PREMIUM #139: COMPETITION AT THE HIGH END OF THE NARROW-BODY MARKET

Boeing’s recent introduction of the 737MAX8-200 with an order from Ryanair is changing the dynamics of the high end of the narrow-body market. It appears that the MAX8-200 may cannibalize potential orders from the 737 MAX9, which has been a much slower seller than the competing A321neo. The Lion Air MAX order for 201 aircraft is questionable as to model breakdown. Boeing has publicly indicated that Lion Air will either be the launch customer for the MAX9 or the first customer in Asia for the MAX8 – but no split has been announced. Based on the order, dollar wise, they can’t all be MAX9s. We split the order as 100 MAX9 and 101 MAX8. Boeing recently announced a 737MAX9 order from Irish lessor Avolon, and in the process released a data point which is eye catching. According to Boeing “the 737 MAX 9, the largest in the 737 MAX family, offers the best fuel-efficiency per seat and will be 7 percent per trip less expensive to operate than its competitor, the A321neo.” As one can imagine this piece of information is viewed skeptically in Toulouse. As a third party, we have gathered data from each manufacturer, airlines, and leasing companies. Since neither airplane is in production, performance numbers are likely to change slightly before EIS, as the OEM and engine manufacturers will continue to tweak and refine designs. Airbus has frozen its A320neo design and the aircraft has just undertaken its first flight. Based on the best currently available data, our independent analysis shows slightly different results, as shown in the table below: We show the 737MAX9 to be between 4-5% better in trip costs than the A321neo, but the A321neo is between 1-6% better in terms of seat-mile costs, using a layout with equivalent seating comfort. Boeing’s explanation of the cost differential doesn’t seem to hold water. Boeing told us the basis of their claim is as follows: “Based on our analysis the 737 MAX 9 will retain the efficiency advantage between the 737-900ER versus the A321 over the A321neo and be around 6 percent lighter. This lighter airframe combined with the overall efficiency gained from the engines and aerodynamic improvements and lower maintenance costs add up to make the 737 MAX 9 cost less per trip to operate at any distance. The assumption in our 7 percent calculation is based on a standard dual-class comparison at 800nmi.” Airbus’s view is, unsurprisingly, quite different: “While the more complex structural changes to the MAX9 have resulted in around 3.2 tonnes more weight addition vs the 737-900NG, the more capable A321neo with significantly higher bypass ratio engines, is only 1.6 tonnes heavier than the A321ceo. Moreover, coupled with the A321neo’s recent passenger capacity boost potential to 240 seats, versus only 215 seats for the MAX9, the net result is that the A321neo is around five percent lighter per seat than the MAX9, which also relates to the advantage for the A321neo of around 14% better fuel burn per passenger vs the MAX9. Those are some examples of the A321neo advantages, which drives a double-digit cost-per-seat advantage of 13% compared to the MAX9 on a typical 800nm sector. The gap is increasing, and we now see a very high demand for A321s, and are ramping-up production so that soon half of our single-aisle production will be A321s.” With 7.5% more seats at the same pitch, the A321neo has a capacity advantage, and also offers better range and runway performance. A key question for Boeing is whether the MAX9 will improve on the performance of the 737-900ERW, which often cannot complete flights without a tech stop from the US West Coast to Atlanta from short runway airports, like San Diego, and is range limited with full loads. That may be a factor holding sales back in the marketplace. The customer base for each aircraft is interesting. Airbus has a wider customer spread. Based on our order assumption, Boeing has nearly half (46%) of its MAX9 orders tied up with Lion Air. This is not unusual these days as illustrated by Emirates at the A380. But Lion Air is not Emirates either in terms of fiscal strength or stature. Airbus is also exposed to Lion Air (11.5%) but it has four customers that account for just under half its orders. People within the industry advise us that the MAX order has yet to be divided into the various models. Here’s the status of total NEO and MAX orders as of September 22nd, based on our split of the Lion Air MAX order. For this analysis, we have split the 201 Lion Air order between the MAX8 and MAX9. The Bottom Line: The A321neo and 737 MAX9 are very close in terms of economics, but not to the degree Boeing claims once seating capacity is adjusted to utilize equivalent seat pitch for the two aircraft. A key to the differential in sales between the aircraft is likely not economics, but the runway capability of the 737 MAX9, which is expected to be similar to that of the 737-900ERW. If runway restrictions reduce loads, or fuel uptake, as has been experienced on some routes, so the MAX9 could be less profitable to operators. Let’s hope the MAX9 is better than its predecessor in that regard. But the MAX9’s runway performance has become a “wait and see” development with customers who are deciding how to split their MAX orders. Today, the overall market advantage, in our view, belongs to the A321neo.

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