In Part 2, we go up a segment to 101-200 sets, looking list prices and seat count.  This segment is where most commercial aircraft are sold, with the 150-180 seat sub-segment being the sweet spot. Up until June this year, the segment has been the exclusive preserve of the big duopoly. This segment has been the traditional play ground for Airbus and Boeing; it is where their “bread & butter” models compete.

However, in June when SWISS takes delivery of their first CS100, the playground grows.  As the chart illustrates, the segment could have been defined differently – we might have started at 120 seats.  Traditionally there was a “no man’s land” between regional jets and mainline jets.  Typically the 100 seat marker was the watershed.  The arrival of the CSeries and E2 shake things up.  The CSeries is buying its way in at steep discounts because it is truly a new aircraft.  The E2 is a refresh and will build on a customer base with over 1,000 E-Jets in service.  Embraer may find though, that this foundation does not protect it from also offering aggressive pricing.  As Bombardier and Embraer enter the mainline arena, they are about to face a considerably nastier market environment.

2016-05-12_10-17-16As before, we will start from the left side of the chart and work our way to the right.

Notice the CS100 and the list price difference between it and the E-Jets.  Clearly Bombardier is not going to get anywhere near that list price.  Not only will Embraer ensure this, but when an airline like Delta buys 50, pricing drops like a stone.  Using the recent United/Boeing deal as a guide, Bombardier likely priced the Delta deal at over 60% discount from list.  If rumors are close, United paid ~$175,000 per seat for the 737-700s.  We suspect Delta paid ~$195,000 per seat for the CS100.  Of the two, Delta got the better deal.

One source we spoke with suggested that a rule of thumb for this segment is ~$250,000 per seat as market pricing.  If that is a fair guide, then imagine the pressure on Bombardier and Embraer. These firms do not have as broad a range of models like Airbus and Boeing over which to offset aggressive pricing.  The guidance suggests that Embraer will also likely be offering well over 50% off list on the E2.  At ~$200,000 per seat for an E-195E2, this would be 65% off list price.  This is not a playground for the faint of heart.

The next area to focus on is the ~130 seat area.  We have the CS300 intruding on the low end Airbus and Boeing models.   While Airbus and Boeing have not been selling their competing models as much as in the past, the CS300 has crossed a tripwire.  Airbus has been vociferous competing to keep Bombardier out and, with the United deal, Boeing clearly stopped ignoring Bombardier.  The challenge here for all three OEMs is the trade-off between pricing power for the old guard facing off against latest technology from the upstart.  Airbus and Boeing can make Bombardier bleed with every order; but their only tool is price.  They cannot make their aircraft competitive in any other way – the CS300 still has better economics than the A319neo and 7MAX.

Which is why the Delta order was so important and influential.  If Bombardier is prepared to bleed, and indications are that it is (using taxpayer’s blood capital), then Airbus and Boeing may have to move out of the 130 seat segment. This move will not come easily and it essentially concedes space to competitors (Bombardier and Embraer) that they do not want to succeed.  It may be messy for a while, but we think Airbus and Boeing are better off focusing on the 170+ seat segment where they will be able to once again focus on each other.  Besides, that is where the market is bigger and more profitable.

At the 150 seat segment we have a Boeing facing its first segment conundrum .  Airbus has made a killing with the A320 and the A320neo.  It is the right size for lots of airlines.  Airlines can buy the 162-seat 737, but will only pay the price of the 150-seat A320.  Boeing has to literally give away 12 seats to win, and that does not make sense.  Hence the MAX7.5.  When one considers how long Boeing has been facing off against the A320 and giving away those 12 seats, one must ask why did it take so long to react with a equivalent sized aircraft?  The MAX7.5, if it is launched, will compete with the A320neo and also serve as a convenient additional hurdle to Bombardier.

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In offering the MAX7.5, it is clear the MAX7 as we know it now will go away.  Once this happens, Airbus is likely to quietly drop the A319 as well (except as an ACJ319).  This is why we believe the big duopoly will leave the <130 seat segment to Bombardier and Embraer.  Boeing will still market and sell the 162-seat MAX8 as this is by far the most popular 737MAX.  Airbus will find the MAX7.5 annoying to compete with and will probably have to find creative ways to get the A320neo to compete against both Boeing MAX7 and MAX8 models.

Next we look at the segment at 180 to 200 seats.  Airbus has done very well with its A321, while Boeing’s -900ER and MAX9 have had much less success.  This is Boeing’s second segment conundrum. Because Boeing is further down the development cost curve on the 737 than Airbus is on the A320, one might assume Boeing can afford to price aggressively.  But even if that is true, airlines and lessors have still selected the A321 more frequently.  The Boeing 737-900 and MAX9 have operational constraints because it is lower to the ground.  This hampers rotation and the risk of a tail strike, which in turn means operating at lighter loads for a given runway.   Unfortunately for Boeing, the MAX8-200 serves to further undermine its MAX9.

We have heard reports that indicate Boeing is considering a MAX10 as a solution to the A321.  This, apparently, could be an aircraft with higher landing gear, a new wing and, potentially, a bigger engine. Yes, this could even mean the GTF.  We expect CFM to fight P&W hard over this, which is exactly what Boeing will want. If Boeing does offer a MAX10, it is likely to beat the A321LR for range and payload because Boeing will ensure it has this capability.  Nobody is talking publicly about a MAX10 – yet. But we are certain Boeing is developing an answer to the A321neo and LR.  That answer must eclipse the A321 and needs to be available around 2019 or 2020 to thwart Airbus.  This small aerospace battle will be one of the most fascinating to watch.

Of the OEMs in the chart, Boeing is the one under most pressure at present.  It is being squeezed from below by Bombardier and at the top by Airbus.  The potential MAX7.5 and MAX10 could be the reactions to solve its challenges.  Given the importance of this segment to Boeing,  don’t underestimate its focus on preserving its market and revenue stream.  The next move here is Boeing’s.  Once that move is made, it will signal where its focus lies.  Since we know a little about the MAX7.5 and think it is a low risk and cost compromise, (which is why word has leaked first) we expect this to not be the primary focus.

Our thinking is a MAX10-type solution will be far more important because it could provide a guide of how Boeing plans to recapture the 757 market, slows A321 sales and closes a gap between the MAX9 and 787-8. Over 1,000 757s were sold and Boeing cannot appreciate the A321neo and A321LR replacing those 757s.  As of 1Q16, 892 757s are still flying, plus 1,229 A321s.  Add another 429 737-900s and -900ERs.  If the market could be over 2,000 then this is a serious potential.  By way of comparison, the total 737-700s and A319s in service as of 1Q16 was 2,516.  On the lower side Boeing faces three competitors and on the upper side it faces one.  Boeing will not capture 50% of the lower sizes, but could capture more than 50% of the upper size.  It makes more sense to focus on the upper size of this segment.  After all, there are also 77 767-200s out there that can must be replaced.  The 180+ seat market beckons far more brightly.

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Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.

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