Insight: The growing Middle of Market segment and a more unstable duopoly

Several times we have put out notes about the MoM segment. In every case, we noted the strength at Airbus and the weakness at Boeing. The issue is getting worse and, by all appearances, the Boeing situation is getting worse. This is deeply troubling. Not because we have a horse in the race - we don't. The reason for concern is quite simply that for a duopoly to function there has to be a balance. Once a duopoly goes unstable, the risk for both firms rises grows. In the case of Airbus and Boeing, such a growing risk will probably destabilize most of the world's commercial aviation. The pandemic provided clear evidence of the crucial role played by commercial aviation in global economic stability, moving vaccines when it could not move people. Even then, many aircraft were parked and tens of thousands of highly skilled people lost their jobs. No, as we emerge from the pandemic, airlines are struggling to restaff. Commercial aviation is a finely balanced system that suffers shocks regularly. But an unstable duopoly would be a new level of shock not seen before. Why are we focusing on instability and MoM? Let's start with the current market. We have been tracking Airbus and Boeing orders and deliveries since January 2000. The chart shows the percentage of orders that fall into the MoM segment. Over the period the industry average is 15.7% of all orders fall into the MoM segment. For many years the yearly number undershot or overshot this average. But from 2018, the yearly amount has remained above the average. Ergo, the MoM segment has been growing. But, crucially, this is the order number. Orders are not entirely reliable because airlines and lessors order one model and then frequently change their minds and take delivery of another. What do we see from deliveries? Here we see that the segment's growth is rapid. Orders are a guide but deliveries are a fact. In delivery terms, the MoM segment averaged an 18.5% share of all deliveries. And since 2018 it has grown sharply. By our calculations, the MoM segment starting January 2000 through April 2022 is worth 5,752 deliveries. This is a big segment, and as we have shown it is growing rapidly. If we summarize the MoM segment deliveries by OEM we get the following chart. The gap between the two speaks to the source of the instability. The sharp decline for 2022is because we have data through April, not a full year. What we see, though, is as the industry started ordering again last year, Airbus was winning MoM business while Boeing was not. It could be argued that this was because of the MAX grounding and no 787 deliveries. What is the "MoM" aircraft, and what does the raw deliveries data show? The following charts show this. There are several points to make: Boeing was the first OEM to develop MoM aircraft by way of the 757-200 and 767-200. It was a brilliant move. Both aircraft were grown to larger models, the 757-300 was not a success but the 767-300ER became a best-seller. Looking at the number of Boeing models that fit the MoM segment one might think they would continue to dominate it. After 2001 Boeing started to lose ground and has not recovered. In over 20 years Boeing has not closed a growing gap. The data gives Boeing a substantial advantage by including the 787-8 - absent this model, Boeing's numbers would look much worse. It is clear the non-replacement of the 757 cost Boeing tremendous business. The 737-900ER and even MAX9 do not match the A321 in their various forms. It is speculation at this stage, but we are comfortable taking the bet that the MAX10 will not help Boeing as much as the A321XLR will help Airbus. In summary: Boeing has not given the market what it needs or wants in terms of MoM. This has given Airbus leverage in the rapidly growing MoM segment. Airbus has an additional advantage in the A220 enabling it to fend off Embraer at the lower end and fend off Boeing at the upper end with the A321. Airbus has pricing power in two important segments. This is why Airbus is increasing its production rates for these aircraft. More Airbus deliveries ensure a weaker Boeing. A weaker Boeing should scare Boeing stockholders as it does Airbus management, airlines, and lessors. There are reports of MAX pricing at rates that appear far too low. Buying market share is not a strong hand. There are market fears that the MAX10 might not make it through certification by yearend which would lead to significant impacts on the MAX program. MAX7 customers are increasingly concerned with Boeing's focus on the MAX10, possibly delaying MAX7 deliveries. Any further MAX delays hurt customers but damage Boeing's brand, again. We have heard from senior Airbus leaders about fears of an unstable Boeing and Airbus' shortage of delivery slots for the A321. There is rising instability in the MoM segment. This instability is impacting the remainder of the two OEMs' business.

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