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David Calhoun, Boeing’s President, and CEO, made the following statements at the firm’s latest Investors Conference.

We won’t contemplate a new airplane; we won’t even put it on the drawing board until we know we’re capable of doing that,” said Calhoun. “So this is strategy for us. Capabilities. And then there’ll be a moment in time where we’ll pull the rabbit out of the hat and introduce a new airplane sometime in the middle of next decade.”

He added: “What matters is the capability you bring to that airplane. Is it differentiable enough to put you in the leadership position?” said Calhoun. “I don’t want to fill a gap in a product line; I want to build a product that’s going to differentiate in a way that absolutely substitutes the airplanes that came before it.”

These statements are very important and send a signal that needs pondering.  They are pregnant with meaning.

Regular readers know we have been pointing to the single-aisle middle of the market (MoM) for over a year.  For an excellent review of the situation at Boeing, we recommend this analysis from our friends at TAC.

Boeing’s decision to roll the dice with the MAX carries risk. Not going for a new aircraft in the hottest commercial aviation segment is odd.  Boeing was late responding to the A321neo – the MAX9 doesn’t compete effectively.  The MAX10 might, but it has yet to be certified.  Meanwhile, to get an idea of the timeline scale, the A321neo entered service in early 2017. Airbus has a crucial five-year head start. 

Moreover, Airbus has continually improved the A321 since its launch 30 years ago: MTOW is up 20%, and its range has doubled.  The A321 used to be ~25% of Airbus single-aisle orders and now represents ~33%.  As the chart below illustrates, for 2022, the MoM segment of the single-aisle market is at 32%.  

Currently, ch-Aviation’s fleet database shows over 779 A321neos in service.  At Boeing’s Renton production rate of 30 per month, the A321neo fleet represents 26 months of production.  To say Airbus has a substantial advantage is an understatement.  Calhoun’s statements essentially have given Airbus a monopoly in a lucrative market.

The implications of the decision have alarm bells ringing. Airbus and Boeing compete vigorously for every order.  Essentially conceding a high-demand segment to Airbus allows Airbus to deploy transfer pricing more aggressively.  For example, if an order is being considered for single-aisle aircraft, Airbus and Boeing will offer various combinations of their models.  

In pricing a deal, Airbus will use its A321 monopoly position and cut its profit margin on that model to support any other model to make the deal winnable.  This has already happened at JetBlue and Qantas. Facing no A321neo competitor, Airbus has been given an “open season.” This makes competitive deals harder for Boeing, as they must cut their margins razor-thin to win. Boeing will walk away from deals that make no economic sense. Airbus has more financial flexibility and will use this to win deals. Winning deals has long-tail implications: more power over the supply chain, lower long-term costs, and a wider customer base. Losing deals has the same implications, just in the other direction.

Boeing offers the MAX10 as its A321neo competitor. Ryanair has expressed interest but won’t accept Boeing’s asking price.  Several airlines placed orders for the MAX10: United (250), Delta (100), VietJet (80), Alaska (50), flydubai (50), and WestJet (42).  

The ongoing pilot shortage makes larger single-aisle aircraft critical to airline operations.  To move the recovering traffic, typical 160-seaters are less efficient than ~200-seaters.  The added capabilities of the larger models like A321neo and MAX10 make them highly desirable.

But the MAX10, despite its orders from big-name customers, lags the A321neo.  The following table lists orders for Airbus and Boeing single aisles focusing on MoM.
The apparent lead at Boeing is due to their listing any MAX model as MAX rather than the actual derivative. The following chart illustrates what was delivered based on our delivery tracker.

Our delivery tracker shows MAX deliveries have been ~90% MAX8.  Among the undefined MAX orders, we estimate ~75% are MAX8s.  Of the undefined 5,969, that suggests ~1,500 MAXs that fit into the MoM segment.  That guides to an order book of ~1,700 (rounding up) MoM-compliant MAXs.  Compare this to Airbus 3,171 MoM orders. 

Could undefined MAX orders be converted? Certainly, as we have seen Southwest convert MAX7s to MAX8s.  We have suggested that MAX10s orders might convert to MAX9s if Boeing follows through with its threat to cancel the MAX10 program.

Having laid out the numbers, we are left with some questions:

  1. How did we get here?
    1. Boeing believed the NG and the MAX could fill the “757-gap” – it didn’t
    2. Airbus kept improving the A321
  2. What does Airbus ~2X delivery advantage mean?
    1. Airbus charges a premium, while Boeing discounts to offset economic differences
    2. Long-term Airbus builds cashflow and Boeing doesn’t
  3. Looking forward, what happens next?
    1. Airbus has funds supporting R&D to keep refining the A321 and develop its replacement
    2. Boeing is betting on a Black Swan (“there’ll be a moment in time where we’ll pull the rabbit out of the hat and introduce a new airplane sometime in the middle of next decade”)
    3. The market is going to keep favoring the A321

Richard Aboulafia shared this view: “The possibility of disruptive new technologies has provided a useful excuse for Boeing to do nothing.  There may be new propulsion technologies coming in 15 years.  Or 20.  Nobody can say.  In the meantime, the middle market is the hottest segment the industry has seen in decades. And it now belongs to Airbus. All that remains is for Airbus to develop the A220-500, gravely damaging MAX8 sales.  That will knock Boeing down to a 25% market share.  And being reduced to a 25% market share is the best excuse ever for continuing to do nothing. “

Boeing is disadvantaged in an increasingly important segment, which impacts its product line. Airbus can exploit its A321 advantage across its product line. While Boeing faces long-tail risks, Airbus is likely to become stronger.

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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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