The Great Game continues

Our title is a play on the title of John Newhouse's "The Sporty Game." If you have not read it, we can recommend it for the fascinating history of the industry. Today we want to share some thoughts on how the Great Game continues. Let's look at the latest chapter in the game, focusing on the putative A220-500. Bank of America put out a note in which they suggested the forthcoming Paris Air Show might see the launch of the A220-500. Today Reuters has a story in which Airbus debunks this idea. There has been chatter about this aircraft for years. We have also opined (Bloomberg A220-500) the value it might offer Airbus. Airbus CEO Guillaume Faury acknowledged that a stretched A220 makes perfect sense, “but we don’t want to be too early.” Previously, he is quoted as saying: “The A220-500 would be a very good version of the A220, but we are not there. We’re not in the altitude cruise." Air France's Ben Smith has openly asked for it. Airbus COO Christian Scherer has stated in our presence, "It's not a matter of if, but when. From a strategy point of view, Airbus has signaled intent. To whom is the signal being sent? To Boeing. In game theory, a signaling strategy does not directly compel or deter an opponent. Rather it attempts to demonstrate a potential action that has negative consequences for the opponent. In this case, the Airbus signal might force Boeing to react. Any reaction from Boeing will cost serious money, whereas Airbus can stretch the A220-300 for far less. If you will, a game of chicken or poker, to be more polite. An A220-500 would strike at the MAX8 and does so effectively on paper. The A220-500, as a stretch, benefits from having more capabilities at marginal capital costs and, equally, shrinks take away benefits. Airbus knows all about this. Its core A320 was shrunk to the A319 (sort of successful) and then again to the A318 (failure). Airbus stretched the A340 to the -500 (failure) and -600 (basically a failure). After a slow start, the A321 stretch from the A320 has become the hottest single-aisle on the market. Boeing also knows the shrink/stretch process. The 737 has seen an incredible number of variants. Airbus is signaling now because the A320 family is firmly moving toward the A321 - over 180 seats from its original focus of 150 seats. Boeing is also moving up. The MAX9 and MAX10 are the future of the 737 until it is replaced. And this is where Boeing has a soft spot. The 737 has to be replaced at some point. The A321 can be tweaked with a new wing and better engines. As a foundation, the A321 offers options. Boeing's MAX10 is probably as far as that design can go and slip under grandfather certification. So Airbus' game wants to pressure Boeing to commit to a new single-aisle program. And sooner is better for Airbus. Airbus can stretch the A220 and offer a family from 100-170 seats. Its A321 goes from 180 up to 240 seats. Forcing Boeing to move serves Airbus because the amount both have to invest is vastly different. If Boeing moves forward, Airbus, under less financial stress, will disrupt market pricing. Moreover, Boeing is recovering from the MAX crisis and the 787 program bumps. Pressing on Boeing's single-aisle sore point serves Airbus. The more pressure, the better. But time is a factor and works in Boeing's favor. The more time Boeing has to stabilize its MAX and 787 programs, the better. We have seen a surge in 787-10 orders. Also, orders for the MAX10. Each delivery means boosted financial strength for Boeing. So Airbus keeps chipping away by signaling because time is not as friendly for them. With recovered financial muscle, Boeing will devote resources to its R&D and develop the 737 replacement. For Airbus, the fear is that this model eclipses the A220 and the A321. Boeing is likely to focus on the 170 to 250-seat market. That leaves the A220 less attractive, and the A321 probably outclassed. Sure Airbus can re-wing the A321 (remember the chatter about an A322?) and use next-generation engines. But that will be less attractive than a new airplane when a buyer is considering a 20-year decision. It helps to know some game theory to understand better what the decision-makers at both OEMs face. There are tradeoffs no matter what they do. No move comes with a consequence. Airbus may have the upper hand - but that could be fleeting. Boeing has hit serious bumps with the MAX and 787. The 777X is a concern, and the KC-46 has been poorly executed. Coming rapidly compounded the impact, and Boeing looks the weaker of the two OEMs. We would argue this is precisely when Airbus should be careful. Boeing has been in the business for a century. It didn't get to be that way without developing a strong engineering culture. Sure, Boeing's overall culture was negatively impacted by senior management decisions focusing on "returning shareholder value." But Boeing is so compelling that Wall Street will bet on the company and provide capital. We remember Fabrice Brégier, Airbus' previous CEO, commenting on Boeing's fumbles. He noted MAX pricing concerns and that a duopoly is a market that does not leave Airbus immune. He understood the game theory implications. Airbus vs. Boeing is a great game. We are privileged to be at the match and enjoy the industry's brightest minds at work. Paris 2023 is, quite possibly, going to be fascinating.

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