Last week Airbus and Boeing provided two charts in their ISTAT presentations that sort of popped. Take a look. Pay attention to their use of color to highlight the point being made.

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Airbus’ chart seems to guide one towards seeing their focus to be on the A320neo and A321neo.  Sales of these aircraft clearly are supporting the Airbus proposition; the A320 and A321 are getting the sales.  They point out that the MAX8 is the sweet spot for Boeing.

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Here’s Boeing’s chart.  They define the heart of the market at 160 seats.  As they see it, their MAX8 is right on the money and the A320neo is a bit small.  Boeing’s sales similarly support the proposition – MAX8 is where most sales are taking place.

So what is the takeaway?  Is this an admission by the larger duopoly that they have abandoned the segment below 150 seats?

In the following chart we list the next generation orders. Boeing has not publicly broken down their MAX orders by variant. We believe the source has a credible breakdown, having followed each order to date.

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Airbus has 49 A319neos on order while Boeing has 60 MAX7 orders – and of these Southwest has 30 and WestJet has 25.  For Airbus the A319neo is only 1% of its neo orders, while at Boeing MAX7 orders are 2% of all MAX orders. Is there any wonder these two OEMs are looking upwards?

It would appear the sub-150 segment is being vacated by the big duopoly. Indeed we think an argument can be made that both OEMs are better off converting customers to the larger models even at the smaller model price – it would be less of a loss than actually building the smaller models and going through the certification process.

The sub-150 seat segment will be the new space for the smaller duopoly, Bombardier and Embraer, to fight in. Its not simple a 130 seat market, but the market from 100 seats all the way up to 150 seats.  However, as we have seen Airbus (particularly) and Boeing don’t want the smaller duopoly to get any traction.  Their use of the cudgel of pricing will ensure airlines and lessors stay in the fold.  Clearly in pricing terms the smaller duopoly can’t win – so they don’t even go there to start a fight.

The fear of the smaller duopoly going further upmarket from the 130 seat segment is valid.  Embraer has just built its first big airplane, the KC-390.  If anyone thinks that the knowledge gained from that project and process will stay within the military side of the company, they’d be very naive.  The KC-390 has been a superb training project.  Similarly Bombardier took a huge risk with the CSeries and is battling its way through the project.  Their track record in stretching aircraft speaks for itself – you’d be rational to assume a CS500 and CS700 are coming at some point in the future.

It is also interesting to note that technology leadership has passed to the smaller players, who have more modern and innovative designs. From composite wings to aluminum-lithium fuselages to advanced fly by wire, sleeker aerodynamics, and complete aircraft health management systems, the new technologies from CSeries and E2Jets are frankly more advanced than the 737 and A320 families, which began life in 1967 and 1988, respectively. Because technology impacts relative efficiency, it is not surprising to see the fade-out of the 130 seat models from Airbus and Boeing that have become economically obsolete when compared with their new technology competitors.

So where are we? It seems that Airbus and Boeing have vacated the sub-150 seat segment.  Except they haven’t said so.  They can’t say it because lessors and airlines will jump straight into the arms of the smaller duopoly.  And that just wouldn’t do at all.

A cat and mouse game is being played out. Airbus and Boeing quietly, and with determination, are moving their customers ever higher up the seat segments.  Hoping that their per-eminence in production volume (going up all the time) and ability to translate economies of scale into more competitive prices will drown out any interest in smaller aircraft. We think the game is obvious to see, but also has its limits. With nearly half of the routes in the world being flown by aircraft under 150 seats, there are many routes that cannot support the larger aircraft, as they lack the traffic.   For those routes, smaller aircraft are needed, and the offerings from the big duopoly are not economically competitive.  Unless they go for massive discounts. But they don’t need to and are better off pushing customers to larger aircraft.

While the heart of the market by volume has moved like Airbus and Boeing indicate, there remains an opportunity for the smaller duopoly. Is it 6,000 aircraft like Embraer suggests or over 7,000 as Bombardier suggests in their market forecasts?  We are uncertain of the market being that large, and it may in fact be in the 5,000 to 6,000 aircraft range. But we do know there are thousands of smaller aircraft below 150 seats that the market will require over the next twenty years.  That volume is certainly sufficient for the smaller duopoly to succeed and comfortably exceed their breakeven points on the CSeries and E2Jets.

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