Airbus Gains, Boeing Loses in Single-Aisle MOM Monopoly

Our analysis last Friday generated more attention than we expected. Not all of it was positive, but that's how it goes. However a follow on issue has been percolating - if we argue that Airbus is being given a monopoly in the single-aisle MoM segment, can we value that? What is the value to Airbus and the loss to Boeing of allowing a single-aisle MoM monopoly? Like a lot of analysis that requires data that isn't public, one has to look in a reflection and deduce from that view. We selected the fleet data at ch-Aviation as a source. We developed typical seat counts from SeatGuru.com. These two sources are combined to form our model. In our previous analysis, we broadly defined the market size and volumes. Now we want to put values around that and get an idea of the monetary impacts. To test the viability of the data, we started by comparing the MAX 8/8-200 with the A320neo. These models have large fleets in service and are expected to be about even in pricing. This is exactly what we find. The A320neo got to the market first, but once the MAX8 was delivered, values were virtually identical. The MAX8 had a current market value (CMV) of $36.3 million to $35.9 million for the A320neo. A CMV difference of 1% put them as equals. The most recent data point shows the A320neo CMV at $53.3 million to $52 million for the MAX8 - a difference of 2%. There was a swing of 3% over the period in favor of the A320neo which is probably due to the MAX being grounded for ~18 months. Comparing the A321neo and MAX9 What we see is quite different than the previous comparison. When both models were in the market, the CMV for the A321neo was $42.5 million to $38.8 million for the MAX9. This was an 8.7% advantage to Airbus. Looking at the most recent data point, the A321neo CMV is $61.4 million to $52.7 million for the MAX9. Airbus now has a 14,2% CMV advantage. Interestingly, monthly lease rates show a consistent gap of $50,000 - the A321neo demands a premium as it should with more seats. If we look at the comparisons on a per-seat basis we see the following. The MAX8 should have a CMV premium over the A320neo because of its higher seating capacity. But its CMV is 2.4% below. The A321neo should have a CMV premium of 5.6% because of higher seating compared to the MAX9. But its CMV trades 16.5% higher than the MAX9. The data guides to the following conclusions: The MAX8 has a CMV lower than it should have compared to the A320neo. The A321neo consistently costs $50,000 more on monthly lease rates. In CMV terms, the A321neo trades at a considerable margin over the MAX9. The CMV "premium gap" for the A321 over the MAX 9 has risen by 63% over the last five years. Bottom Line We estimate Boeing must discount its MAX9 by ~$9m to offset market demand for the A321neo when facing a competitive order. If a potential order from a lessor or airline is for multiple models, Airbus can use its CMV advantage to offset discounts (via transfer pricing) on the package. Boeing's need for the MAX10 is clear as the MAX9 does not compete effectively with the A321neo. Boeing needs the MAX10 to close the growing gap with the A321neo. Boeing must bring the MAX10 to market ASAP. The fact that airlines like Delta and United have ordered the MAX10 even though they have A321s on order suggests the industry wants a choice and competition. For example, through October Delta had taken delivery of 28 previously owned 737-900s compared to a dozen new build A321neos. The need for this size aircraft is growing. Boeing not having competitive products reduces income as well as impacts multi-model transactions. Airbus benefits from a monopoly, which is artificial in a duopoly, providing it with income and flexibility on multi-model transactions. Airbus will accumulate capital and have greater R&D resources as a consequence. Over the long term, Airbus will deploy these R&D resources to ensure it retains its advantage. What is this advantage worth to Airbus? If Boeing does not bring a competitive model to market, Airbus will see its market share keep growing. This will give it ever greater negotiating power over the supply chain. That advantage is worth multi-billions of dollars. What is the cost to Boeing? Lost market share means less power over the supply chain and a steady increase in the cost of parts. This is a reflection of lost negotiating power. Boeing is also likely to have to engage in higher discounts to offset Airbus's advantages. The cost is billions of dollars - whether Boeing decides to bring a competitive model to market or likely even higher if it chooses not to.

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