Premium 2018.8: The Wide-Body Pricing Fray

While much of the discussion at ISTAT this was about the middle of the market, digging a bit deeper into recent transactions and campaigns indicates that the price war is intensifying between the A330neo and 787. It appears that Boeing is being quite aggressive in pricing in order to preclude the A330-800 any market traction to keep as much of the market as possible for its 797. Airbus is countering with aggressive pricing on its own models, including the A321LR and A330neo and even the A350 family. With the 797 a few years off into the future, today's campaigns for the near-term lift between 2021-2024 are placing the A330neo, A350, and 787 directly against each other. Pricing dynamics are changing, becoming even more competitive, with heavy discounting. List prices have become absolutely meaningless and bear little resemblance to actual market transactions, as we've discussed here before. Our market intelligence shows prices for larger customers tend to be very heavily discounted, as shown in the table below: The larger discounts for the A330neo recognize the fact that the re-engined models are not as efficient as the competing all-new composite fuselage 787 and A350 series. But the OEMs are expert at pricing to the point of economic indifference, based on operating cost differentials, expected utilization, and the cost of capital. Pricing and negotiations have become a multi-level chess game, with the recent insertion of services in addition to aircraft. Several other factors also impact pricing. For example, when is a 787 not like another 787? When it is the -8 versus the -9 and -10. The -8 shares only between 40-50% of its parts with its larger brethren, which were developed much further down the learning curve and utilize different and more efficient production processes than the earlier model. The 787-8 has a cost & weight problem. The larger -9 and -10 models are actually less expensive to build than the smaller initial model, the -8. Estimates of the cost differential are in the range of $12-$18 million per aircraft, with the larger aircraft counterintuitively less expensive than the smaller model with a lower list price. The impact on margins is, to say the least, substantial. Needless to say, Boeing would prefer to sell the larger new models than the less profitable smaller models, even if the smaller model is the “right size” as a 767 replacement. But not selling that model leaves no viable Boeing product as a 767 replacement in the short term, as airlines need to wait several years for the 797/NMA. If an airline wants a 250 seat aircraft, the only option at Boeing today is the 787-8, as authority to offer the 797 hasn't yet been granted by the Boeing board. But margins are so poor, when compared with other models, that Boeing is pushing larger models and “added profit potential” in its sales campaigns with major airlines. At the same time, Airbus suffers from a credibility issue, having canceled the A350-800 and forcing its customers to move to the larger A350-900. Looking at the A330-800, the smaller neo model, which lacks orders, Airbus has to overcome the hurdle of convincing customers that the program will actually be built and is not just a paper airplane. At least a physical A330-800 exists whereas an A350-800 does not. While the market in general and Airbus fully expect that the A330-900 will be the better selling model of the two, given its superior seat-mile economics, the A330-800 is the niche aircraft for either smaller markets or longer-range missions. It is also likely to be the basis for the next MRTT. Airbus must convince airlines that the 253 seat A330-800 is the ideal 767-300ER replacement. That isn't a bad argument if the aircraft is correctly priced, and Airbus can convince airlines which ordered the A350-800 and are skeptical that the aircraft will actually be built. With the three US airlines operating aging 767-300ER fleets, American, Delta, and United will all be making some replacement decisions in the short-term. Delta already has some A330-900s on order but will also look at the 797 and keep its 767s a bit longer. American and United are currently looking at options and are in discussions with the OEMs. Our colleagues at AIR (AirInsightResearch) indicate that the market size for the MoM segment will be over 5,000 aircraft over the next 20+ years, including replacement and growth. Today, the 787-8 and A330-800 are of this. Airbus, with lower development costs for its A330neo than the Boeing 787, is pricing aggressively, yet still not having much market success. That likely means that Boeing is countering their offers with exceptional deals of their own, and Boeing may still be losing money on every 787-8 it delivers (while making money on the less expensive to produce -9 and -10 models). Boeing has combined the accounting block to cover all 787 models, and as a result visibility into individual model profitability is obscured. Boeing's recent wins at Westjet and Hawaiian are therefore to be looked at with some degree of skepticism with respect to the a) margins on those deals and b) a true and accurate reflection of "fair" market values of these aircraft when priced rigorously. How much of a hit will Boeing be willing to take to continue denying market space to the A330neo? But the price war is apparently hot and heavy between the two OEMs, pricing incrementally to win the key 767 replacement orders as quickly as possible. The Bottom Line: Airbus wants to drain Boeing's profitability on the 787-8, forcing it to develop a new MoM aircraft against which it could offer a low-cost alternative in the A330-800. Boeing wants to keep the A330-800 from gaining market traction by contesting every offer with attractively priced 787s until its 797 becomes available as an alternative to the 787-8. Our assessment is that neither OEM will earn the margins they need on aircraft and will need to rely on new and unproven aftermarket and service products to maintain margins over the next decade. The question of how well “services” catch on with each OEM may determine who wins the current price wars.

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