Insight: Friday 5 February 2021: Filling the Gaps at Boeing – Part 1

News:

This week several important issues emerged with the announcement of a staggering $12 billion loss for Boeing. Today, we will cover the news and implications about the NMA, the New Middle of the Market Airplane.

Boeing’s stock rose on Wednesday amid rumors that the company may finally launch the NMA airplane to compete with the A321neo family that has been outselling the larger 737MAX variants by a 5:1 margin. This market gap has been a key area in the 10 percent market share shift that has occurred from Boeing to Airbus, which will be costly to re-gain.

Tuesday, David Calhoun met with aviation experts and indicated that the company is moving forward with the “New Midsize Aircraft”or “797” despite the pandemic and historic financial losses the company has endured.

Analysis

With respect to the NMA aircraft, the rumor mills indicate a small wide-body twin, likely close in size to the 787-8 or 767-300ER to differentiate itself from the A321neoXLR. The key question is whether a twin-aisle aircraft can deliver equivalent economics to a narrow-body and whether the trade-off of comfort versus economy could win the day for Boeing.

Calhoun indicated that Boeing is aiming to “offer a really differentiated product” that could be launched within 12 months with entry into service in 2026. However, he also indicated that product improvements could evolve over the next five years to provide “advanced solutions” on the aircraft. The airplane will heavily incorporate composite materials and “incredible innovative concepts that would support the point design of the next aircraft.”

Insight

The NMA decision is expected to come by year-end 2021, although we have heard that story before. The difference this time is that airlines will be determining the future of the MAX and whether an earlier replacement will be necessary. If airlines choose not to order the MAX in the volumes previously intended, Boeing will need to bring forward the timetable for a MAX replacement to 2027. If the MAX returns successfully and has strong passenger acceptance, a new aircraft nearer the end of the decade is likely.

Our key concern for NMA is that it may be too little, too late for the marketplace. Airbus has a strong competitor in the lower cost A330neo for the high end of that segment, and the A321neo family currently dominating the low end of that segment. While there is room for the NMA in the marketplace, Airbus is currently in a position to heavily discount its offerings and spoil the business case for the NMA through lower margins, requiring higher sales volumes for Boeing to break-even.

We believe it unlikely, given the market share and order book for the A321neo, that Boeing will generate more than 800 orders for the NMA. That may or may not be adequate for their business case, especially since Airbus is rumored to have an A322 ready to launch to counter Boeing and firmly defend their newly gained market share.

The next question, given the likely margin squeeze from Airbus, is where Boeing will build the aircraft. Seattle is now a high-cost area, while the Southeast offers low-cost production. From our standpoint, Charleston is the likely site for NMA production as Boeing slowly leaves the Puget Sound area, with new programs migrating away over the next 15 years.

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