Insight 1 July 2020: How Boeing Can Recapture Market Leadership

News: Airbus has captured commercial market leadership from Boeing. The MAX crisis exacerbated Boeing’s issues in the narrow-body market, and the failure of the Embraer acquisition left Boeing without a competitor to the A220, which is popular as airlines emerge from the pandemic as an exceptionally efficient aircraft. If we look forward, new firm orders booked as of 1 June 2020 clearly favor Airbus with 7,665 over Boeing with 4,744. That is a clear indication that the future belongs to Airbus, which has taken a massive lead in the narrow-body market, 6,770 to 3,776. With Norwegian’s cancellation of 97 orders (92 MAX and 5 787) and BOC Aviation’s cancellation of 30 MAX, the gap will likely continue to widen. Boeing still has a lead in wide-body orders, 968 to 895, with the difference primarily being freighter aircraft, a segment that Boeing dominates. The MAX is reeling after an extended safety grounding and negative publicity, with the potential for passenger boycotts. But as a relatively new program, Boeing can’t simply abandon it in the near term, particularly when the next generation of engine technology, which tends to drive efficiency for aircraft, won’t emerge until about 2030. Until then, Boeing will likely be stuck in second place, a position in which they are both unfamiliar and uncomfortable. Analysis: Boeing needs a game-changer to flip its position back to a winning hand versus Airbus. Their last effort at a game-changing project, the 787, incurred massive cost overruns, a three-year delay, and a grounding for safety reasons before the aircraft finally became a commercial success. The result, however, is that the program will likely never turn profitable despite strong sales. Boeing now needs a 787-type innovation in the narrow-body market. Whether this entails new aerodynamics such as a lifting body aircraft with engines atop the fuselage, or another style of aircraft, we believe Boeing requires another “moon shot” to recapture market leadership. It is now quite clear that the limitations of sticking with a 1960s design on the MAX went too far, and that Boeing needs an all-new aircraft. Environmental issues and efficiency require new materials, new aerodynamics, hybrid propulsion systems, and new engine technology to meet the carbon-neutral goals that are forthcoming from governments worldwide. Boeing certainly has the capabilities to innovate across the board in all of those areas. The question is whether they are willing to essentially “bet the company” to do it. Insight: A me-too airplane from Boeing that utilizes today’s configuration and layout is unlikely to differentiate itself adequately from Airbus offerings to recapture market share. Once ceded to a competitor, it costs about 10 times more to regain that market share than to maintain it, and the safety issues with the MAX cost Boeing about 10% of the narrow-body market. Regaining it will require “moon shot” technological innovation. Boeing has the capabilities within the company to achieve its objectives. The question is now if management has the financial wherewithal and confidence it the engineering and manufacturing teams to successfully pull it off. Boeing’s recent track record hasn’t been good. The MAX failure, the 787 development debacle, a late 777X derivative, and a KC-46 tanker that doesn’t meet requirements represent the last four programs Boeing has brought to market. Each of them has been over-budget and behind schedule. There is clearly something wrong with the new aircraft development process at Boeing. Contrast that with Embraer, which delivered 13 new models in 13 years, all reasonably on-time and on-budget between commercial and business jets. Perhaps there is something to the specialization at Embraer on individual areas, with engineers specializing in landing gear or avionics or wings working on multiple airplane programs to leverage their experience rather than a program by program organization. To regain market leadership, Boeing needs to do two things. First, fix its product development process to ensure programs are on-time and on-budget, and second, to innovate beyond what its competitor expects. But leaders who come from a private equity background aren’t accustomed to “bet the company” decisions and taking risks. Boeing needs innovation to regain market leadership. The question now is will they recognize that fact and can they do what it takes to achieve a breakthrough new design.

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