Huge backlogs have been a public concern for Airbus and Boeing for a year or two, with focus on the inability to offer early delivery positions. The companies are sold out on their current A320 and 737 lines until 2016-17. The A320neo and 737 MAX are sold out to 2020. The 787 and A350 lines are sold out to 2018 and beyond.
But what hasn’t been discussed—and what is inhibiting sales, according to customers—is that the extended delivery dates affect pricing via standard escalation clauses. Escalation in the price is typically pegged to inflation, protecting the OEMs against rises in costs.
With deliveries of the current generation of single-aisle airplanes now four-five years or more away and the re-engined aircraft eight years or more away, the escalation clauses are seen by customers as a huge risk. Since nobody can guarantee what inflation will do between now and delivery, the acquisition cost could escalate to a point where the economics of the airplane no longer makes sense.
John Leahy, Airbus’ COO Customers, mentioned this challenge to us during the Airbus Innovation Days when responding to a question why there have been few sales recently for the A350. Why, he asked rhetorically, would anyone want to take the escalation risk eight years out?
Since then, we’ve talked with customers who make the same point with respect to Boeing and the 737 MAX. The entry-into-service for the 8 MAX is currently slated for the fourth quarter of 2017. The 9 MAX follows in 2018 and the 7 MAX in 2019. Production ramp up is crucial, and Boeing hasn’t given any indication this far out how quickly it will come up to rate. Boeing will be at 42/mo by 2014 and the MAX will create a third assembly line at the Renton plant, which has the theoretical capacity to match the 21/mo of Lines 1 and 2. But as with any new airplane program, there is a learning curve. Also unknown is how quickly demand for the NG will taper off. Boeing, like Airbus, anticipates a two-three year transition from NG to MAX.
What this means is that it could be at least two years before the MAX rate matches the NG rate and perhaps longer if Boeing takes rates well above 42/mo. With 1,000 orders and commitments already for the MAX, this is two years of solid production at current rates.
There are, of course, essentially only two ways to deal with this issue: cap the escalation costs or lower the price of the airplane. The natural dynamics and competing interests between the customer and the OEMs make a resolution difficult.
A third way, which only partially addresses the problem, is to up production rates to provide nearer term delivery slots. This won’t help the A350, which is challenged to meet its mid-2014 EIS target date. Initial production ramp up will be slow, and in any event we envision an EIS slip of perhaps six months. It could help the 787; officials are considering rates of 12-14/mo from the announced 10, which has a goal of the end of 2013 (and which nobody we talk to believes will be met).
Airbus will create an A320 assembly site in Mobile (AL), to become operational by 2015, when the A320neo is scheduled to enter service. With the 737 MAX following two years later, this additional production capacity can give Airbus a major competitive advantage over Boeing and the MAX.