This past week saw something very interesting.  Take a look here. According to Buckingham Research, as quoted in ATW, Boeing might not bid on Delta’s single aisle RFP.  That is an eye-opener worthy of some consideration.  Delta’s RFP states a requirement for 200 airplanes in the 737-700/A319 segment. Two hundred is big for anyone in the business.Why would Boeing pass on this opportunity? Delta is one the biggest airlines. And a very important Boeing customer.  So let’s not get too far ahead on this idea.

We have reason to believe that Buckingham’s information is sound. However, there could also be something else at play.  Remember the winglets on the 767 tanker? Boeing is masterful at controlling information flow.  The information flow on the 737 replacement has been amazing – Boeing has kept the industry unsettled for a long time. Each time it publicly deliberates the choices it faces (re-engine or new design), they buy time. This time suits them because airlines hold back from buying decisions – Boeing is able to give just enough information to cast doubt on options available such as Bombardier’s CS and now Airbus’ NEO.  So despite Buckingham’s information, we think it premature to count Boeing out of the Delta RFP.

Boeing will not comment on any customer interaction – the customer gets to talk first, and only then will Boeing say anything. And whatever it says will likely be typical Boeing – understated and circumspect.  Just the kind of response that drives media and analysts crazy as they try to parse and tease out something.

Delta want to replace a number of older airplanes in the 130 seat segment. It has a lot of these after acquiring Northwest. The airline clearly needs and wants to have a significant number of planes in this segment.  Note that Delta is going to have a fight on its hands when Southwest (via AirTran) moves into Atlanta.  Delta will want to lowest cost airplanes it can get. fuel costs now accounting for ~50% of airplane costs, low fuel burn is among the top three things it will look for.

Delta has lots of Airbus and Boeing planes. So sticking either means minimal retraining – the DC9/MD80/90 crews will have to be re-trained anyway. Airbus clearly is going to pull out all stops to win this deal.  We understand Airbus’ A321neo is off to a good start as a potential 757 replacement.  If successful, such a win will say something the 737-900ER.

But the real race is the A319 and smaller/older 737 replacement. Here the race includes Bombardier’s CS. This is a new airplane and these days that makes a lot of people nervous.  For Airbus, Boeing and Bombardier this will be a tough fight.  We cannot see Boeing walking away from this fight.  Its 737NG is a very good airplane and Delta is by all accounts pleased its fleet of NGs.

The challenge is looking forward twenty years. The NG will age faster than the other offerings.  The NEO is compelling in that it is newer and appears to be a low risk step forward – Delta has a lot of A320 family planes. They know it well, too.  The NEO option has to be attractive because it has a number of features that are compelling – newer engines, quieter operation and significantly improved fuel burn.  But Airbus wants a premium for the NEO and Boeing can offer a discount on the NG to upset that.  Yet another reason not to dismiss Boeing.

Then there is the new kid in the fight. Bombardier also has a compelling offering. It is completely new – not a re-engine like the NEO.  It is lighter and in many ways a clever option in this segment.  On a per seat basis the CS promises what Delta (and others) are looking for.  Low costs, great fuel burn, very quiet and small enough to go into small airports – crucially quiet enough to probably serve noise sensitive communities anytime of the night.  For a legacy carrier like Delta, its huge international reach, the CS would be a very good feeder plane for its global network.  Sure there is a challenge in re-training.  Bombardier has been accused by at least one competitive OEM of understating this cost.  But in fairness to Bombardier, Delta is going to have a lot of re-training costs anyway as it runs down its MD/DC fleet.

For airlines you would expect the emergence of a new player to compete Airbus and Boeing would be welcomed. As hard they compete with each on every order, a third player certainly keeps everyone at their peak. If Embraer can move forward their own new airplane in this category the fight gets that much better for the airlines.

Which is why Airbus and Boeing would like nothing better than to squash Bombardier and Embraer’s ambitions.  Their lives are complicated enough already.

If Boeing decides to withdraw from the Delta RFP, Bombardier’s competitive situation could be considerably be strengthened. Not a great thing for Boeing.  Airbus will then of course attack the CS more aggressively than it has – and it has been by far the most anti-CS voice to date.  After all, if it loses to the CS at Delta that would be a huge upset.  Far greater than the loss at Republic. Airbus, to its credit, has great momentum NEO.  Certainly enough to ensure Airbus feels justified in continuing its campaign to describe the business case for the CS as over.

The stakes at Delta are very high. We expect that Airbus might win some business – particularly the A321neo, which we feel is their best plane for this race.  Boeing cannot be discounted because their NG is very good and could probably be priced to overcome perceived advantages the others have.  For both Airbus and Boeing a concern is production slots – they don’t have any until 2015 or 2016. Delta is going to want to move sooner than that. (Patience is wearing at other airlines too)  Which is why Bombardier cannot be dismissed because we believe it has the best airplane among the <130-seaters on offer.  We would not be surprised to see it get an order when the dust settles.

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