Premium #230 – Making Sense of Single Aisle Markets

At Airbus and Boeing, the trend in single aisle aircraft is quite clear – both OEMs are delivering larger aircraft, and have virtually abandoned the under 150-seat segment in recent years. The following chart shows Airbus single aisle deliveries from 2000-2015. The relative balance between A319s and A320s seen in 2000 has changed dramatically, with very few A319s now being delivered, while the A321 has enjoyed substantial growth at the high end of the market. Boeing has seen a similar pattern with its larger -800 gaining a higher share than its smaller -700 counterpart in the marketplace. While the large -900ER aircraft has also gained in recent years, that aircraft is being outsold by the Airbus A321 by a wide margin, and has not gained substantial market success. Another way to examine the dramatic growth in aircraft size over the last 15 years is to look at deliveries as a percentage of the total. The following chart illustrates Airbus deliveries. It is notable that the larger A321 has grown from 10% of the market to 30% over that period, while the smaller A319 has shrunk from 45% down to 10% during the period. Similarly, the following chart shows deliveries from Boeing by aircraft size. At Boeing, the -900 grew from almost nothing to about 13%, while the -700 shrunk from near 40% and a peak of near 60% in 2004 to about 5% last year. While the 737-600 was never a volume product, the 717 did account for about 15% of deliveries in 2001 before that program was cancelled. If we examine historic data from both Airbus and Boeing, as shown in the chart below, the only conclusion that can be reached is that the narrow-body market has moved substantially upward in terms of aircraft size. But what does the future portend? Looking at the outstanding order book is one way to tell, although there is often a minor bit of bias from leasing company orders, often placed for smaller models to reduce progress payments and change to larger aircraft later. Looking at orders for new models, the A320neo family and the 737MAX family, we find the following: A320 family backlog by size: 737 family backlog by size: The backlog for new aircraft shows higher order levels for larger models indicates that the trend towards larger aircraft is continuing with the big two OEMs. While the great rush to order aircraft fell off a cliff in 2015 and 2016, with 7-8 year backlogs, the industry is now apparently catching its breadth while airlines start to take delivery of new technology aircraft. Implications In examining the trends shown above, the relevant questions are: what were the factors causing the trend, are those factors still in play, and what other factors will influence the market that may not have been present over the last 15 years? Seat Mile Economics and Fuel Prices One of the key factors in the increase in aircraft size is seat-mile economics, largely driven by increasing fuel prices over the period in question. While fuel prices began to drop near the end of the period, most of the orders were placed during periods of high fuel costs. In such environments, fleet planners tended to gravitate to larger aircraft that provided better seat-mile costs, and airlines, particularly in the United States, abandoned smaller routes that became unprofitable due to a lack of traffic. (Consolidation also played a key role) Today, high fuel prices are a thing of the past, and with additional capacity from older aircraft that can easily restarted, fuel prices have effectively been capped for the foreseeable future at under $50 per barrel. The result is that a driving force for larger capacity has now been reduced. The rush to order the A320neo and 737 MAX have also slowed, as lower fuel prices mean that existing aircraft can remain profitable, since fuel burn savings are offset by higher capital costs when fuel prices are low. Today, an older A320ceo or 737NG can compete with the neo or MAX when capital costs are factored in. Several airlines have deferred deliveries of their replacement aircraft for that reason. The economic equation has changed significantly. New Technology Entrants Compounding the issue, there are two new technology entrants in the 100-130 seat market that obsolete the A319neo and 737 MAX7 economically – the Bombardier CSeries and Embraer E2. Both of these jets are lighter and more efficient than the “shrink” models from Airbus and Boeing, and offer better economics. As a result, Boeing was forced to increase the size of its MAX7 by 12 seats to better compete, but the CSeries is outselling the A319neo and MAX7 combined. The E2 also promises outstanding economics, and an established customer base with more than 1,100 E-Jets in service. With two strong optimized contenders in the 100-150 seat category, Airbus and Boeing have each seen the handwriting on the wall and are moving away from the segment in which they cannot effectively compete without dramatically reducing margins. There is more margin in selling an A321 or MAX9 than an A319 or MAX7. The Future So where does this leave the narrow-body market? The 100-150 seat segment remains substantial, and will likely be split between Bombardier and Embraer, with a smattering of orders for Airbus and Boeing. The answer is 150 seats and greater for Airbus and Boeing, with a renewed emphasis on their largest models. Today, Boeing’s 737-9 is being outsold by the A321 by a ratio of nearly 5:1 according to most industry estimates (Boeing does not reveal MAX orders by model). With that segment as the fastest growing in recent years, and providing higher margins than the mid-range aircraft, it is important that Boeing regain balance in that area. Boeing has been studying the potential for a MAX10, as well as looking at a new middle market aircraft. But the question today is whether enough of a market remains for a new model, as both Airbus and Boeing are due for new narrow body families in the 2030 time frame to take advantage of technological advances. A MAX10 launched today would have only about 10 years of sales until replaced by an all new narrow-body family. As we’ve seen with 777 and 777X, orders for the existing models dry up quickly once a new model is announced. It may be too little, too late for Boeing at the high end of the narrow-body market, as our analyses show the business case is simply not there for a MAX10 derivative. Advantage Airbus at the top of the narrow-body market. Aviation is a game of leapfrog, and Boeing has deftly maximized the value of the 737, first introduced in 1967 through four major aircraft series. The A320 dates to 1989, with the neo its second series, but focused on maximizing commonality. New technology at the lower end of the market with the potential for stretched models, particularly a CS500 from Bombardier, could be disruptive and force Boeing and Airbus to accelerate their planned “leapfrog” models that will replace current narrow-bodies scheduled for the 2025-2030 time frame. The narrow-body game has the potential for new competition in the heart of the market. Can Bombardier can pull it off and gain sufficient scale economies to effectively compete in a low fuel cost environment? Improving Engine Performance Pratt & Whitney has already announced a 2% fuel burn improvement for the A320neo family available in 2018. The geared turbofan has substantial growth potential. The competing CFM LEAP is viewed by some as having less growth potential. But GE is well known for its performance improvement programs and this could change things for the LEAP. Engine technology drives aircraft performance. With re-engined models, Airbus and Boeing must wait for the next generation of aircraft engines to power new aircraft. With typically a 15-year cycle for new generations of engines, that points closer to 2030 than 2025 for replacement models. The Bottom Line The narrow-body market has grown disproportionately with larger aircraft from Airbus and Boeing in recent years. The 100-150 seat market has been shrinking. But smaller cities that require airline service are still there, and waiting for an answer. The new models from Bombardier and Embraer will fill that requirement, and Airbus and Boeing will be relegated to the 150 seat plus market for the foreseeable future.

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