The Boeing 797/NMA: An Economic Challenge

As we approach 2019, and the imminent announcement of what Boeing has in mind for the 797/NMA, let’s consider what drives the business case for the aircraft, and the economic performance that will be required to make it successful. We know that the aircraft will be in the 225-275 seat range. The industry rumor mill indicates that airlines are expecting a price between $65-$75 million, meaning a list price in the $130-150 million range. That is a key driving factor for Boeing’s business case analysis, leading to the question of whether enough airplanes can be sold at that price to create a profitable program? That will depend, in turn, on how much technology is required to achieve performance targets, and whether the supply chain can reduce costs if Boeing can push through a third round of Partnering for Success. Capital Cost is a Constraint Boeing, like any aircraft OEM, faces a series of trade-offs in the design of a new aircraft. New technology can provide economic improvements, but it often comes at a high price that could push the aircraft price beyond what the market will bear. Boeing is balancing several trade-offs, including competing engines, a composite or metal fuselage, advanced aerodynamic improvements, and high aspect ratio composite wing, among others, as it develops the final design and business case for the NMA. While it is unlikely that Boeing can choose a high-tech option for each trade-off and keep the price at its target, a blend of high tech with existing tech should provide an economically effective aircraft that is competitive in the marketplace. But how good does that aircraft need to be to be equivalent to competing aircraft, especially if it has a potentially higher price point? The NMA will be sandwiched between the Airbus A321LR and A330-800neo, which offer slightly lower and slightly higher seating capacities. Each of these aircraft has state-of-the-art new engines, and offer strong competing economics. As a result, Boeing’s task is not an easy one. Backing into Performance Requirements through Economic Analysis To analyze how economically effective the aircraft needs to be, a starting point is to take the target price airlines have told us they are willing to pay, we utilized our economic model to determine where the NMA will need to fall in terms of total economics to successfully compete against other aircraft models. For an aircraft in the $70 million range, we would expect a monthly lease rate of about $600,000 per month. Using that as a starting point, we can compare similar aircraft, as shown in the table below: That part of the equation is set. Now the question is how much better will the economic performance of the NMA need to be to be economically equivalent to the lowest cost aircraft in the fleet? The following table shows estimated costs for a 2,500nm mission in two class seating, as one might expect on a US transcontinental route replacing a Boeing 757-200. The major competitor on this type of route will likely be the Airbus A321neo or A321LR. (We have not included the proposed intercontinental A321XLR in this analysis.) Taking the mission costs, and calculating the number of annual seats, we can compute the total annual operating costs, total annual capital costs, and compute a total annual cost per seat, as shown in the following table: The chart below shows combined operating and capital costs per seat graphically, and how narrow-body and wide-body aircraft are clustered in this case. Because wide-body aircraft tend to be optimized for much longer routes, they would tend to have higher costs on trans-continental routes that would be in the target range for the NMA. So how good a performer will the 797 need to be? Since we’ve assumed a capital cost that the market tells us they want to pay, we can back into what the operating costs need to be to compete with the A321LR and A330-800. We’ve taken the A321neo, A330-800, and 787-8 as modern examples of aircraft that will be competing with the NMA. The A321neo, at $145.15 per seat for a 2,500 mission, is the least expensive new aircraft and provides the lost cost target for the NMA, while the competing A330-800neo is at $175.12 per seat, typical for a wide-body aircraft. We have chosen a target of $160 per seat for the NMA, as it is a small wide-body with additional comfort. Using that target, we can then back into what the operating costs need to be for a 230 seat configuration, as shown in the table below: Based on our analysis, the NMA will still need to be about 12.5% better than the 787-8, which is a tall order, to meet the target, although costs would remain higher than the A321neo. Matching narrow-body economics with a wide-body is not feasible, as it would require a 23% improvement over 787-8 economics to match the A321neo. The A321neo appears to be the new standard for low-cost transatlantic operations, with TAP introducing lay flat business seats in its aircraft for long-haul service. (Jetblue is also considering this) While seating configuration does impact economics, the NMA has a challenging target if it is to truly become a wide-body replacement for the narrow-body 757-200. The NMA appears to be targeted as a 767-200 replacement, for which it will be well suited. The Bottom Line The economic improvements required to be at the point of economic indifference between models is significant. A 13% jump in efficiency from the 787-8 is not an easy task. While it can be done, the question is how much expensive high technology will be required to achieve the economic target? The twist in the story is that unlike the 757/767, which were introduced as domestic and international aircraft, the NMA will need to fill both shoes, and will compete with the very efficient A321LR at the low end of the market. The capital cost differential and lower monthly lease rate from a competing narrow-body throws a wrench in the economic equation, versus competing only with wide-bodies. With the industry willing to pay only $65-$70 million for an NMA, the business case can quickly become a difficult one to solve. Will the market be large enough to absorb development costs and keep lease rates low? Will the supply chain support another round of Partnering for Success to bring the NMA price to where it needs to be through efficiency improvements? Can Boeing and the engine OEMs provide the 13% operating cost improvement over the 787-8 required to make the economics work prior to EIS in 2025? It is not a surprise to us that the business case will be difficult to achieve. The replacement market is already being attacked on both ends by Airbus, who will likely be relentless in price competition to preclude the NMA from gaining a strong market foothold. Boeing is once again facing a difficult decision that will “bet the company” on the success of a new aircraft program. Based on our economic analysis, their task of achieving the balance of capital and operating costs necessary for success will not be easy to achieve. Services revenues may need to make up the difference if the economic equation and business case are to work in favor of the aircraft.

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