News:

After 9-11, it took six years for airline traffic to fully return.  With the coronavirus having a deep impact worldwide, airlines will be looking carefully at the mix of aircraft in their fleets. As they look forward expecting lower traffic levels, airlines, who are risk-averse, are looking at retaining many of the smaller aircraft in their fleet to better match capacity to traffic and maintain, to the degree possible, higher yields.

That is likely to stimulate demand for several aircraft types, including the A220, A321 family, Embraer E2 jets and potentially the 737 MAX7 and MAX10. The A220 and E2 jets will replace larger narrow-bodies, while the A321s and MAX10s could replace small wide-bodies for certain routes.

With international traffic likely to remain a patchwork quilt of restrictions in the near term, and uncertainty over longer-term impacts, airlines may choose to continue to favor smaller wide-body aircraft over larger ones for their international routes. This favors the 787 and over the larger A350-1000 and 777X models. The A380 and 747-8 are a dying breed, and most of the former and a portion of the latter may not return from the deserts where they are currently stored.

Of course, many of the oldest aircraft will simply be retired, including most of the MD-80s, 757s and 767s currently in passenger service. Some will continue on as freighters, but the era of Boeing’s middle of the market twins appears to be coming to a more abrupt end than anticipated.

Analysis:

The A220 provides an intriguing option for airlines, particularly with a longer-range A220-300ER on order by Breeze, the new airline founded by David Neelman. This aircraft will have the flexibility of having trans-Atlantic range with a smaller capacity, enabling new routes to open between smaller cities. That flexibility is important to the market for two reasons; first, the ability to open new routes and second, the ability to fill the aircraft and be profitable quickly.

The A220 is the most efficient narrow-body in its class, having been designed around the Pratt & Whitney GTF engines that power it, and is primed for success. It will be one of the few aircraft to see production rates rise over the next few years.

The competing Embraer E2 jets are also very efficient, and offer long-range for domestic operations but cannot cross the Atlantic. A re-engined version of the popular EJets series, the E2 jets are comfortable, well received by passengers for a spacious two by two economy seating configuration, and also quite efficient, powered by the same Pratt & Whitney GTF as the A220.
Unfortunately, the aircraft has not been selling well for two reasons. First, the EJets fleet is quite young and therefore the replacement market is a decade away. Second, the proposed acquisition of the Embraer commercial aircraft business by Boeing has not yet been approved by international regulators. Customers are accustomed to dealing with Airbus and Boeing on multi-aircraft transactions, and the inability to put those types of transactions together pre- has customers sitting on the fence waiting for the merger to happen before they open more serious negotiations for the aircraft.

Since the coronavirus, the market value of the entire Embraer enterprise has dropped well below the agreed on value for the commercial aircraft segment. That places the proposed deal in jeopardy, as Boeing would be dramatically overpaying for an asset at a time that it is asking for a federal government bailout. With Boeing having squandered $43 billion on stock buybacks, moral hazard considerations may come into play as well, with the optics of $4 billion of taxpayer money going to Brazil politically difficult. As a result, the jury remains out on this acquisition.

The A321 has become the de-facto Boeing 757 replacement and has been ordered by all three of the US legacy majors. Boeing was too late to the market with its proposed new middle of the market aircraft and has essentially lost its opportunity until the next generation of aircraft and technology emerges around 2030.

The A321 is a replacement for older 757s domestically, and even 767s on international routes. With industry-leading seat-mile for narrow-body aircraft and longer range with new A321XL and XLR models, this aircraft has become the go-to aircraft for both traditional and low-cost carriers.

The Boeing MAX10 is a competitor to the A321 but has been outsold to date by a wide margin. This is primarily due to more limited range and runway performance for the MAX 10, which does not measure up well against the A321. Nonetheless, this larger MAX model offers improved seat-mile over the baseline MAX8.

With a move to smaller aircraft, the MAX7 may finally generate some interest in the market. To date, it has had limited success, even after a stretch to boost its seat-mile vis-à-vis the A220-300 and A320neo. The question, once the MAX re-certification problems are solved, is whether this aircraft family can regain momentum after the grounding and loss of several hundred orders.

Insight:

In the narrow-body range, Airbus currently has a significant advantage over Boeing with two exceptionally efficient models whose popularity is growing, the A220 and A321neo. With both the MAX return and Embraer uncertain, it will be difficult for Boeing to effectively compete in the narrow-body sector in the near term without substantial discounting.

We foresee a 60%/40% market share split between Airbus and Boeing for the near future, until the Embraer can be completed and the MAX successfully returns to service. Until Boeing and Airbus introduce the next generation of narrow-body aircraft in the 2030 time frame, it is difficult for us to project Boeing returning to a 50% market share in narrow-body aircraft.  The coronavirus outbreak may favor Airbus, which is better positioned to capitalize on opportunities as airlines recover and alter their fleet plans.

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