Boeing is still obfuscating regarding a 737 replacement, while increasing production rates for the existing models. Two things are clear — the has a significant economic advantage over the current 737NG series and is selling quite well, and that the 737NG will face increasing competition from the A320neo, Bombardier CSeries, COMAC’s C919, Irkut’s MS-21, and a new model from Embraer that is pending launch based on what Boeing will do.

Of course, when a competitor bases its new product decision on your decision, keeping things close to the vest while working on parallel options is an excellent strategy. Unfortunately for Boeing, market conditions won’t allow that strategy to continue forever.

Boeing has stated that will not undertake two development programs simultaneously, as it did with 787 and -8 — but two aircraft will need replacement – the 737 and 777, each of which is facing new competition from Airbus in the and A350XWB.

is clear that Boeing’s market share for narrow-body aircraft is peaking — as the narrow body market for aircraft over 100 seats has grown from 2 to 6 participants over the last 5 years. But this has also been the cash cow for the company and the 737 has been the best selling model of all time since its introduction in 1967.

The first new technology narrow-body, the Bombardier CSeries, is only two years from entry into service and the CS300 has a significant advantage in operating economics over the 737-700 (and even larger -800).

Boeing will need a leapfrog – but using the same new technology engine as the CSeries and neo, there isn’t much of an advantage without a radically different design. A 737 replacement using today’s technologies would not likely provide Boeing with enough of a to differentiate it.  A re-engining would enable to compete more effectively with neo, but remain behind CSeries in economics.  C919 and could also pose a challenge, as they will also be new designs using the same new engines – LEAP and GTF, respectively.

The re-engining option is still being studied, and may be needed as an interim option if neo continues to rack-up orders at its current rate. Airlines want savings from high fuel costs now, and Bombardier and Airbus are best positioned to deliver them in the near term.  The 737NG can compete effectively until the new aircraft begin to be delivered – but that’s only 2 years away, and the lead time for a re-engining program is likely 3-4 years.

Prediction – without a re-engining, the market for the 737 will fall off just as the production increase comes into play.  But this increase in production rate might be the perfect way for Boeing to quickly work off all of the existing backlog to clear the slate for a new aircraft,  once they decide to move forward.  One possibility for Boeing would be to utilize primarily composite structures for a high frequency narrow body aircraft — but whether composites can handle the high cycle operations of a narrow-body remains a question.  Bombardier chose a lighter Aluminum-Lithium alloy for the CSeries, and Airbus is also leery of composites for high cycle narrow-body operations.  Could 787 technology migrate well downward to the 737?  We’re not convinced that can without presenting maintenance issues.

The Decision Won’t Come Until the 787 Program is Stabilized

The key for Boeing is getting the 787 and 747-8 delivered this year. The Board of Directors is not going to approve a new program until the existing ones are under control, and first deliveries will go a long way for management to prove its case that the difficulties are primarily behind them. Of course, the 787 program still faces massive challenges, with a new plant, labor issues, a slow ramp-up, heavy rework on the first 20+ aircraft, and a large backlog to work off at low margins due to delay penalties.

The day of decision will come shortly — and will decide which program to undertake, the 737 replacement or a 777 replacement. Simple re-engining and upgrades would render these aircraft competitive, but will not create the industry leadership position in economics they once enjoyed that created their success.  That’s a significant change in competitive dynamics.

Which market do you attack. The large one that is becoming increasingly competitive, with six players rather than two, or the smaller one that remains a duopoly with Airbus.  We’ll find out soon which market Boeing considers most critical to shore-up in the short term, and which can wait another five years. A logical sequence would be a re-engining of the 737, a 777 replacement, and a new narrow body entering service in the 2024-2025 time frame.

The Real Cost of the 787 Debacle

The real, but hidden cost of the 787 delays is the impact on Boeing’s long-term competitive position. With the inability to accommodate two new aircraft programs simultaneously, the company must choose which of two much needed improvements will come first. Had the 787 been accomplished on time, one of those programs would already be three years down the road and nearing market entry, with another ready to launch in 2013.   Now, one of them won’t get started until 2012 for delivery in 2018-19, and the other likely in 2018-2019 for delivery in 2024-25.  The three and one-half year delay has compounded into a five to six year setback in new product development, and has provided a window of opportunities for the new competitors in narrow-body aircraft.   Boeing has inadvertently given its competitors an opportunity to change the competitive dynamics of the industry, and they are taking advantage of that opportunity.

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