The aviation industry’s pricing process is generally opaque.  Nobody pays retail, even though these are the only prices quoted,  Take a look at this chart which is ranked in declining cost per seat. All prices apply to January 2012 and come from the OEMs. (Boeing‘s prices have increased 6% since then.)

When one looks at retail prices and computes this to a cost per seat, an interesting picture emerges. Take a look at the E-190 and E-195; the more capable and expensive airplane is over 4% cheaper on a per seat basis.

For the sake of this post, we are use retail prices. But discounts are de riguer. Often the discount can be deep – especially with a program launch customer, and we have seen discounts at more than 50% for competitions for large orders from bellwether customers.

Based on retail prices, the per seat cost of an A319neo is 52.3% higher than an SSJ.  But what if, say, Air Asia gets a 50% discount as an A319neo launch customer? Suddenly the difference with a (retail) SSJ on a per seat basis is under 5%.  There is no doubt that Sukhoi could not match Airbus because it does not have the product range across which to spread such a discount, nor the financial wherewithal.  Think about this when considering Aramavia’s switch to SSJ from the A319. How did that deal work?

Comparing an A319neo with a 737-7MAX is equally instructive.  First, the MAX is 12.5% cheaper than the A319neo and 11.1% cheaper on a per seat basis. Even when one considers discounting, the price spread between the two cannot sustain; airlines and lessors ensure pricing is equal or at least ensure the deal offered is priced to the level of economic indifference.

The Bombardier CS300 looks well priced (retail) on a per seat basis compared to the Airbus and Boeing products.  But of course discounting and deeper pockets come into play again – Bombardier cannot match Airbus or Boeing in a price war.  Which is to say Airbus and Boeing can discount to 50% and stay in business with well established programs way down the cost recovery curve.  If the Airbus and Boeing are discounted 50% and are offered at between $300,00 and $340,000 (per seat), Bombardier has to discount by ~40% to be in the running.  Bombardier cannot afford this, since its program is new and therefore at the top of its cost curve.  But by removing a bathroom at the rear of the CS300 and adding six more seats, Bombardier could discount by 30% and remain in the game, but Boeing and Airbus could offer their larger aircraft at lower per seat costs.

The key for Bombardier, Embraer and Sukhoi may be right sizing.  As 100 seaters replace regional jets, and 160 seaters replace today’s 130 seaters, we are seeing growth in aircraft size as airlines attempt to minimize seat-mile costs.  But for many markets, the 160 seat jets won’t work, and a modern, cost-effective 100-130 seat jet would be ideal, and these aircraft, which are lighter in weight than the smallest models from Boeing and Airbus are more cost effective for certain routes.  Those new competitors, if they can withstand price competition from Airbus and Boeing, should win a fair share of new orders.

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