The narrow-body market has been flooded with orders, with both Airbus and Boeing holding record backlogs, resulting in only a few delivery positions available through 2020. But in achieving these record high backlogs, the companies have been heavily discounting aircraft, with price reductions greater than 50% off list prices commonplace for large orders. Airbus jumped out to an early lead, launching neo in an attempt to block market entry by CSeries and gain an advantage over 737NG. Boeing, mired in 787 problems, was unable to launch an all new aircraft, and was forced to quickly react with MAX, which was announced during the heat of battle for the American Airlines order, which was split between the manufacturers.
Paris 2011 was the year of the neo, and Farnborough 2012 the year of the MAX, as each gained significant footing in the market. Since then, it has been a battle of discounting, with Airbus taking a higher market share in the re-engined market. But why discount heavily in what is essentially a duopoly environment? Part of the reason has been to preclude future competition, and the strategy appears to be working well.
Three years ago, the prospective glut of competition from Embraer, Bombardier, COMAC and Irkut appeared to spell a significant future market share reduction for Airbus and Boeing in the narrow-body field. Thanks to the aggressive discounting and locking up record backlogs, that threat appears to now be fading somewhat. The programs from COMAC and Irkut appear to be facing significant delays, with only domestic customers. Bombardier’s potential traction with the CSeries has been delayed enough that a potential stretch version that could become a direct competitor at the heart of the market has been delayed. While Bombardier and Embraer will likely take the former A319 and 737-700 market segments, as they did with the similarly less efficient A318 and 737-600 previously, Airbus and Boeing will focus on the more profitable A320/321neo and -8/9 MAX models which provide them higher unit revenues.
We expect Embraer to continue to be successful with its EJet program, and Bombardier to succeed with their CSeries against the A319neo and 737-7MAX. While we do expect China and Russia to eventually succeed with their aircraft, we no longer expect significant exports for either program, which will focus on domestic markets. Even so, the 10 aircraft per month from Bombardier and potentially 10 from Embraer, along with 5 each from COMAC and Irkut will, by 2020, begin to change market dynamics. Their impact on the supply/demand balance will likely result in an oversupply bubble in the narrow-body market.
As of 28 July, Airbus has generated 2,348 firm orders and 846 options for the neo family, while Boeing has generated 1,491 firm orders and 834 options for the MAX family. The market share for the re-engined aircraft is 61.2% for Airbus and 38.8% for Boeing on a firm order basis, and this market share has been holding fairly steady over the last few months. We expect this trend to continue, as from our independent calculations, the aircraft are very close economically, with a very slight edge, and future growth potential, to the PW GTF equipped neo.
In recent days, we’ve heard some interesting statements from Airbus and Boeing regarding the marketplace, focused on the narrow-body space. Airbus indicates that it is not interested in maintaining a market share of more than 60%, despite their belief that they could obtain a two-thirds share in the marketplace. Boeing still indicates that it would like to achieve 50% of the market as its goal. Adding these together, one still gets 110%, which isn’t possible. With the Airbus and Boeing success at killing the market for potential competitors, who were very quiet at Paris, will the price war ease off, or will both continue to cut prices to gain share?
We believe discounting will ease, for several reasons. First is the heavy backlog and relative scarcity of delivery positions. While we believe some positions may be speculative, the current order books are filling up to capacity, eliminating the need to further discount in the near term. Second, the immediate competitive threat from CSeries has not materialized to the degree feared, and the Chinese and Russians appear stalled. As a result, with the competitive threats eliminated to a great degree, duopoly pricing can return. Third, both companies have significant development projects underway in both the narrow-body programs as well as the A350, 787-10, and 777-X wide bodies, and need positive cash flow.
The Bottom Line:
Don’t expect massive discounting of narrow-body aircraft to continue, as Airbus and Boeing are again well positioned competitively, no longer as worried as they once were about potential new competitors, and will soon focus on their more profitable models and cash flow.