Boeing’s Strategic Dilemma

Boeing has fallen behind Airbus in narrow-body market share, which was already dropping before the MAX grounding. Airbus now holds a 65%-35% lead in narrow-body backlog, a position that is worrisome to Boeing management and its shareholders. The strategic options for Boeing include developing two new aircraft to compete with Airbus prior to the end of the decade. These include the NMA, or New Middle of the market Aircraft and FSA, or Future Small Aircraft, the replacement for the existing 737 MAX. The first option, the New Middle of the Market Airplane (NMA) has been under evaluation for some time. The industry rumor mill indicates that Boeing’s potential offerings under consideration may now include narrow-body as well as the potential wide-body alternative that was publicized several years ago. The business case for this new aircraft remains under study at Boeing, which has yet to decide whether to move forward with the new airplane. If Boeing does move forward with the NMA this year, it would likely arrive on the market in 2026-2027. The question facing Boeing is whether they are too late to the market with an alternative in the 180-240 seat market, or whether they might be too early for new engine technologies anticipated in the 2030 timeframe, which could place them at a competitive disadvantage only a short time after introduction. The second option is the FSA. The question of a 737 replacement also centers about when the aircraft would enter service. Typically, a production run for a variant runs about 20 years. The initial 737 series were delivered from 1967 through 1988, a period of 21 years. The 737 Classics were introduced in 1984 and delivered through 2000, a period of 16 years. The 737 NG was delivered from 1997-2019, a period of 22 years. The MAX, which entered service in 2017, might normally be expected to remain in production until the late 2030s, as 2037 would represent 20 years of deliveries. But the MAX has only one model that is truly competitive, the 737-8. The -7 has poor economics against the A220-300 and the larger -9 and -10 have both seating capacity, runway performance and range deficiencies when compared with the A321. The latter is outselling the larger 737 models by a 5:1 margin, highlighting the need for a new aircraft. Combined with the grounding and a lack of consumer confidence in the MAX, Boeing will almost certainly need a new airplane in the 2030-2033 time frame, effectively cutting the MAX production life to 13-16 years. The cargo conversion market will have plenty of feedstock becoming available as relatively young MAXs are replaced with new aircraft during the next decade. Can Boeing afford to wait that long to replace the MAX? An NMA could potentially stem the market share shift to the A321 in the near term, but would Airbus introduce a newer technology A322 a couple of years later, capitalizing on new engine technology to maintain their current market leadership? Moving too quickly in a market with changing technologies in propulsion, avionics, actuation systems, and materials may not be an optimal decision. If Boeing brings the FSA into the 2029-2030 time frame, taking advantage of new engine technology, would be face an A360 from Airbus a couple of years later? The airplane business is, to a great degree, a game of leapfrog, with competitors always trying to gain a competitive advantage in performance and economics for their customers. The game is in a constant state of flux. From a capital perspective, it is expensive to develop and certify a new airplane. The 787 illustrated the dangers of cost overruns, and the combination of fiscal mismanagement through share buybacks, the MAX crisis, the pandemic, and now 787 quality issues and a delated 777-X, Boeing lacks the capital to develop two new programs simultaneously. The company will likely need to borrow money to develop its next aircraft. Airbus, by contrast, has been more fiscally responsible and has no current programs underway, and has the cash to support new developments quickly. Should Boeing authorize the NMA, Airbus would likely quickly counter with an A322. If Boeing instead chose to more forward the FSA, Airbus would likely launch an A360 replacement for the A320. In the game of leapfrog, Boeing’s position is clearly behind the 8-ball. The Strategic Decision Boeing can’t afford to do nothing, or will continue to lose market share to Airbus. Airbus has spent the last 50 years trying to catch-up to Boeing, and has finally succeeded in taking market leadership for the foreseeable future. But the decision alternatives Boeing faces are all sub-optimal in a competitive environment in which it has lost first-mover advantage and lacks the cash to innovate as the industry approaches a transition to emerging technologies and more radical designs. We’ve all seen diagrams of futuristic aircraft designs with alternative propulsion systems. Airbus has committed to radical breakthrough in environmental performance by 2035 and will likely require highly innovative aircraft to accomplish their goals. If Boeing launches airplanes too early, will they be unable to develop new technologies to match just a few years down the road. Would airlines sign up for a new technology aircraft? The 787 order book at launch is all the proof anyone needs, customers like innovation that earns a profit. While Boeing couldn’t deliver the 787 on time, or without flaws, they had designed what the airlines wanted, an innovative and cost-effective airplane. Unfortunately, the cost-overruns and grounding had a very high cost. The strategic choice for Boeing is to counter, or to wait and live with their existing product line. The former comes with no guarantees, while the latter does - lower market share or lower margins from discounting less competitive aircraft. The choice Boeing takes will determine whether they will be able to regain market equality with Airbus, or risk the permanent loss of industry co-leadership.

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