Daily Insight: Friday 8 March 2019: The 797 gaining support

News AirLease and Avitas have both indicated that the Boeing NMA, or 797, is likely to proceed ahead on schedule, with the formal launch now deferred until 2020, rather than the 2019 Paris Air Show, as was expected. But the business case for this new aircraft has remained the sticking point, and Boeing management has indicated that the business case for the new aircraft must stand alone, without anticipated revenues from Boeing services. There are two overriding issues that have emerged to date. First, can Boeing develop a twin-aisle aircraft that is economically competitive with a smaller single-aisle aircraft? Second, what will this require from the supply chain to achieve economically? Analysis Boeing’s objective is to build a small wide-body twin that can compete economically with smaller single-aisle aircraft, both in acquisition cost and operating economics. This represents a significant challenge. Given that wide-body aircraft are larger and heavier than their narrow-body competition, innovative materials will be needed to keep weight low. But those materials, particularly composites that require an autoclave to cure, tend to be more expensive than traditional aluminum or newer aluminum-lithium alloys. How can Boeing keep costs down if it needs to set a new standard in wide-body economics? Narrow-body aircraft also tend to be more fuel efficient than equivalent capacity wide-bodies, and while a short-term advantage could be gained in the near term, the next generation of narrow-bodies (the existing mainstream models derive from 1967 and 1989 designs) will likely represent a technological leap forward that will be equivalent to the gains from the NMA by their introduction in 2031. Is a decade of economic leadership enough to generate the sales needed to support the business case? That will all come down to pricing and economics - which leads us to the supply chain. Boeing will likely require exceptionally low pricing for the NMA from the supply chain to make the economics work. That will likely result in some new terms and conditions, and tremendous pressure to lower costs throughout the supply chain. Those who complained about Partnering for Success will be facing an additional hard reality for NMA, and investment will likely be required to gain a production contract. Insight Boeing has traditionally had lower margins than its supply chain, and is working hard to reverse those positions. There will be increasing price pressure on suppliers as Boeing attempts to price the NMA to negatively impact the A321, which is currently the leader in the middle of the market sector, having effectively replaced the 757. Adam Pilarski recent said that Boeing will “get a wonderful widebody plane at narrowbody economics by beating up suppliers. Boeing will say, if you want to be on this program, you have to spend money, and that includes the engine people. It will be like buying the right to be a supplier.” We concur with Adam that Boeing’s supplier terms and conditions for the NMA will be more onerous, and will set the stage for the new Future Small Aircraft (FSA), the next program scheduled for a 2030-2031 entry into service to replace the 737MAX. The concessions that Boeing can obtain from the supply chain for NMA will set the stage for different future economic arrangements and tax the supply chain much further than Partnering for Success. The NMA appears to be well positioned to replace the 767, but to achieve the economics to replace the 757 will require low capital costs. Achieving that will require “investment” by Boeing suppliers and likely result in the aircraft being assembled outside of Puget Sound. We fully expect that Boeing will choose a Southern location with lower costs and a non-union environment as it continues a slow migration from Seattle to lower cost areas for production. The 787 line in Charlestown was only the first step in this evolution. The business case for the NMA will likely require lower assembly costs, as well as lower prices from suppliers. The screws are already starting to turn as suppliers evaluate their potential participation in the NMA program. We expect some turn-over in the supply chain and painful decisions across the industry when Boeing formally launches the program in 2020.

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