The state of the duopoly should worry everyone

The duopoly refers to Airbus and Boeing - between them accounting for at least 90% of new aircraft deliveries, month after month. These two OEMs are very important companies. What happens to them impacts your world. Until quite recently these two companies were relatively equal in terms of market share. Game theory dictates this balance is the optimal way for the duopoly to remain stable. Over the recent past this balance is gone, the duopoly is unstable and it is getting worse. Look at this chart. [caption id="attachment_81058" align="aligncenter" width="580"] AirInsight[/caption] The amount of advantage to Airbus on a monthly basis looks small, but it adds up. Currently, estimates are that Airbus may hold a 60% market share to 40% for Boeing. And that gets worse every month that Boeing cannot deliver their MAX 10. This is the only model Boeing has to try catch the nearly inelastic demand for the Airbus A321. The delay to the MAX 10 certification is likely to move deliveries of that aircraft to 2026. This model was announced on August 11, 2011. This is the reason reports have emerged of United's CEO traveling to Toulouse to see if he can get A321 delivery lots. He didn't make a phone call, he went there in person. Unlike Scott Kirby, Ryanair's CEO Michael O'Leary has confidence in Boeing. He has to since his airline only flies Boeing aircraft. There are few areas where Airbus and Boeing have a lot of daylight between them. One is freighters, where Boeing is head and shoulder ahead of Airbus. The other is the MoM segment, and here Airbus has a lead that is, to be kind to Boeing, commanding. No amount of freighter and military advantage for Boeing closes that gap. [caption id="attachment_81059" align="aligncenter" width="174"] AirInsight[/caption] The MAX 9 is Boeing's closest model to the Airbus A321 and it is not competitive. The market shows steady demand for the A321neo and values have been rising. And these values were rising before the Alaska Airlines MAX 9 lost a door plug inflight. And, crucially, this was before the FAA halted MAX production expansion. Scott Kirby noted during United's recent earnings call: “We are not canceling the order. Boeing is not going to be able to meet their contractual deliveries on at least many of those airplanes, and let’s leave it at that,” United won't cancel the order and lose its deposits. It just has to out wait Boeing and the breaking of delivery dates, throwing the deal into cancellation without penalties. Delta also has orders for MAX 10s, but is sanguine. Why? Because it is loading up on A321neos as fast as it can, having ordered 155 back in 2017. Delta already has 120 delivered, and this adds to its 127 A321ceos in service. Delta bought aircraft during the "off years" and the business cycle swung heavily in its favor. If the MAX 10 is delayed into 2026, Delta is under much less pressure than United. The duopoly is no longer in balance and has not been for some time. Looking at what is happening with the MAX 7 and MAX 10 certification, it will get worse. Alaska Airlines is suing Boeing for $150m for the impact of their MAX 9 fleet grounding. We don't know how much Boeing will be paying Southwest Airlines for the MAX 7 delays, and this will incur expensive 737-700NG MRO repairs for aircraft planned for retirement. Southwest Airlines will make Boeing cover that cost. And also, probably quietly regrets putting all its fleet eggs in one basket. In 2018 we heard Airbus CEO Fabrice Brégier express fear of the duopoly going out of balance. He said the only way for Boeing would be to buy market share, with a resultant damage to both OEMs. Part of his fear came true - Boeing has to offer sharper prices. But the fear for Airbus is much less, because the market wants its A321 and there s no MAX to compete on price. But an increasingly unstable Boeing is a danger to the entire commercial aviation sector. The state of the duopoly should worry everyone.

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