Premium #320 – MOM Replacement in the US

We continue our review the market for the MOM this week. Last week we explained that we see the replacement market at about 2,200 aircraft. This excludes any growth – we know the market will grow, but did not project that growth in a replacement analysis. MOM has been thought as primarily a requirement for US airlines. Typically the MOM is the 757 and 767 market for Boeing and the A321 and A330-200 for Airbus. The US was the biggest market for the 757 – 780 of the 1,049 ordered (74%) were from North American airlines. Airbus and Boeing will each solve the MOM challenge in North America first, to take care of a large replacement market and second, to help those carriers grow new routes in light of advancing international competition. We published a chart last week that showed how Boeing's decisions allowed customers to move towards Airbus, enabling Airbus to enter and overtake Boeing into a segment that it first identified and controlled in the 1980s. While Airbus done very well in the North American market, Boeing should have a natural “home country” advantage (see Boeing deals). Despite that, Airbus has won market share in recent years with the A321/A321neo outselling the 737-900/MAX9 by a wide margin. The following chart lays out the US-based fleet for aircraft between 180 to 250 seats (MOM territory). It is a busy chart. Each airline has its own color and the bubble sizes reflect fleet sizes. The aircraft that fall inside the box are those we believe to be prime replacement candidates. There are only 396 of them. When looking at the MOM it becomes clear that this segment is a crossover point from single aisles to twin aisles. That switch makes the segment complex. All three US network airlines have already begun to show their hands in terms of what they might be doing by way of updating the fleet in the segment. The MOM is essentially the market that the 757 and 767 initiated in 1982. Airbus moved into the segment with the A321 and A330. With no replacement for the 757, the only Boeing solution is the 737-900/MAX9 and are viewed by most of the industry as not being up to par with A321. Airbus has captured American and Delta using the A321 as an alternative to the 757. On the single aisle side of MOM it appears there are solutions already available. Boeing’s 737 MAX10X appears to be a step to better match the A321, but we don’t foresee a strong market success for it. Boeing’s single aisle MOM strategy is still evolving. We have seen the MAX7 up sized. The MAX8 is a winner but the MAX8-200 negatively impacts the MAX9. Meanwhile, the MAX9 has been outsold by the A321neo by a wide margin. Perhaps the MAX10x will do better, but we simply don’t see it based on preliminary data. The following tables show the relative importance of the MOM fleet for the US legacy airlines. Typically, the MOM segment is about one-third of the fleet. If we split the MOM segment into the single and twin aisles, single aisle accounts for between 73% at Delta to 86% at United. The chart below shows that these airlines have seen some variation on how important the single aisle has been in the MOM sector. Over the last few years, the rise of single aisle MOM sized aircraft at United and American has been dramatic. As American reduced its 757 fleet, it acquired A321s. Delta also reduced its 757 fleet, but that fleet received a boost via the Northwest merger. Delta also acquired A321s and 737-900ERs to begin the 757 replacement process. United’s 757s were kept at a steady 97 until its merger with Continental, when the fleet grew to 136. This fleet has been reduced to 56 by 3Q16. Since 2011 United started taking delivery of 737-900ERs at a faster rate than its 757s were being retired. So we can see the single aisle replacement process is underway. American moving to Airbus, Delta buying Airbus and Boeing while United is staying with Boeing. With the single aisle representing about 80% of MOM, Airbus has won a significant share, with the A321neo being seen as a superior offering to the 737 MAX9, and likely MAX10, in economics and performance. Reviewing the other 20% that makes up the twin aisle MOM segment, the chart demonstrates this has been Boeing “territory” for many years. Unlike the single aisle segment, where 757 domination declined, the 767 held its ground better. We note that the A330-200 has started to make some headway. While the 767 numbers are falling, as one would expect with the ageing aircraft, the A330-200 numbers are slowly creeping up. Delta has been the largest of the big three to deploy twin aisle MOM aircraft, followed by American and United. Among these three carriers Boeing held a monopoly from 2000 to 2009. Airbus grabbed a 5% share in 2009 with 10 A330-200s at Delta (ex-Northwest). By 3Q16 the Airbus fleet was at 25 with American (ex-US Airways) also deploying the aircraft. Boeing’s hold on the segment appears to weaken with each year as it offers no ideal 767-300ER replacement. Although the 787-8 has entered American and United’s fleet, the aircraft is not an ideal 767 replacement due to its high capital cost and range. The Bottom Line This brings us to the latest talk about a 797. At the recent ISTAT Americas event, the talk was that Boeing is developing a twin aisle MOM aircraft. You have to look at infrastructure, airport constraints, capacity constraints, frequency constraints, and then see if you can superimpose an airplane that's between the 787-8 and 737 or between the A330 and A321," said ALC Chairman Steven Udvar-Hazy. "So, there will be a growing need for an airplane in that category. It's not magnified today, but if you look at the lifecycle of the airplane, it is significant. Don't forget the 737 is 50 years old this year. A critical constraint is engines: AerCap Holdings CEO Angus Kelly pointed out engine developments have not reached the stage at which such an airplane would appeal to a global customer base. "The key part of this is the engine technology," said Kelly. "If you're going to be searching for that window between the A321 market and the 787 mark...you need a bigger engine; you need a more efficient engine. It's not there yet." A potential launch customer for Boeing’s 797 is almost certainly United. The airline’s CFO Andrew Levy signaled strong interest replacing aging 757s and 767s during an airline panel discussion at ISTAT. He noted the A321 "does a nice job," but he added that it doesn't meet all of United's Newark operations to Europe. "That being said, the 757 didn't either," he noted, "We had some issued going deep into Europe on the westbound leg, Berlin as an example." Mr Levy went on to say, "It doesn't have to be a narrowbody. The new Boeing product is actually a twin (aisle), which we were skeptical (about) at first but after studying we actually think it has a lot of merit and if they decide to launch it would be something we'd be very interested in." Last week we showed how Boeing appears to have been dithering on the MOM segment for a decade and a half. Looking at the big three US carriers provides a deeper understanding of how the parts and pieces are evolving. Boeing’s 787-8 did not meet the 767 replacement, and came with a very steep learning curve. This caused resource constraints that forced Boeing to develop the MAX rather than an all-new narrowbody, and as we can see, that remains a work in process. If the 797 is a better solution, then the industry will be very pleased. The challenge is to get the 797 operating economics to approach that of a single aisle. Consider this, there are only 519 passenger 767s in operation. Its a tight market for a new aircraft development. For the 797 Boeing needs to see a substantial addressable market. Meanwhile Airbus benefits from a more clarified offering in the A321neo and A321LR. Airbus also offers the proven A330-200 and forthcoming re-engined A330-800neo for twin aisle MOM. While Boeing will require heavy capital investment for the 797 (less so for MAX10X), Airbus doesn’t face the same hurdles and will price its products accordingly. Airlines could favor Airbus for some time, which will add to financial pressures at Boeing. Today MOM is advantage Airbus.

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