In Part 3 of our series on Aircraft List Prices, we focus on the market over 200 seats. This is not as large a market as that viewed in Part 2, but this market is for the very expensive “big iron”. This is the flagships sector.
This is a market also exclusively big duopoly territory. It results in both a cleaner chart and a somewhat easier market to evaluate. The main focus of the chart is between the 250 and 350 seats. More than half of the wide-body aircraft types on offer lie between these two lines.
Once again, starting on the left, the smallest aircraft is the 787-8. This aircraft has been disruptive because it was the first of a generation of high tech, lightweight and highly fuel efficient aircraft, and it offers hub-avoidance capabilities. While the -8 has seen orders slow recently, its larger siblings have seen growing market success. The -9 now outsells the -8, as might be expected with this variant closer to the heart of the market.
The arrival of the 787-8 was an immediate threat to the A330. But for the 787 delays, Airbus should have struggled. Instead, as Boeing had to work through technical challenges, Airbus started to upgrade the A330 to keep it competitive. This was successful, and Airbus sold many A330s while Boeing’s program was delayed.
However, once Boeing got the 787 sorted out and started delivering in quantity, Airbus had to rethink. It was developing its A350 which focuses on the 777 as a competitor. The A330 needed a step change beyond the continuous performance improvements. This essentially meant dusting off the original A350 design, provide updates based on lessons from the A350 and, voila, the A330neo was born.
As the chart demonstrates, Airbus has a price advantage for the A330ceo and neo. While list pricing indicates an increase on the neo versions, Airbus can still provide lessors and airlines with an extremely aggressive price point against the 787. For many airlines, capital cost is the most influential number. The neo offers near 787 type economics but with less technology. Technology means complexity. As we have seen, some airlines have struggled with the 787’s demanding operational requirements. For airlines that want to avoid complexity, the A330 remains a highly attractive solution.
The A330 platform has been very good for Airbus and is the firm’s best selling twin aisle. A senior Airbus executive explained to us that the principal purpose of the A330neo was to provide the market with a solution that worked for customers and at the same time made it more difficult for Boeing to charge a premium for the 787. To some degree this seems to have worked.
On the other hand, Boeing has sold more 787s than Airbus has sold A330s since its introduction in 2004. For the many operators for which 787 complexity represents no concern, the 787 offers a solution with decades of future revenue generation. With lower fuel costs today, the fuel efficiency of the 787 is of lesser importance. But fuel prices are likely to rise over the next 20 years. The light weight and lower MRO costs associated with its advanced skin should result in significant MRO savings.
Moreover, the 787 does offer a unique tool to act as a “hub-buster” on a vast scale. Because of its range, the 787 can serve a large number of markets from home bases. One only has to look at ANA and JAL in Japan and British Airways in the UK. These three airlines have used the 787 to open many new secondary US markets. In the US, United has opened secondary markets in China and started SFO-TLV using 787s. Absent the 787’s range and economics, they probably would have not been able to start those routes with reasonable economics and risk. The 787 is certainly an enabler.
Looking at the 777 vs A350, we now can add the 787-10 to the competition. In the super twin market to date, the 777-300ER has been the benchmark. As the chart shows, the 777X will be a considerable improvement in capacity. The 777X also has a substantial range improvement.
In this segment replacing the 777-200/A340 and early A330s is a big need. As of 1Q16, the target fleet of 15 or more years old looked like this: 52 777-200s, 211 777-200ERs, 31 777-300s, 127 A330s and 101 A340s. 522 aging models is a big market at the pricing these aircraft command. While the A330neo will win a share of these replacements, we would think the 228 Airbus aircraft up for replacement is the best bet. The 787-10 could replace the 294 Boeing aircraft. As 777-300ERs start to retire, the 787-10 could replace many of those too, where the 777X range isn’t needed.
However, Airbus offers operators a choice that Boeing does not. This could muddy the decision process considerably. Airbus offers high tech and medium tech solutions. And both come with common flight decks, which means fast pilot transition times. In this way, Airbus can offer a less sophisticated operator a stepping stone to high tech aircraft. An additional attraction is that the medium tech solution comes at the market leading price point. As one considers this, the clever move to offer the neo becomes more apparent. Boeing’s solutions are higher technology only. Even the 777X is a step change in technology over the current 777. Boeing cannot demand a price premium because, at some point, the Airbus ensures a trade off is priced away.
Only a few years ago, Boeing was showing that its combination of 787s and 777s left Airbus short on offerings. Boeing claimed the A350 could not compete against both Boeing models. It was a great argument. But it also dismissed the A330 way too early. Airbus has shown the A330ceo to be be capable of improvement, year after year. Boeing did not see the neo version as the threat it was. Now we see a market where Airbus and Boeing each have six models – and there is no doubt that Airbus has the lower cost options of offer. The 787 is a superb aircraft, but cannot get the price Boeing wants as long as the A330neo is out there.
The 777X will also be a great aircraft, but has to compete against an equally good A350 that employs high technology. While Boeing claims the 777X eclipses the A350, Airbus holds the opposite view. From a seating standpoint, the real race will be between the 777-8 and A350-1000, and the 777-9, currently a step up in seating, against a stretched A350-1100. The jockeying for market supremacy in the super twin sub-segment will remain fierce. This will be a battle to watch.
The four-engine 747-8 has not generated many takers as a passenger aircraft, and is similar in capacity to the 777-9. It has however a unique niche as a freighter. Unfortunately, the freight market is currently moribund, an an oversupply of used 747-400F aircraft exists. We believe that after the next Air Force One is completed, Boeing may pull the plug on 747 production after a nearly 50 year production run.
Finally there is the A380 – off in a niche that seems a world by itself. Unique in its payload capabilities, the A380 is much maligned. But over time, markets growth is catching up with the aircraft and Airbus has been right to stay the course. We understand there could be tweaks coming that provide customers with ~4-5% improved economics. This is about a half step of what Emirates wants in a neo version, but is achievable without new engines. Airbus has also increased standard seating from 525 to 550 in a four-class configuration. Meanwhile Emirates has introduced a two-class version with over 600 seats.
The A380 customer base is slowly growing, as ANA has decided to try out the aircraft. But what happens to the first batch of A380s come off lease in the next two years? The tweaks we mentioned earlier will be available for retro-fit. That means a large used aircraft with low capital costs per seat, with 550 seats and 4-5% better economics could quickly be available. If the price is right, these aircraft are unlikely to be parked for long. Many airlines cannot resist a real flagship aircraft. Today that aircraft is unquestionably the A380.