Insight: Monday 4 January 2020: Looking Ahead – The Narrow-Body Market in 2021

In this first of our series of previews for 2021, we look at the market for narrow-body aircraft. We break the narrow-body market into three segments, the under 140 seat segment, the 140-170 seat segment, and the over 170 seat market. Competitors in production and planned for these sectors are shown below:

The Under 140 Seat Market

This segment includes both new and older technology alternatives, with new technology aircraft introduced by regional airframe manufacturers optimized for this size category competing with the smallest “shrink” models of legacy families.

The Airbus A220 began life as the Bombardier

C Series, and is an all new design optimized for the Pratt & Whitney GTF engine. This is the most efficient aircraft in this class, and offers seat mile economics that are competitive with larger aircraft with lower aircraft mile costs. The competing Embraer E190-E2 and E195-E2 aircraft are also exceptionally efficient, also use the GTF engines, and have new wings tailored specifically to each model. These aircraft also offer better economics than larger aircraft, but lack the trans-continental range of the A220.

Nonetheless, we expect both aircraft to be successful, with Airbus having a marketing advantage and Embraer lacking the resources they expected from Boeing after the proposed acquisition failed.

The 737 MAX 7, currently under development, is less efficient that the A220-300 and we expect limited success for the MAX 7 in this segment with those customers requiring fleet commonality and operating the MAX 8. Currently, Southwest and WestJet are the major customers, with fewer than 100 orders between them.

Our summary outlook for this market follows:

The 141-170 Seat Market

The heart of the market is the 140-170 seats segment, in which the Airbus A320neo family competes against the Boeing 737 MAX. These aircraft have very similar economics, with a slight advantage to the MAX which is 8% larger in capacity than the A320neo. Since the two MAX crashes and grounding, Airbus has continued to gain orders for the A320neo while the MAX has seen its order book shrink dramatically. Nonetheless, with the MAX regaining certification in multiple jurisdictions and now back in service we expect some renewed momentum through heavily discounted sales by Boeing.

However, during the grounding, Boeing continued to build the MAX, and completed approximately 450 new aircraft that are awaiting delivery. The timing, with the global pandemic impairing airline demand, could not be worse. As a result, it will likely take Boeing the two years or more to clear its inventory of aircraft that have been finished but not delivered.

Compounding Boeing’s problem, a number of those aircraft became the subject of cancellations by airlines, since Boeing’s inability to deliver the aircraft on a timely basis during the grounding resulted enabled a contractual no-penalty walk-away clause for airlines. As a result, about 100 of the already-built aircraft now appear to be without customers. Boeing’s salespeople will be busy trying to move the already-built inventory.

The return to service of 370 plus aircraft after an 18-month hiatus during a period of limited demand will dampen the capability of airlines to take on additional new aircraft. Combined with the 450 already built but undelivered aircraft, an inventory of about 820 aircraft cannot be absorbed by the industry in 2021.

Compounding the issue for Boeing is the need to continue to produce aircraft and retain its skilled work force in Renton. Boeing has enough aircraft already built to satisfy market demand in 2021 but needs to produce new aircraft to maintain its production resources. While the company will likely take this opportunity to further optimize its production system, it needs to provide suppliers with a level of production that guarantees their survival during the economic downturn, as well as to maintain its skilled workforce. We expect Boeing to begin to ramp-up production from 5 aircraft in January to 22 aircraft per month by December during what will be a difficult year.

Airbus, meanwhile, has reduced its A320 family production rate to 40 per month in 2020, and if demand warrants, could increase to 47 aircraft per month during 2021. Given the continuing difficulties with the global pandemic, we do not foresee that rate until the 4th quarter or early 2022. Nonetheless, Airbus should deliver more than 440 A320 family narrow-bodies in 2021.

Contenders in the heart of the market will also include new models from China and Russia, both of which are in flight test and could enter service in late 2021 or early 2022. The C919 is China’s alternative to Airbus and Boeing but will ramp-up production slowly at first to 5 aircraft per month and is quite competitive with the current generation of aircraft, but not quite equivalent to the neo or MAX in economics. UAC in Russia is building the MC-21, which is also expected to ramp to a production rate of 5 per month as it will primarily serve the CIS market. Trade sanctions are impacting the GTF version of the airplane with western components, and a Russian built model is currently in-flight test using Aviadvigatel PD-14 engines.

The outlook for each program is shown in the following chart:

The Over 170 Seat Market:

This market has been the driver of growth in the industry, as operators are utilizing larger narrow-body aircraft with trans-Atlantic range to replace wide-bodies on some flights. This segment is also gaining replacement order for the aging Boeing 757, with the Airbus A321neo family garnering most of those orders due to the more limited range capabilities of the 737MAX family.

Airbus has been outselling Boeing by a 4:1 margin in this fastest growing segment of the narrow-body market, and since 2018, the A321neo has become the bestselling narrow-body aircraft model, even surpassing the A320neo in orders. The market has shifted upward, and the availability of a product that meets airline needs has been a significant benefit for Airbus and a problem for generating sales at Boeing. While the MAX 8 is a very competitive aircraft, the MAX 9 and 10 lack size, range, and runway performance to be competitive with the A321neo family.

The new longer-range variants from Airbus, the A321XL and A321XLR, have effectively captured the Boeing 757 market from Boeing, changing narrow-body market share for the next decade. In this segment, Airbus has a clear advantage that appears sustainable until Boeing develops a new narrow-body middle of the market aircraft to replace the 757, which does not appear likely given their financial constraints from the MAX crisis and global pandemic.

The outlook for each program is shown in the following chart:

The Bottom Line:

Airbus has gained a 60-40 advantage in market share over Boeing, Given the problems with the MAX, and substantial difference in order books, that market share advantage is likely to continue for the next decade, changing the mantle of leadership in the industry deliveries from Boeing to Airbus. Boeing needs to introduce its new Future Small Airplane (FSA) earlier than it once intended and needs to hit a home run with it to regain market share and the associated aftermarket services tail that will impact financial performance for 20 plus years.

In the game of leapfrog, it is now Boeing’s turn to introduce new technology into this market segment. The question is not if, but how soon can it happen.

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