This aircraft is at the center of a serious trade allegation by Boeing against Bombardier and is being viewed by many as, at best, a niche aircraft. What are the facts that might us to better understand the situation and competitive dynamics?
First let’s look at the MAX7s predecessor, the 737-700. The following chart is based on Boeing delivery data. Deliveries matter more than orders because airlines and leasing companies may order one model, but another may be delivered. Often, leasing companies will reserve the smallest model, with the right to move upward, and pay a smaller deposit as a negotiating position. Delivery data shows us what is really happening.
The chart below shows that Boeing has successfully replaced each generation of 737s with successor models. The 737-700 had a better run than earlier models. At its 1997 entry into service, it represented 2% of 737 deliveries which reached a high point in 2004 at 56%. But that is 13 years ago. The 737-700 was eclipsed by the far more attractive -800, which became the best selling 737 model. In 2017, 78% of 737 deliveries were -800 variants. At the same time, 737-700 deliveries slowed to a trickle, with very few deliveries in recent years. It is notable that in each generation the best seller has been larger than the previous generation. The -800 and MAX8, each larger than the MAX7, lead the current sales statistics.
The next table shows where the 700 is headed, but does this give us any clues as to the MAX7? The current MAX7 is 12 seats larger than the original MAX7, that was the same size as the -700. The aircraft was not selling well, and Boeing increased seating capacity to improve its relative economics against the competing A319neo, C Series, and E195-E2. Even with the increase in capacity, the larger MAX7 has not sold well and appears to be, at best, a niche airplane.
Based on Boeing’s delivery data the -700 has been a success. The largest operator of the model is Southwest Airlines, which took delivery of 362 from Boeing. The table lists the top 14 737-700 customers for new deliveries from Boeing. These customers account for 75% of 737-700 new deliveries by Boeing.
We think that the future of the MAX7 is limited, and an inkling of its future can be distilled from the next table and the MAX7 order book. Southwest Airlines is the prime example. The table shows the fleet at Southwest, by model, over the last 17 years. While Southwest is a 737-only airline, the mix of aircraft and their average size is increasing as the airline has now retired early 737-300s and -500s in favor of larger -800s and MAX8s. This is how Southwest’s fleet looked in 3Q17. The airline retired its last 737-300s in 2017.
It is notable that while Southwest took factory delivery of 362 737-700s as new aircraft, they are flying many more than that. The other aircraft came from the second-hand market, as the airline was able to secure attractive deals because the -700 has been falling out of favor vis-a-vis the -800 and they were much better priced than buying new aircraft.
The 737-700 continues to dominate Southwest’s fleet. But the -800 and the MAX8 are spurring fleet growth. Is it not a surprise that Southwest has deferred the MAX7 and converted some orders to MAX8, given their need for low seat-mile costs to remain economically competitive.
Based on the data it seems to us that:
- The MAX7s ordered are unlikely to be delivered to Southwest Airlines.
- Southwest has deferred 23 aircraft for later delivery, which we believe will be converted to MAX8s
- Meanwhile, by 2023, the deferral date, any potential Embraer deal with Boeing would be securely in place.
- With its biggest MAX7 target customer effectively out of the market, Boeing will have a tougher time convincing others to go for the MAX7.
- However, it is clear that Southwest sees the need for a ~140 seat aircraft because it has added to its -700 fleet, even though it went to the second-hand market.
- This means when it comes time to replace the -700s it will have to consider the E2 and CS or stick with larger Boeing models.
- The last 737-300s and 737-500s were ~25 years old when retired.
- Southwest’s oldest -700 are about four years away from that vintage.
- Will up-gauging aircraft continue, or will the MAX7 actually find a niche with 737 operators, despite superior economics from the E2 or C Series?
We reached out to Southwest with a question about the 140-seat market and got this response. “The 140-150 seat market is very important to Southwest Airlines, and we expect it to be for the foreseeable future. The Boeing 737-700 represents approximately 70 percent of our fleet”.
The Bottom Line
The MAX7 will clearly not be a best seller or match the success of the -700. As a shrink of the MAX8, the model around which the MAX series was optimized, it will suffer the same fate as the 737-600, which was a shrink of the -700, the model around which the NG series was optimized. Smaller models don’t sell well. Effectively, the MAX7 is economically obsolete when compared to its competitors. (As is the A319neo)
With respect to the trade case, Boeing has limited its complaint to the 100-150 seat segment. Boeing has been successful with their MAX line, with orders for more than 4,000 aircraft. But about 85% of those orders are for the MAX8 which has 162 seats and is outside of the trade case segment. By cutting the trade case at 150 seats, and ignoring the successful 162 seat MAX8, Boeing focused their claim of “economic loss” to a segment in which they lack a competitive product. Boeing also chose a peculiar range limit for the case, but that is beyond the scope of this article.
The MAX7 and A319neo will be the next generation’s equivalent to the 737-600 or A318 – shrink models of larger aircraft that carry too much weight for their size and cannot effectively compete with aircraft specifically designed for that market segment. We don’t expect many 737 MAX7 deliveries over the life of the program.
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.