppliers continue to earn higher margins than Boeing, which will likely lead to an additional round of Partnering for Success efforts focused on cost-reduction. A third is the degree to which Airbus has already locked up the 757 replacement market with the A321neo and A321LR, which are widely outselling the 737-10 in the marketplace. It would not be difficult for Airbus to launch an even larger narrow-body, with likely lower capital costs and lower seat-mile costs than the 797 quite rapidly, perhaps even beating the 797 into production. The likely competitive reaction will be a key factor in Airbus decision process. With the A321LR and A330-800 already in production and competitively priced, Boeing has scant room for high margins with a new aircraft, which will need to be aggressively priced to meet the price targets airlines have indicated will be necessary. With a decision widely expected this year now being delayed until next year by Boeing, something appears to be clearly missing in their business case. Demand appears to be there, given the success of the A321 and continued growth in low-cost, narrow-body transatlantic services. Can a larger twin-aisle with similar capacity effectively compete economically. That is the real challenge for Boeing, which will be difficult to achieve. The market may simple not be as robust as Boeing expected for the NMA, since existing modern and cost-effective alternatives exist from the competition, surrounding its market position. We concur with industry observers that this will be a tough call for Boeing. The key question for us is to what degree Boeing’s future 737 replacement, the FSA or future small aircraft, can have in common with a 797. Product line synergies are important, and in a new era of cost reduction and heavy competition, Boeing must get its production processes absolutely right to replace its best selling airplane. Can the 797 be the learning curve for the FSA. If so, the business case might be justifiable. But without synergies to future programs, the business case looks tenuous, and a potential loss-leader to ensure the competition doesn't own that market.

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