Background Our team discussion and near-term narrowbody strategy focusing on Boeing’s next moves. Ernie Arvai, President of AIG characterizes Boeing’s position as such “Boeing is in a precarious position in the narrow-body market. Airbus now has a 60/40 market share in new order backlog and has gained a competitive advantage. The 737 MAX 8 appears to be an economically strong airplane that is right at the sweet spot of the narrow-body market, but the MAX 7 doesn’t compete well with the Airbus A220-300, and the MAX 10 doesn’t offer the flexibility that the Airbus A321neo family provides.” He views gaps in the Boeing product line that need to be filled if Boeing is to regain narrow-body parity with Airbus. Michel Merluzeau, AIR Research Director views Boeing’s path forward as a two-tier strategy over the next few years. In his opinion “Fundamentally, Boeing needs to stabilize the MAX and return to “normal” production volumes as we return to a post-pandemic environment.” He also agrees with Arvai about the MAX8 “t is very true what you say about the MAX 8, and while I’m not going to qualify it as the “heart of the market,” it certainly is from the economic standpoint a very strong product for Boeing.” Merluzeau believes that stabilization of production of the MAX is essential to Boeing’s future strategy since that is going to pay the bills for any future aircraft program. This airplane (the MAX Family) is going to be the future foundation of BCA. Merluzeau also views insurmountable issues with some of the MAXs “At the end of the day, you are right in saying that the bookends of the MAX product lines are in an exposed place, MAX 7 is under significant pressure from the A220 and the MAX 9 and 10 are currently, as we say in French, surclassés (outclassed) by the A321? Merluzeau views a new strategy as imperative: “So the problem that is presented by the MAX market situation needs to translate into a new product strategy. The question is with what money, on what timeline, with what technology access, and with what sales strategy? As a strategist, I’m thinking 10-15 years out and weigh the impact that the current indecisiveness from Boeing will have. So my question to you would be: is a steadfast all MAX approach an option? It seems to me right now that Boeing doesn’t have any choice but to be successful with the MAX.” Arvai is generally in agreement with this point: “I tend to agree that Boeing has very few options right now, primarily because of the share buybacks that failed and took a lot of cash that could have been used to develop new airplanes. Losing $43 billion as the shares fell during the two crises, MAX and then the pandemic, in hindsight could better have been spent on a new product family, but that’s water over the dam. Going forward, Boeing doesn’t have the cash to develop two new airplanes at the same time. But they need one at the small end of the narrowbody market and one at the larger end of the market, so the question becomes one of timing. Given that engine technology drives aircraft economics, and we are looking at the next generation of engine improvements emerging in the 2028-2030 time frame, perhaps that would be a good time for Boeing to look at the option of replacing the MAX.” Timing for a new narrowbody will be critical as well according to Arvai: “The question is whether that is a little too early because the MAX would not have as long a production life as the NG in that situation, or whether the MAX can continue in production for a few years longer to enable Boeing to bring a leapfrog program into play leveraging even more advanced technologies Whether you leapfrog your competitor as a first mover and risk a higher technology competitive response a few years later, or wait to take advantage of emerging technologies, including hybrid propulsion systems that may or may not be ready by 2035 is the strategic risk. The changing technologies in the industry and their uncertainties present an additional challenge to the already difficult timing element in a product development strategy.” Arvai sees the need for two airplanes at Boeing: “There are certainly two airplanes needed in Boeing’s long-term narrow-body strategy. One of them is the NMA, which aimed to better compete with the A321, which has been on and off, and on and off again in recent years. The indecisiveness illustrates how problematic this program is for Boeing, and whether a business case can be made for re-gaining the 757 market share that has been lost to Airbus. The second airplane needed will be a competitor to the A220, which Boeing nearly had with the E195-E2 prior to the Embraer deal falling apart.” Merluzeau does not view the market segmentation similarly: “I think the strategy for Boeing is to go as deep as possible with a good aircraft, and the MAX is a good aircraft to get them into the 2030s. Fundamentally, the deeper you go, the more mature emerging technologies will be, particularly in materials. The new aircraft will benefit tremendously from the transformation of the industrialization of commercial aircraft production according to him: “For Boeing, de-risking the industrial production system is one thing that needs to happen with a new design. Remember what Calhoun said last week, he wants to apply the lessons learned from the eSeries Aircraft/military programs to the commercial side of the house. To de-risk this, you need to migrate what appears to be an attractive and functioning production system from the military side to the commercial side of the business.” Challenges will be significant: “the scalability is not the same, suppliers are not the same, the tools and requirements are not the same, so if you are doing a new high rate narrow-body design you need a production system that is bulletproof from the get-go.” Merluzeau still believes that NMA is not an A321 competitor: “NMA is (was) larger, with stronger range characteristics than the XLR, more like a modern 767 with the right range and systems from the 787, not a me-too A321” What to do first? Going back on the narrowbody topic, he believes that MAX is not a near-term concern: “When you think about the two narrow-body options, it is not going to be about replacing the MAX in the near term. Airbus is all-in on the A321 segment of the market. So at the end of the day, where do you prepare that new production system? The NMA was going to and maybe still that airplane, with relatively low rates and lower risk. But I don’t think NMA is a viable aircraft until 2028-2029 at the earliest and we won’t see any significant market pickup on the wide-body side for another few years. I also believe that NMA would be the wrong aircraft to launch in 2021 or 2022. This would jitter the investor community and maybe a serious setback to returning to issuing dividends as Mr. Calhoun suggested” Merluzeau believes that the fight might be at the lower end of the market: “The addressable element of the market may be the MAX 7. We saw that Southwest was not even a close call, and one of the many reasons that Southwest chose the MAX7 is that it is so fundamentally a 737 operation. The introduction of a new type would have presented a steep learning curve and challenge the flight ops culture at Southwest. Plus, Boeing needed to win this bid at any cost, and Southwest, as the largest 737 customer, certainly got the best deal of any MAX customer. As a result, I’m thinking that Boeing needs to respond first to the A220. The A220 is on the verge of running the 24 hours of le Mans by itself right now. On an absolute basis, product to product comparison, there is no question the A220 is a superior aircraft, but it is a different issue when you look at both aircraft within the context of networks integration and larger fleets.” The Brazilian bride went away and Boeing now finds itself with a near-term competitive disadvantage. Is this the place where Boeing should concentrate its efforts, with a relatively manageable production volume as it transitions to a new production system? Arvai agrees with this argumentation: “From my perspective, it is where you want to prove the new production system, on a low volume or a high volume program, and my view is the former rather than the latter to minimize risk and ensure a smoother operation before addressing higher rates. The A220 competitor is probably the right move, as there is a smaller market in the 110-140 seat capacity range of about 2,500-3,000 aircraft available over the next 20 years. This is the smaller bookend of the market than the A321 sized aircraft, where the order book for that aircraft itself has ballooned to more than 5,000 airplanes. If you are trying to minimize risks in a new production system, you go with the lower volume model. But if you are trying to optimize the production system, you go with the larger model, assuming you believe you can make that system work.” Arvai remains concerned about Boeing’s track record and its ability to execute on its four current programs: “there is little confidence in the industry Boeing can execute well on new programs from a timing and budget standpoint. Were I at Boeing I would choose to minimize risk and go for the smaller program, the Future Smaller Aircraft to compete with the A220 and E195-E2 rather than go head to head with the A321 with an NMA-v2 type airplane.” Merluzeau anticipates more near-term issues to deal with than just the aircraft: “Also remember that your supply chain is also going to need to transform. We’re talking about adaptation, new composite materials technologies – it’s not just Boeing in a silo. We’ve got to look at the entire supply chain and their ability to transition. There are digital twins, automation, and other factors that need to be incorporated. The A220 is an uber point-to-point asset and the A220 is opening markets between second and third-tier airports To me, the Future Regional Aircraft, although I don’t view this terminology as representative, is, at the end of the day, the right choice if Boeing is not going to do NMA.” Looking at it from a product portfolio standpoint, Merluzeau believes that Airbus doesn’t have an equivalent to a potential NMA.“They have a very good A321XLR. They don’t have the pax and range configuration that the original NMA is (was) going after. Consequently, It is not like they have a unique capability in the MoM (Middle of Market) space that Boeing needs to respond to.” Both Boeing and Airbus have products at the higher end of the MoM, Boeing with the expensive 787 and Airbus with the low selling A330neo. Where they don’t have a presence and where Airbus can do an increasing amount of damage is the A220 market segment, which is a key growth market segment and where the MAX 7 is increasingly looking like a suboptimal sitting duck solution.” Merluzeau believes that Boeing can take the MAX 10, work on it and make it better and more operationally relevant to current operators, and perhaps a few others. Merluzeau suggests that “the MAX 10 is also a priority at Boeing, as it’s got to work. We know what the issues are; range, payload, and field performance. But if I were at Boeing, my priority would be on how to counter the A220 and its planned derivatives” Arvai views the A330neo as a strong option for Toulouse: “But Airbus does have the A330-800neo at 253 seats in a typical configuration with attractive enough economics that could be discounted heavily to compete against any potential NMA and disrupt the market for a new Boeing model. Airbus would like a return on its investment, which will be smaller than any new model Boeing comes up with. As a result, there is a strong opportunity to play the role of spoiler, or even to tailor that model to the new market segment.” Merluzeau again emphasizes: “Where Airbus has one of the strongest advantage (besides the A321) is the A220 market, where Boeing doesn’t have an answer and the MAX 7 is not an economically attractive solution. Boeing doesn’t have the E2 anymore. But they can go all out on the MAX 7 efforts to compete and erode Airbus A220 margins. Boeing will lose more and more campaigns, but they can be very competitive for existing MAX operators.” Critical technology Enablers For new narrowbodies, technological advances will play a decisive role and Arvai emphasizes this aspect: “My thoughts turn to the technology side, as we know we are going to have new materials technologies, and a new production system. The question is what happens with engine technologies. We know the current generation will have improvements available from PW and CFM by the end of the decade and new competition from Rolls Royce in the same timeframe. But after that do we go hydrogen, electric, or hybrid-electric? How long a production run will a new airplane in the 2030 time frame have before we get to an electrification point for commercial narrow-bodies?” Obviously, the process will start with smaller aircraft, and today we can effectively operate a 9-seat commuter with electric-only propulsion using current battery technology. Challenges will arise as the technology migrates upward: “There is a program in the process for a 19 seat model that looks feasible. The question is can we get to 50, 100, and then 150 seats with battery technology over the next few years where we have electric power for cruise and conventional technology assisting for take-off and landing operations. That hybrid concept is one that we might see in the 2035-2040 time frame. Would that quickly economically obsolete new models that appear in the 2032-33 time frame? How would that work in long-term product timing? We have the potential for the last generation of conventional aircraft to have a short lifespan, much as the Lockheed Electra turboprop was rapidly eclipsed by jets and had a short production life when technology changed. That puts another twist on the strategy.” Merluzeau is more reserved about the potential for hybrid-electric propulsion: ” I hear you – I don’t agree – but I hear you. I think we’re debating 21st-century problems with 20th-century mindsets. I agree that electrification of the lower end of the market will work up to about 30 seats. I flew a Cessna Caravan recently which is the perfect aircraft to electrify, there is no question, and I’m all for it. The issue is that we are still polluting, and perhaps even more so, with the battery solution. Electricity is the way to go, absolutely, but what is the source of that electricity? Is it coal, that ends up polluting more than the airplane? Nuclear is greener but is expensive. Hydrogen, to me, for small airplanes, may become the way to go to have a viable solution by 2035.” He however remains perplexed about the hydrogen potential for larger aircraft over the next two decades: “hydrogen today is an irrational and impractical solution for anything over 75-85 seats. Hydrogen creates huge challenges over the next twenty years. It is simply not operationally and financially realistic with today’s technologies and infrastructure. Furthermore, who bears the cost of this engineering experimentation?” “I don’t want to dwell on environmental issues. We have great technology. This industry has probably done more to minimize its carbon footprint over the last 25-35 years than any other industry. Why? Because simply polluting less means using less fuel, which means more efficient and economical operations and more money. When you have a business that is fundamentally driven by the economics and profit you can achieve, a cost-saving technology becomes a driver for those economics and this results in more rapid pace of low-risk technology adoption and a less polluting aircraft” “If you dis-incentivize the industry to make money and increase carbon taxes like we have recently seen in Canada, then you might reduce the ability of the industry to invest and field cleaner, more efficient, and less fossil fuel-intensive technologies. Fossil fuel, whether extracted or its derivative “biofuel”, will be with us for the next 40 years. We’ll see a phasing in of hydrogen and out will go oil. I don’t think we have the perfect path forward yet. I believe it is hydrogen, and I don’t think batteries are the solution, they are an environmental disaster in progress. Hydrogen still is a complicated process and is very polluting from an electricity generation requirement. Let’s see what the Chinese do as well. They will come up with their own solution, as they become more assertive in their choices and control of advanced technologies and regulations.” We’re still going to need to move people from one part of the world to another as efficiently as possible and conventional propulsion is still the way to go. Merluzeau believes in the evolution of systems rather than propulsion itself in the near to medium term: “The next narrowbody – I believe there may be some significant electrification, perhaps replacing the hydraulic system or the APU, but we have a lot of research to go to get there. There are a lot of new ideas popping up in the last few years partly in response to the “little Swedish maniac” and her gang, partly because it is a nice, popular, and politically correct way to channel government subsidies to a struggling industry during the pandemic, particularly in Europe.” We’ve got to be realistic. There are so many things today that we can “greenify” in the commercial aviation value chain; production line and factories, transportation, airports, materials, and better recycling – we can make tremendous strides even if the flying part itself remains more static in terms of engine emissions for a decade or two. Conclusion: where to for MAX? As Arvai and Merluzeau have focused on the MAX for Boeing’s near-term strategy, Arvai wonders if the MAX is a tainted airplane in the marketplace and if it will regain the trust of passengers and if Boeing’s purposeful hiding the existence of MCAS from airlines may have any lasting effects? Merluzeau is more prudent on this issue: “Both 737 and 787 are tainted airplanes because of the groundings. The tragic loss of life associated with the MAX is clearly going to stay with us. But the MAX 8 is a tremendous airplane and will be a solid cash-generating airplane for Boeing over the next decade. This may be the same way that the DC-10 and Comet were tainted. The DC-10 is still flying. The traveling public has the collective memory of a goldfish. I’m not so worried about the MAX not being perceived as a safe airplane, but how Boeing and an airline will manage that next event. Merluzeau reiterates a point he has made several times since the accidents: “I hate to play the armchair statistician. Commercial airplanes do have accidents, even though we’re used to an extremely high level of safety today. Someday, a MAX or an A321 will have an accident. The key is how you manage it. The beasts in the media will play it up more if it is a MAX than a 717 or 767 because they thrive on controversy. Remember, these are the same people that brought us the 2020 election coverage disaster, that’s the real risk in the situation. Arvai remains suspicious of the MAX: “While I have a slightly different view and believe that the MAX was rightly vilified by the press for Boeing’s managerial incompetence and purposeful deception of the FAA, should another MAX go down, whether from an airplane flaw or simple pilot error, we will certainly hear from the media, and it wouldn’t be pleasant. Lockheed renamed its airplane the Electra II. Boeing, whose near-term strategy depends on the MAX, might have been better advised to do the same.”
