There has been a sudden rush in the rumor mill last week that Boeing might back off on its new mid-market aircraft program. Nothing definite, of course, but started by comments of a less than certain attitude during a recent discussion with a senior Boeing executive. With the crash of a second 737 MAX aircraft resulting in a substantial grounding of the fleet, and Boeing’s need to quickly fix any problems, there is additional financial pressure on Boeing. But is not moving forward with the NMA/797 really a plausible outcome given what we know?
Let’s look at some facts. First, Boeing has leadership in the wide-body market but is trailing Airbus in the narrow-body battle. The place Airbus is winning is the low end of what could be described as the middle of the market, where the A321 is cleaning the clock against the 737MAX9 and MAX10. Simply put, Airbus has a replacement for the 757 and Boeing does not, and cannot generate one from the already strained 737 platform. That platform works well for the MAX8, which is ideally positioned in the market and a fine aircraft.
To compete with the A321, Boeing would need to launch its FSA, or future small aircraft. But since that airplane is planned for 2030 or 2031 entry into service, it is premature, and the engines and technologies required for that program aren’t quite ready. They can’t do that, so something needs to be done in the interim to stem the tide.
Stemming the Tide
That leaves the upper half of the middle of the market, where small twin-aisles rule the day. Boeing had most of this market with the Boeing 767, which is also aging and being replaced. The 787 and A330neo are potential replacements for the 767. Unfortunately, the 787 (and A350) being long-range aircraft, are too expensive for trans-Atlantic and trans-continental operations. So that leaves the A330neo as the lower-cost option in small widebodies.
Boeing needs an alternative to the 787 to serve the low end of the market. It had an alternative planned in the 787-3, designed as a medium range domestic aircraft for the Japanese carriers, but that fell on the cutting room floor after the initial production debacle, leaving only the long range 787. But that is “too much airplane” for the mission. So enter the NMA, a clean-sheet design with 225-275 seats with modern engines and technology to undercut the A330neo, which comes in at around 255-310 seats.
The Market and Competition
Boeing sees a potential market for some 5,000 small wide-bodies over the next 20 years. We are in the 3,000 range in our forecast, but that still leaves enough airplanes for a profitable program. Now it comes down to price and performance, where the rubber meets the road competitively.
Airbus A330neo has low development costs, maintaining a 95% parts commonality with the A330ceo. The basic differences are the engines, and what is needed to integrate those engines into the aircraft systems. The commonality in type rating, spares, and maintenance processes, along with the potential to build the aircraft inexpensively due to low up-front investment, likely leads to >60% discount from list prices, putting substantial pressure on Boeing’s business case.
Economics and The Business Case
Boeing’s competitive response, therefore, needs to be both inexpensive from a capital standpoint, and have a substantial advantage in operating costs to compete with the A321. Physics being physics, a smaller narrow-body cross section will always be lighter than a larger wide-body cross-section, ceteris paribus. Two things result – first, the wide-body will be more expensive to build, and second, the economic differential needs to be larger to overcome the size difference in the aircraft. It is likely that the economics of a 225 versus 275 seat version of the NMA will be quite different, and that seat-mile economics may dictate a larger 275 seat replacement for the 767-300ER.
The Business Case needs to solve these problems. How can Boeing pull off the seemingly impossible?
First, it can dramatically lower the cost of the aircraft. Boeing needs about 15% across the board reduction in cost to bring the program in at a price that can compete with the A330neo. While Partnering for Success was viewed by many suppliers as a shock, and we remember UTC being replaced by Heroux-Devtek for the 777X landing gear, the requirement for NMA will go even further.
If the NMA is going to work, Boeing will need to establish new relationships with its supply chain that can guarantee lower costs. That will likely include some upfront investment by the supply chain and a significant reduction in cost for production items. And with Boeing Services having its own agenda, I don’t think we’ll be seeing any aftermarket concessions, either. The bottom line is that Boeing will push for margin equalization between suppliers, who traditionally have high margins, and its own margins that have traditionally been lower. But how low will or can Airbus go with pricing, as the OEMs are expert at pricing to the point of economic indifference?
The second element is operating economics, which is primarily driven by engine and materials technologies. Engines for the NMA will need to be a step-function better than those for the A321, which offers the latest from CFM and Pratt & Whitney. Will a LEAP or GTF derivative be a step-function better than their current models? The answer is that it is doubtful, and in a short time, the latest technologies would find their way into the A321 anyway as routine product improvements. So the key is how large the short-term splash can be, and how many customers can be convinced to acquire this “latest and greatest” aircraft before the competition catches up.
Again, pricing to the point of economic indifference can erase advantages but reduces margins.
Clearly, the NMA will have an operating cost advantage over the A330neo, as it will likely be smaller and lighter. But it is unlikely to have an operating cost advantage over the A321 without a lot more seats, which restricts the route applicability for the aircraft. In our view, the NMA will evolve into a 275 seater, with a few of the smaller aircraft sold to fit certain routes while maintaining commonality.
From a competitive standpoint, Airbus will want to limit the impact on its best-selling A321 and focus on increasing orders for the A330neo, perhaps even introducing a smaller and lighter model to try and pre-empt Boeing in the market. A rapidly developed derivative with new engine technology at a low price can be a compelling economic combination.
To build, or not to build, that is the question. There is no doubt that Boeing has missed at least half of the replacement window for its 757 and 767 models that were introduced together nearly 40 years ago. It cannot afford to miss the other half.
Do the economics for this aircraft look attractive? Not really, as competition from Airbus wasn’t really there when the 757 and 767 entered service. Airbus wasn’t yet making a narrow-body, and certainly not a market leader at that time. So the past will not be prologue for this decision.
Boeing is stuck between a rock and a hard place. It cannot afford to cede the middle of the market to the A321 and A330neo, and the 787 is simply too much airplane for that segment. The 787-8 is a very different airplane than the more recent 787-9 and -10, which incorporated substantial new technology after the initial program failures. As a result, the 787-8 is more expensive to manufacture and not as efficient as is newer counterparts. With a very small market for small ultra-long haul aircraft, the 787-8 has a limited market and is ripe for replacement. The NMA could be that replacement, generating additional savings if the 787-8 goes out of production.
With the recent crash of a second MAX8, there will likely be financial repercussions for Boeing, as the MAX has been grounded by aviation safety agencies around the world. An unexpected problem is the last thing that Boeing needs as it looks at its cash flow and new product decision process.
Boeing needs this airplane. But Airbus has it surrounded by existing models that can be inexpensively produced and will squeeze the margins by pricing its aircraft to the point of economic indifference.
It all comes down to this. Can Boeing sell enough NMA/797 aircraft and generate enough margin to make the program successful? Airbus is throwing every wrench it has into the works to make the case more difficult, and is succeeding. Otherwise, Boeing would not be taking an additional year for its decision. The key will be price, and what Boeing can gain from the supply chain. If it is able to extract and move margin, it can move forward. If not, it will cede a key portion of the market to a competitor.
We’re betting that Boeing will beat-up on its suppliers, and build the new model, even with lower margins, to maintain market leadership in the wide-body segment.