The Single-Aisle MoM drives duopoly instability

An unstable duopoly is dangerous for the industry. If you need confirmation, do a quick research on game theory. That should end your skepticism. Our view about the unstable duopoly is based not only on the data we are about to share – we heard the Airbus CEO talk about this years ago when the MAX had its first hiccup. The single-aisle MoM segment is the heart of the duopoly’s instability. The Big Picture We use our daily new delivery tracker for this article. It starts in January 2021 and is current through October 12, 2023. Yes, this is a limited period, but it gives us a view of the industry and offers trends. The duopoly drives the industry when considering OEMs in commercial aviation. The duopoly market share of deliveries is consistently above 90%. [caption id="attachment_78017" align="aligncenter" width="551"] Source: AirInsight[/caption] The following chart tracks new deliveries running totals. This chart clearly illustrates the dominant role single-aisle aircraft play. Many industry observers we have spoken with describe this segment as “commodity trading.” The key driver is not merely the aircraft price; it includes pilot training, fuel burn, and several other items. Fleet decisions are tough. However, the commodity view explains why airlines switch from one OEM to another. These decisions are important because a selection is a 20-year choice. Having shown the sharp rise in deliveries and the dominance of the single-aisle segment, let’s drill down into the data. The following chart lists deliveries by OEM. A stable duopoly should not show a widespread between Airbus and Boeing. And that spread is growing. [caption id="attachment_78019" align="aligncenter" width="478"] Source: AirInsight[/caption] The wider it gets, the more unstable the duopoly becomes. Game theory tells us the “loser” in the duopoly is forced to take radical steps to restore equality. It should be evident that these radical steps don’t occur in a vacuum. For example, cutting prices hurts both parties because of matching. Remember Bob Crandall’s famous “death by a thousand cuts” statement? The Single Aisle MoM Segment We can break down the segment into types by looking at the single-aisle running total for deliveries over the period. That is whether the aircraft is a middle-of-market (Mom) or not. This is what the model provides. The non-MoM segment appears vital and the most significant part of the market. However, the MoM segment is growing. The average share for the period is 35%. As a benchmark, it is interesting that in 2000 and 2001, when the 757 was the single-aisle MoM, it averaged 14.5% of Boeing’s single-aisle deliveries. Recall that the majority of 757s were based in the US. The market has changed considerably. [caption id="attachment_78020" align="aligncenter" width="580"] Source: AirInsight[/caption] Looking at the data from 2021, we see the following distribution across global markets. While 757 operations were US-biased, several markets have bought into the single-aisle Mom segment. [caption id="attachment_78021" align="aligncenter" width="580"] Source: AirInsight[/caption] Another way to visualize this data is the following table, which summarizes the chart above. The US accounts for 31%, with Asia close to 28%. The EU for another 16%. This is quite different than what the market looked like at the height of the 757’s era. One more data point: 1,065 757s were delivered new. In about three years of our tracking, the single-aisle MoM is already at 84% of that number. This is a strong signal of the growth in this segment. [caption id="attachment_78022" align="aligncenter" width="447"] Source: AirInsight[/caption] The following table splits these deliveries by OEM, and a pattern is instantly apparent. And this is where we come back to the unstable duopoly. [caption id="attachment_78023" align="aligncenter" width="580"] Source: AirInsight[/caption] Going into deliveries by the two OEMs generates the chart to the right. This chart illustrates single deliveries by OEM along with the model. The gap we saw above becomes clearer. The market has embraced the single-aisle MoM. In doing so, the market has moved firmly towards the A321. What happened with Boeing? The first answer is operators see the MAX9 as not an effective competitor to the A321neo and its variants. If an operator can get an A321neo, they grab it. For example, the Alaska Airlines A321neo fleet has been acquired by American Airlines. The deal was done quietly and quickly. A second answer must be the delays in getting the MAX10 certified. Boeing built three MAX10s and painted them in United colors. The former 747 line at Everett is planned to be the MAX10 assembly line. It will be the first 737 built outside Renton. Moving the MAX10 into Everett guides us to how vital that aircraft is to Boeing. Moreover, recent sales campaigns have been MAX10-focused, and big-name customers have signed up. The FAA, bruised by the MAX grounding and the attendant fallout that besmirched the agency’s reputation, is doing a painstaking process of certifying the MAX7 and MAX10. The delayed MAX7 is causing Southwest heartburn as its older -700s slated for replacement early in 2024 now need expensive MRO work. Boeing has moved the MAX7 behind the MAX10. The MAX10 is a priority. This decision is tough as Southwest is Boeing’s most significant 737 customer. There is a great deal of annoyance within Southwest, but it won’t be made public. Other 757 customers, like Icelandair, went to Airbus. American, Delta, and United were the most significant 757 operators. Delta and United have ordered the MAX10. But all three A321 customers. This entire fleet of single-aisle MoMs should have been Boeing’s. After all, Boeing invented this segment. Several industry experts find the decision by Boeing not to offer the market a 757 replacement as shortsighted. For example, Richard Aboulafia in 2015. Or Ron Epstein in 2018. Look at those dates! This has been a “thing” for nearly a decade. Boeing is adamant they will not develop a new aircraft. Watch Boeing’s CEO David Calhoun say this at the pre-Paris media briefing this year. The Cost Not offering the market a viable 757 replacement has cost Boeing – no matter what Mr. Calhoun claims. For example, the typical A321neo CMV assessed by Collateral Verifications is $63.6m compared to $58.4m for a MAX9. Using typical seating, the A321neo's CMV is 9.5% higher and offers 9% more seating capacity. As the numbers testify, markets are efficient. Airbus delivered 529 single aisles YTD compared to 365 from Boeing. Of the 529, 39% of the Airbus deliveries are the higher value A321 than Boeing 365, of which 15% are the MAX8. Airbus is doing more business at high values - building market share and making more money. Additionally, Airbus can keep its pricing sharp as it has better supply chain negotiating power. What might happen to these data points with the entry into service of the MAX10? That is going to be interesting. But we don't see Boeing catching up. When the MAX10 starts operating, Airbus can push customers to the A321LR and XLR. We are already seeing the LR and XLR win several orders. Airbus has better product options than Boeing. How does Boring fix its "half" of the duopoly? The growth in the single-aisle MoM segment continues to favor Airbus. This allows Airbus to use tools like transfer pricing to keep winning deals. And this means the duopoly's instability continues to the detriment of the market.

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