Premium 2018.22 – Boeing’s war on the A330neo

Airbus announced its A330neo at the 2014 Farnborough Air Show. The idea was that this refresh would act as a highly disruptive offering in the market – close to the 787 in performance but at a considerably lower cost. The concept was plausible. Market reaction to the announcement came with 121 orders. In addition, Delta Air Lines ordered 25 to start replacing their 767s, despite having a legacy order for 787s (later canceled) placed by Northwest Airlines. Currently, there are over 200 orders for the A330-900neo but none for the smaller A330-800neo. The A330 has proven to be a very good program for Airbus. It beat the 767 and befitted from the 787 delays. The A330 won against the 777-200ER at Qantas where both A330 models were ordered. Airbus spent $2Bn developing the A330neo compared to over $30Bn Boeing spent on the 787. Whereas the A330ceo has a 13-15% better fuel burn than the 777-200ER, Airbus claims the A330neo is 25% better. This improvement makes the A330neo is a good match for the 787 in terms of performance and pricing. Supporting Airbus' view is this slide from today's presentation at the delivery of the first A330neo to TAP. It’s no wonder then that Boeing is out to attack the A330neo in any campaign. Boeing wants to see off the A330neo. Boeing particularly doesn't want the A330-800neo to gain a foothold in the market and reduce the potential market and business case for the proposed 797. The battle for the middle of the market is ongoing. Boeing's campaign against the A330-800 has been successful. Now four years after Farnborough 2014 and both Airbus and Boeing have seen the market evolve. The A330-900neo is about to be delivered, on time. Boeing in the meantime has also made big improvements on the 787, particularly in improving production efficiency. What does this mean? Airbus has, in the A330neo program, the disruptive aircraft it wanted. Boeing has managed to cut its 787 production costs as it moved rapidly down the learning curve. Look at the following chart – Boeing is now able to deliver a 787 faster than a 737. Customers ordering a 737MAX must wait for about five years for a delivery and slightly over two years for a 787. This provides Boeing with a tremendous advantage, including lower costs. These lower costs allow Boeing to price more aggressively. Consequently, the market gap that Airbus saw between the A330neo and 787 has shrunk considerably. The A330-800 could act as a replacement for aging 767-300ERs and 777-200ERs and even compete with the 787-8. The A330-900 competes favorably with the 787-9 and -10 in economics and capital costs. Hence, Boeing is now much more aggressive and appears willing to close any gaps between the 787 and the A330neo in pricing. Because the A330-800 is at the upper end of the middle of the market, where Boeing has its NMA focused, it is important to stymie an progress on the A330neo. Just Airbus is using its A321neo at the lower end of the middle of the market against Boeing's MAX, Boeing is using its 787-8 against the A330-800. In several recent competitions, the 787 has beaten the A330neo. It happened most recently at American, Hawaiian and Vistara. We did a quick look at this and concluded that Boeing’s competitiveness is supported by its alliance with GE. Sources advise that, in the American deal, Rolls-Royce did not or could not match what GE was doing to help Boeing. Rolls-Royce faced challenges with its 787, A330neo, and A380 engines. Last Friday it announced large layoffs. Rolls-Royce likely does not have the financial muscle to match GE. For American, selecting the 787 is worth pondering. As the chart above illustrates, a typical A330-200 mission is from about two hours at the low end to over ten hours. Will American get the same kind of flexibility in the 787-8 as it gets with the A330ceo? Perhaps, but there is an argument that the A330neo could serve their needs better. After all, the 787-8 is a long-range aircraft that is probably less efficient on two-hour missions. When we look at the African market, where the A330-200 is the most popular widebody, missions to Europe work well with the A330ceo. But for services to North America (as considered by Rwanda Air) require the range of an A330-800. There are reports this airline is considering exactly that choice. But there’s more to it. Another part of the answer as to why the 787 has been winning is the way Boeing is looking at aircraft sales -- in a new context of services. Boeing argues it has a more efficient aircraft in the 787. But Airbus and Boeing are experts at pricing to the point of economic indifference. As we have explained, the A330neo and 787 are very closely matched in fuel burn. It appears something else has changed, and Boeing, which should be taking a premium, is pricing at levels lower than the “less efficient” Airbus would traditionally price at. Airbus claims it would not price at a loss for American and says that Boeing did just that. Of course, this wins Boeing orders. The answer may also be in services. Boeing is no longer looking at a transaction as only a product sale, but a total sale for the company, including multiple service elements. Those elements include maintenance, materials management (spare parts inventories, initial provisioning), training, routing services, predictive services for operations and maintenance (big data), engineering, configuration, and records management services. Boeing offers all of these via Boeing Global Services, which adds considerably to revenues over the life of an aircraft. However, consider that American has its own MRO and may not be a big buyer of Boeing’s services. So, we wonder, is there added value for American? With these service revenue streams, an aircraft becomes a more like a razor and blade strategy -- sell the airplane once and reap 20-30 years of aftermarket services. The razor and blade argument works very well when one considers the engine business. Incidentally, it is interesting to note that Boeing today has several senior people who are ex-GE and understand the engine razor/blade approach very well. It's not just the airplane, but what you sell with it. Airbus also has a services division, but it got started later than Boeing’s. That said, Airbus does sell services to the likes of British Airway and Cathay Pacific. So, any gap between what Boeing offers in services and what Airbus offers is probably small. There are other factors worth considering: Pricing – by bringing the GE relationship to bear, Boeing has seen GE powered 787s sell well against the A330neo. Age – the typical A330-200 is ~9 years old and the typical A330-300 is ~7 years old. Replacing an A330ceo with an A330neo is taking longer than expected. The chart demonstrates the young age of the active A330ceo fleet; 65% of the fleet is ten years or younger. There is no replacement wave because only 18% or 222 are 15 years or older and we know there are A330neo orders for roughly this number. Fuel – the A330neo was first offered as fuel prices went below $50/BBL. Airlines kept their aging 767 and 777-200ERs. However, fuel prices have doubled in the past year and this means retirements are likely to accelerate, providing more opportunities for both the 787 and A330neo. Boeing will continue to fight the A330-800 in every campaign because it is a threat to the 787-8 and future larger NMA. To date, Boeing has been successful. Airbus has a fight on its hands and needs to be patient and persevere as it did when the A330 was first launched.

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