Insight – Wednesday 10 February 2021- Filling the Gaps at Boeing – Part 4

News

The 737 MAX has been problematic for so long it seems old news, and with the aircraft now flying again, all should be well in Renton. But as Coach Lee Corso would say, “not so fast, my friend.” Boeing has a huge backlog of undelivered airplanes that will saturate the market during a global pandemic, and will likely be unable to resume high volume production until 2023.

The market for new aircraft in 2021 remains depressed given the global pandemic and closure of international routes. Demand for the MAX is down from two causes, the pandemic itself and the reputation of the MAX after two crashes. It will take time before we know whether consumers will return to the MAX in large numbers, and, with the pandemic impacting demand for flights, the consumer reaction to the MAX will not be as rapidly known internationally, with India and China yet to approve re-entry of the airplane in two key markets.

The MAX, which critics have derided as the “world’s first self-hijacking airliner,” has a difficult road to climb as it re-enters service around the world to regain a reputation as a safe and dependable aircraft.

Analysis

The order book for the MAX has fallen significantly, and despite recent new orders from Ryanair and Alaska Airlines, the total backlog as of February 1st stands at 3,989 orders, less 749 orders than are unlikely to be delivered according to accounting rule ASC606 for a net total of 3,240. This compares with a backlog of 5,822 for the A320neo family from Airbus, plus 484 A220, for a total of 6,306 narrow-bodies at Airbus. The market share for firm new orders stands at 66% Airbus and 34% Boeing, quite a difference from a few years ago.

While we do not expect Airbus to maintain a near 2/3rds share of the narrow-body market indefinitely, it is likely that the market share advantage will remain above 10% for the foreseeable future. That dramatically changes the market dynamics from a game of equals, which it has hovered around for some time, to a game in which Airbus has an inherent advantage.

Boeing lacks an aircraft to compete with the A321neo family, and the new NMA, which appears to be a wide-body, will need to achieve dramatically better economics to be successful. Achieving superior economics with a wide-body against a narrow-body of similar size, as Boeing knows from its 757 and 767, is simply not possible without a technology breakthrough that a competitor cannot match. We do not foresee Boeing offering a differentiated technology that Airbus could not match in a new model, such as an A322, to counter it. As a result, we don’t expect the NMA to gain traction with the low cost carrier market, where a 220 seat aircraft with the lowest seat-mile costs is needed.

Insight

The 737 MAX was the result of a reaction to the potential loss of an order from American Airlines, a long-time Boeing customer. With 20-20 hindsight, the best thing to do would have been to ask American to wait for the new model, deliver it within 5-6 years, and watch Boeing “leap frog” its competitor to give American the most efficient fleet. But Boeing didn’t do that, when senior management panicked, overruling engineering to choose to re-engine a derivative that was, essentially, one stretch too many for the aging 737 airframe.

The effectiveness of this airplane, other than the wonderfully efficient and optimized -8 variant, was simply not as good as the A320 family. With 8% more seats, the MAX 8 had an economic advantage over the A320neo. The MAX 9 and 10, however, fell well behind the A321neo, which has recently become Airbus best selling model.

Prior to the pandemic, the narrow-body market was shifting upwards in average size for new orders, moving past 150 seats and approaching 170 seats, larger than either of the smaller models. The 185 seat A321neo had a substantial advantage over the 170-seat MAX 9 and 175-seat MAX 10, and has maintained that lead as the market has shifted upward. Boeing simply doesn’t have a viable competitor in that size category..

The irony is that Boeing built this market segment with the 757, which was an ideal aircraft for where the market re-centered itself, but with old-technology cockpits and engines, simply could not compete effectively against newer technology. Boeing chose not to replace the airplane that would have been the “grand slam home run” as the market moved to exactly that size aircraft with a similar flexibility in range.

Now Boeing faces a technology decision, as new engine technology is likely to become available in the 2030 time frame. Should Boeing, at a 1/3rd to 2/3rds disadvantage in orders, introduce a new airplane sooner to fill the gap, but perhaps without the latest technology, or wait for the next generation of engine technology when both Boeing and Airbus will likely introduce high tech replacements for their existing models. The launch timing for the “FSA” or Future Small Aircraft will be a bet the company decision for Boeing. Let’s hope they make the right choice.

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