Does an A330neo Make Sense in 2014?

[This is the first part of a report we are about to publish] In April 2012, we produced a short report regarding the concept for an A330neo. We concluded, at that time, that there was no viable business case for an A330neo. However the market has since evolved, and we decided to take another look at the case for an A330neo. Airbus is seriously considering the matter. In an interview with Airbus in January, Crawford Hamilton, the Airbus’ Head of Twin Aisle Marketing led us to believe this is not on the cards any time soon. What’s Changed Since 2012? Several things have changed since 2012 with respect to the A330neo concept. Airbus is backing away from the A350-800, which is less efficient than the competing 787-9. The order book for the -800 has shrunk to 34 aircraft, and it now appears that Airbus may cancel this model in favor of a larger A350-1100 that will enable it to better compete with the Boeing 777-9. The cancellation of the A350-800 is, in our view, imminent, and leaves a hole in the 200-300 seats market for Airbus. The order book for the A330 has begun to shrink, as book to build ratios are falling below 1:1. As a result, the backlog is now only a little over two years, and Airbus needs to either focus on the A350 or refresh the A330 to maintain its competitiveness. Reuters reported on May 2, 2014 that “Airbus said it faces increased challenges in managing the order book for its A330 wide-body jet beyond 2016, highlighting the stakes involved as the plane maker considers an engine revamp for its most profitable long-haul jet.” The A330 has been a great source of revenue and profit for Airbus. During the challenges faced by Boeing’s 787 delays, A330 sales kept growing. Each hiccup for the 787 led airlines to consider the A330, while as an older technology aircraft, had an attractive price and predictable reliability that made it a “go to” option. The neo has worked so well with the A320 at low capital investment and risk, that it has changed the attitudes at major manufacturers. The success of A320neo led directly to the rush to create 737MAX at Boeing. The refresh strategy gained additional support with 777X, and the A330 and A380 are currently posed for potential refreshment at Airbus. Even Embraer chose this path for its E-Jets. The 787, while still not achieving dispatch reliability goals, has improved enough that airlines feel comfortable that Boeing is finally getting the bugs out of the aircraft, albeit eight years later than initially expected. The new technology competition for A330 has arrived not only from 787, but also from the forthcoming A350XWB. Both airlines and leasing companies are embracing the concept of a re-engined, but lower capital cost A330. Delta Air Lines has become profitable utilizing older, but well maintained aircraft in its fleet, trading fuel costs for capital cost. The same tradeoff will exist, but to a smaller degree, with an A330neo against significantly more expensive 787 and A350 models. Steve Udvar-Hazy, head of Air Lease Corp., who was skeptical of an A330neo at ISTAT in 2012, appears to have changed his tune to be more favorable. While controversial, he is pragmatic, and listens to feedback from potential customers that would want to lease an A330neo. Similarly, news reports indicate that CIT[3] is also favorably disposed to an A330neo, along with Singapore Airlines, Air Asia and several other carriers. Several airline CEOs including Richard Anderson at Delta have commented on new aircraft being optimized for extremely long haul operations rather than medium range routes that they routinely fly. An aircraft optimized for a 7,000 nm segment is not effective for a 4,000-5,000 nm segment, which is a sweet spot for the current A330, and likely for A330neo. Very few flights actually need to utilize the long-range capabilities of new technology aircraft, and these aircraft are “overkill” for many routes. In our 2012 analysis we came to the following conclusion: “Despite urging by Air Asia, we see the A330neo being a challenge, as it simply doesn’t make compelling economic sense in our analysis. It will be tough to make the program competitive without significant re-engineering of the airframe to gain better economic performance. Airbus, having already ceded the 210-seat market to the 787-8, has a new technology aircraft with 270 seats to compete with the 250-seat 787-9. Re-engining a 253-seat aircraft to compete with a 210- seat aircraft makes little sense to us. As with any program decision, the question becomes how many airplanes could it sell to at least breakeven? Loyal customers like Air Asia and Singapore Airlines (reportedly also interested) are crucial in the next steps facing Airbus at this juncture. But, in our view, they would be shortsighted to order a neo version of an old-technology airplane when a new technology alternative, with higher profit potential and better economics, is right around the corner.” Our 2014 Conclusion With Airbus moving away from the A350-800, which was not well received in the market, it lacks a wide-body offering with fewer than 300 seats. The existing A330 models, with 253 and 295 seats in three-class configuration, respectively, could provide a lower cost competitor to Boeing’s 787 that could virtually negate the current significant difference in operating costs. That said, we recognize Airbus faces resource limitations. Even if the business case is promising and the technologies are available, does Airbus have the human resources required to accomplish all the tasks in the time available? Time, money and engineering resources are in short supply at Airbus as they are at Boeing. Both OEMs have gutted their historic capacity to engage in multiple simultaneous major projects. The question is how well these improvements might impact capital costs and how the point of economic indifference could change. Let’s examine this with a look a comparative economics, based on AirInsight data and assumptions regarding aircraft economics gleaned from a number of sources. The Economic Equation If we assume a 12% improvement in fuel burn for the neo, the economics for the A330-200 and A330-300 improve to levels very close to that of the 787. Assuming improvements to the FMS and Sharklets provide an additional 1% (at minimum) in efficiency, the chart below illustrates projected seat-mile and aircraft-mile direct operating costs for medium sized wide body aircraft for a 5,000 nautical mile mission: Note that the A330neo eclipses the need for A350-800. Our economic estimates are provided in detail in the following table, which show an A330neo, with a 13% improvement in fuel burn, would be extremely competitive with new technology aircraft. Using this data, we can compute the differential in capital costs to reach the point of economic indifference. Operating two 5,000 nm missions per day, the average monthly operating costs for can be computed by multiplying the total trip cost by 2 and by 30.4 days per month on average. The results show that, relative to the 787-8 and 787-9, the A330-200neo and A330-300neo would be competitive. Our analysis shows that the A330-200neo needs to be priced about $7 million lower than the 787-8 using a 0.8% per month surrogate for lease rates. The A330neo would compete well against the 787-9, and would not require an economic differential, as its economics are slightly better based on a 13% improvement in fuel burn. Today A330 aircraft are less expensive than their higher technology counterparts, and have been discounted to make up the differences, and from our market intelligence, quite aggressively. With new engines and reasonably equivalent economics, Airbus could reduce discounting for this aircraft and still provide strong value to airlines. From an economic standpoint, if the aircraft can deliver 12-13% better fuel burn, the A330neo makes sense. (Our report continues with additional information and industry feedback)

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