Insight Wednesday 12 August 2020: A Contrast in Timing

News:

Two stories illustrate the contrast in timing between Airbus and Boeing in the narrow-body market this year. The first speaks about Airbus pressing on with its new plan seen as immune to the travel slump, while the second tallies July cancellations that have cut the MAX backlog by 860 in 2020. It all comes down to having the right product at the right time, and coming out of the pandemic, Airbus has that product and Boeing doesn’t.

The A321XLR provides the economics of a narrow-body aircraft with a longer range, making the aircraft capable of trans-Atlantic operations and is the ideal replacement for aging Boeing 757s. As a lower-cost alternative with lower seating capacity, the aircraft is ideally positioned for airlines coming out of the pandemic seeing lower traffic on key international routes.

With more than 450 orders from carriers that include American and United in the US, the A321XLR faces no current competitor from Boeing, which did not replace the 757 nor provide an efficient replacement in the MAX series.

The MAX10, which has not yet been certified, is to be the competitor to the A321, but it falls short on both range and runway performance to effectively compete. Combined with the poor public image of the MAX after the two fatal crashes and an 18-month grounding, it is doubtful that Boeing can match Airbus’ success in the large narrow-body market.

Analysis:

Wide-body aircraft, the mainstay of international travel, have been hit hardest during the pandemic, as they have higher operating costs than narrow-body aircraft and with traffic levels substantially down from prior levels, cannot easily be filled. As a result, airlines are seeking to utilize narrow-body aircraft that are less expensive to operate to replace more expensive aircraft whenever possible.

The Boeing 757 was utilized for trans-Atlantic operations between smaller markets in the pre-pandemic period but has since transitioned to major markets to replace wide-bodies. But the 757 entered service in 1982, and even the most recent models are beginning to age, both physically and economically when compared with the A321XLR. The problem for Boeing is that they spent $43 billion on share buybacks rather than filling gaps in their product line, which has cost them both market share and market leadership.

The MAX series of Boeing 737s can be utilized for some trans-Atlantic routes, and Norwegian successfully operated 737 MAX8 aircraft from the UK and Irish airports into the Northeast US. The MAX lacks the range for London-Miami or Rome-New York that the A321XLR can easily handle. Therein lies the advantage for Airbus.

But that doesn’t explain the gigantic walkaway from the MAX, whose backlog has been reduced by 860 airplanes this year alone. One reason for the massive walkaways is that the FAA safety grounding of the aircraft put Boeing in a position from which they could not deliver aircraft contractually on time. That enabled airlines to cancel orders, receive their deposits back, and walk away without penalty. As a result, it is easier to walk away from a MAX order than an A320 order from a legal standpoint.

Another reason is that airlines suddenly have a choice again. Some airlines may have wanted to order the A320, but with backlogs out 7-8 years, there were no delivery slots when airlines needed the aircraft. Today, with the pandemic, demand has fallen and delivery positions have become available, and airlines are poised to re-order aircraft once demand returns.

A final reason is that airlines fear that the traveling public may shun the MAX. In the past, aircraft that have been grounded for safety reasons from fatal crashes and come back, like the DC-10, Lockheed Electra, and DeHavilland Comet, occurred long before the days of social media and the Internet. Today, the potential for a MAX boycott by passengers is stronger than it was several decades ago given more diverse communication channels.

Insight:

Boeing examined the business case for a smaller wide-body, the New Mid-market Aircraft, but after analyzing the success of the A321 family in replacing the 757, determined that the market simply was not there to successfully bring the aircraft to market. That gap in its product line had been and continues to be exploited by Airbus, who are using the A321XLR to further cement their leadership in the large narrow-body market.

With traffic remaining low in both the US and international markets, demand is expected to be weak for several years, and airlines will take delivery of aircraft that are more efficient and defer those that are either less efficient or too large for their needs. The A321XLR is on the delivery list, while A330s and 787s are being deferred.

The MAX crisis had already placed Boeing at a market disadvantage, as the limitations of a 1960s design finally hit home with the MAX. Boeing tried to do too much with an older airframe and failed from both safety and performance standpoints when compared with its competitor.

While the A321XLR may not be the ideal airplane for the middle of the market role, it is currently the viable option. With that segment of the market growing post-pandemic, Airbus has hit on the right product at the right time, while Boeing is enduring the perfect storm of a safety grounding followed by a global pandemic. Timing is everything, and this is not Boeing’s time.

Views: 0