On March 31, Airbus announced that they had added the A319neo to their test flight program.  There are few orders (50) for the aircraft, and of these, 24% are for either governments or “Undisclosed customers” – perhaps a discreet way to describe ACJ sales.   This model does not look like a winner.  The list price of the aircraft is $99.5m – or roughly half that for an airline, but much closer to that for ACJ customers we suspect.

Airbus claimed the A320neo family program would cost “slightly more” than €1BnAirbus sold 4,868 A320neo family aircraft as of the 2016 year end.  If the €1Bn translates into about $1.3Bn, the average program development cost per aircraft to date is, roughly, $270,000.  Airbus has already comfortably exceeded its 15-year goal of 4,000 orders.  The program overall is a big winner.

The A319neo accounts for 1% of the A320neo family orders.  While the overall program is a success, we’re not so sure about the A319neo.  If we proportion the development cost on this model, the cost would be $13.4m per aircraft ordered.  Even at full list price, Airbus is unlikely to recover its associated 13.6% development cost.

The challenge for Airbus is that the market for the A319neo has withered and the problem grows worse with each conversion.  The chart shows the problem exists to a similar extent at Boeing.  Boeing also spent serious money on developing its MAX program.  It too is unlikely to see a great ROI on the MAX 7 – bear in mind the MAX 7 is being revised so R&D costs are not done yet.

Avolon, the leasing company, provided a great 2013 white paper on the transition to these new models for investors.  On page seven of this document is something to note. Take a look at this.

If the big driver was oil prices, things don’t look great.  Oil prices are not at the levels projected – we are at about 50% of the projected 2017 price now.  This reduces a lot of the attraction in these new aircraft.  But as we have seen with both neo and MAX, the larger models are where market interest is focused, even with lower oil prices.

So where do Airbus and Boeing go with their smallest new models?  Airbus’ Kiran Rao told us that the A319neo is needed for the ACJ and airlines that need its”special performance”.  The answer does not justify the ROI, we’d guess.  At Boeing, looking at all 737 BBJ orders (147), 119 (81%) have been for the model based on the 737-700.  No BBJ is planned for the MAX 7 – Boeing starts with that program with the MAX 8.

To answer our initial question: It seems Airbus (or Boeing) does not much riding on the new smallest model.  Which is interesting, because Bombardier and Embraer are almost certainly going to come up with a solution to the market demand for top-end business jets.  Embraer already has this in its Lineage 1000 and for sure will have an E2 version.

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Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.

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