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Price and availability take precedence over efficiency in Airbus A320neo and Boeing B737 MAX battle


It is easy to portray the new narrowbody marketplace of the Airbus A320neo and recently-launched B737 MAX as a battle between the two airframers to sell the most aircraft, an agenda the two propagate and play into. But such an outlook is irrelevant to the wider industry because the only battle for airlines is the one to find the right aircraft for their needs – and no aircraft will suit every airline since pricing, availability and commonality can override whatever single-digit percent gain the manufactures promise. The bottom line improvement is critical for cost-driven carriers to stay ahead of the competition, and they will continue to disproportionately lead initial sales.

MAX claims 7% advantage one year behind neo, but presently with better availability

Boeing’s 30-Aug-2011 launch of its re-engined 737, named the B737 MAX, came with high impacts, including that the MAX had commitments for 496 aircraft from five airlines – 40% of the 1200-plus A320neo family aircraft ordered in the aircraft’s nine month existence - see Appendix.

The MAX, Boeing says, will offer the best fuel efficiency and lowest operating costs in the single-aisle market with its 7% operating advantage over Airbus’ forthcoming re-engined narrowbody, the A320neo, a 16% lower fuel burn than the standard A320 and a 4% lower fuel burn than the A320neo. These improvements will come at cost, with the B737 MAX offered at a premium over the B737NG, like the A320neo over the A320, but Boeing has not disclosed the exact premium.

Boeing has set the first MAX delivery for 2017, one year behind the neo’s targeted first delivery, although Boeing says that date is cautious and it would like the MAX to enter service in 2016, although Airbus holds the same sentiment and would the neo to enter service in 2015. Given the extensive delays both airframers have experienced on their recent new aircraft – Boeing’s 747-8 and 787, Airbus’ A350 XWB and A380 – it remains to be seen how bullish or conservative their entry into service dates are. Certainly, no airline should hold their breath.

With A320neo production sold out until 2018/2019, the B737 MAX currently has better availability, although Boeing has not made clear delivery dates for individual MAX variants. The A321neo, for example, will enter service a year behind the A320neo. If Boeing can close the gap between MAX variants entering service, it will gain a further availability advantage.

Boeing, like Airbus, is offering a re-engined version of only its most popular variants: the -700, -800 and -900ER, which with the new engine will become the MAX 7, MAX 8 and MAX 9 (no dashes). Boeing is not offering a MAX version of the other B737NG model, the -600, whose sales have lagged, like that of its counterpart, the A318, which will not presently have a neo option.

Further technical specifications on the MAX are awaiting, including airframe commonality and range improvements. Airbus says the neo will have 95% commonality with the standard versions while Boeing has so far only said the MAX will have the same cockpit of the NG. The neo has a 500nm range improvements by incorporating winglets (“sharklets”) that will first debut on an Air New Zealand A320 in late 2012. Boeing’s 737NG family already has a winglet option. If Boeing can deliver its promised efficiencies, and increased ranger, it would not be the first time the airframer is late to the party but with a better option, as its B777-200LR sales have outpaced the earlier A340-500.

The name MAX was chosen “because it optimises everything we and our customers have learned about designing, building, maintaining and operating the world’s best single-aisle airplane”, said Nicole Piasecki, Boeing vice president of Business Development and Strategic Integration. The MAX family will offer as a default the B787-inspired Boeing Sky Interior, which features more cabin room and larger overhead bins.

Single engine supplier will need to deliver capability

Boeing’s boldest move on the MAX programme – besides waiting a year to launch after Airbus announced the neo – is continuing its single-source strategy by only offering one engine type for the airframe: the yet-to-be-built LEAP-1B from CFM International, a joint-venture between General Electric and Safran’s Snecma. While the B737NG is exclusively powered by CFM’s CFM56 engine, the A320neo offers CFM’s LEAP-X as well as Pratt and Whitney’s geared turbofan powerplant, the PW1000G, which will potentially offer unprecedented levels of efficiency.

The exact diameter of the LEAP-1B is still be finalised, with Boeing choosing between a 66in or 68in fan, up from the CFM56’s 61in fan. A larger fan improves efficiency, but Boeing is challenged to keep the powerplant narrow enough that it does not ride too low to the ground, infringing on the 17in necessary to maintain ground clearance. Boeing has ruled out accommodating significantly larger engines as the landing gear would have to be raised, causing significant rework to the fuselage.

To justify having only a single engine supplier for the MAX, Boeing will need the LEAP-1B to deliver continuous improvements as the CFM56 has, and even the GE90 for the B777, which has significantly out-performed early expectations thanks to GE90 enhancements.

MAX could surpass neo commitments by November

The 496 commitments Boeing has for the MAX are from carriers outside the United States, except for 100 MAX aircraft, of an unspecified variant or variants, committed from American Airlines. Southwest Airlines, the largest B737 operator and the launch customer for the B737NG, has publicly said it is not part of the 496 commitments Boeing so far has. While American Airlines on 20-Jul-2011 became the first public commitment for the re-engined 737, American says it will not be the launch operator, leaving the door open for Southwest to claim the title. US carrier Delta could also be expected to order the MAX, following its 25-Aug-2011 order for 100 B737-900ER aircraft.

Provided the neo has no more major commitments in the short-term, industry watchers see the MAX possibly surpassing the neo by November.

LCCs to lead in early MAX purchases

Low-cost carriers operate 20% of the current A320 family fleet, but account for a disproportionate 55% of A320neo orders, and LCCs can be expected to lead in orders for the MAX. Indeed, American Airlines has committed to 100 MAXs. Although it is by definition a legacy carrier, carriers in America compete with each other on price, not service.

More efficient aircraft even pose a threat to LCCs by lowering the operating costs of competitors who order them, as former Virgin Blue CEO Brett Godfrey remarked in Sep-2009, well before the re-engine campaigns gained traction.

“The future of established, traditional, or legacy LCCs is exposed,” Mr Godfrey remarked. “They were born as a result of a set change in technology: the A320 and the B737. If price is your only loyalty and sustainability is dependent on having lower cost than your competition, what happens when, as advocated and stated by Boeing, Airbus, and the engine manufacturers, these guys deliver the 20-25% step change in cost for the next new plastic fantastic?”

While both manufacturers abdicated a clean-sheet design for re-engining, which can be developed faster but with less efficiency, LCCs can still use the neo or MAX to undercut competition, such as the 14% gain Boeing claims the MAX will have over the standard A320.

“You know a lot of these guys are locked in to delivery streams and aeroplanes that will technically be old technology. Barriers are low,” Mr Godfrey said of starting a LCC, before returning to the notion of price being a LCC’s only loyalty draw, which would be undercut by new and improved aircraft. “Without that loyalty, what happens to your customer base? Are Ryanair really smarter than Pan Am?”

Mr Godfrey, who retired in May-2010 from Virgin Blue, which re-branded as Virgin Australia in May-2011, gave further insight, not in words but in action, that the process to build a new aircraft – re-engined or clean-sheet – would be long and unguaranteed: he used his speech to announce plans to acquire up to 50 B737NGs. Those aircraft started to arrive in large numbers this year as other airlines finally addressed their fleet requirements, but left themselves exposed to operating inefficiencies in the medium-term.

Southwest expected to sign for MAX

At the time of American Airlines committing to the then-unnamed re-engined 737, which confirmed Boeing's strategic direction, Southwest Airlines expressed disappointment that the decision to re-engine the 737 had not come long ago.

Southwest is the largest B737 operator and was the launch customer for the -300, -500 and -700 and may well play the same role for the MAX since it is now in negotiations with Boeing. It previously stated it would be first to put the new aircraft into service, but has yet to make an announcement.

The airline’s smaller B737s are long in the tooth, ranging from 16-27 years for its -300s and 500s, although it has refitted 100 -300s with efficiency-improving winglets.

Its order book already includes 95 aircraft including 75 -700s with winglets and 20 -800s with winglets, which will be exchanged for a like number of older 737s in its current 559 aircraft fleet.

Southwest Airlines fleet: at 5-Sep-2011

MAX comes as US airlines are entering fleet replacement

Boeing's decision to launch the MAX comes as US carriers are renewing their fleets. In addition to American Airlines' planned acquisition of 130 A320s, 130 A320neos, 100 B737NGs and 100 B737 MAXs, Delta has ordered 100 B737-900ERs as part of the airline's fleet renewal program, which United is also in the throes of. JetBlue, Frontier and Virgin America have all opted for the A320neo program as part of similar fleet renewal plans. Frontier parent Republic Airways Holding has also ordered the Bombardier CSeries.

The fleet renewal comes after a devastating decade of bankruptcies and then a round of mergers and the wholesale restructuring of airline fiscal policies, all of which have forestalled earlier replacement programs.

Indeed, the merger between United and Continental has delayed further consideration of a narrowbody order, as has the failure to reach a new pilot contract to accommodate such an order. United placed an order for wide bodies in 2009, splitting the order between Airbus A350 XWBs and Boeing B787s. It had planned to announce a narrowbody order last year.

The combined United can afford to wait, given the youth merger partner Continental brought with its new B737NG fleet, compared to its peers at Delta and American. Pre-merger United brought A320 family narrowbodies ranging in age from nine to 18 years with 23 Airbus A319-130s scheduled to be added to the 47 of the type now in operation. It also has 19 A320-230s set to enter the fleet, adding them to the 73 currently flying. Its B757 fleet ranges from 16-22 years, although 20 of the 90 in the fleet are equipped with winglets.

The MAX is seen as a replacement for the B757, which is the next aircraft in acute need of replacement with leasing companies and airlines alike looking to cover that size with their new narrow-body orders. American Airlines and Delta both said their new aircraft orders will help replace their B757 fleets.

United Airlines fleet (at 5-Sep-2011)

Continental, on the other hand, has 228 B737s with its -500s ranging in age from 14-16 years and the rest between one and 13 years. It operates 22 B737-700s with another 17 on order while its B737-800s number 121 with no orders for the type although it also has 33 -900ERs with 17 on order. Continental also has 62 B757-200/-300s and ranging in age from eight to 16 years.

Continental Airlines fleet (at 5-Sep-2011)

Delta just made its replacement bid for an order for 100 B737-900ERs, disappointing Airbus by sticking to its Boeing roots despite exposure to Airbus via its merger with Northwest, who acquired A320 family aircraft and A330s.

Delta plans for the -900ER to replace not only B757s but also A320s and B767s. It still has 126 Airbus A319 and A320 aircraft with another five A319s set for delivery along with its new Boeing order worth USD8.5 billion at list prices. Its B757s are all over 20 years old along with nine A319s. The new Boeing aircraft will be powered by the CFM56-7BE in an engine order valued at USD2.2 billion. Airbus had hoped to increase its footprint at the carrier, given its history with Northwest but last week’s order put paid to that, at least for now.

Rounding out the large US carriers is US Airways with a relatively young fleet as well, although most of its B737s are over 20 years old while the majority of its B757s are between 15-26 years old. US Airways has been transitioning away from Boeing in favour of its Airbus fleet, which is very young with 65 narrowbody Airbus aircraft in the queue for delivery over the next few years. US Airways has expressed interest in the A320neo for its promised fuel efficiency as the carrier does not hedge fuel.

Boeing on the come-back trail

While Boeing did not snag the majority of American’s narrowbody orders, it did do very well in that deal with a potential 300 B737NG and MAX aircraft, if all options are exercised. Delta’s B737-900ER order is a win although how big is unclear since Airbus could not offer A321 delivery positions for Delta’s requirement for full fleet delivery between 2013 and 2018.

“If taking a modest number of airplanes can improve the P&L we will do it, if not, we won’t,” CEO Richard Anderson said at the last earnings call. “Let me be crystal clear about this. We are not buying shiny new objects. Our goal is improvement in the P&L with a modest order. If you can take down maintenance costs with more efficient operations you get an improvement in CASM and if you stay with the goal of USD10 billion in net debt you get an improvement in the P&L if you integrate in the right way and take out the much higher cost airplanes. And that is conditioned on owning, not leasing.”

During the order announcement, Mr Anderson added the order would provide significant savings in fuel and maintenance costs and would be cash-flow positive and earnings accretive in the first year of operation. He also stressed the 15-20% fuel burn improvement over its B757, B767 and A320 aircraft.

This year Delta is eliminating 140 older aircraft to save USD250 million in maintenance costs in the second half. In other words, while the rest of the industry is going for long-term improvements, Delta is minding its short-term balance sheet by maintaining both capacity and financial discipline. The neo and MAX come at a cost premium, which for now may be too high for Delta’s conservative fiscal philosophy.

Saving maintenance costs was very much American’s strategy and MIT Research Engineer Bill Swelbar estimates American, in getting rid of the MD-80s, could save USD135,000 per month per aircraft during the maintenance honeymoon for its new equipment. Boeing says the B737 MAX uses 50% less fuel per seat than the MD-80. Getting Boeing and Airbus to back the airline was another coup with USD13 billion in off-balance-sheet financing. American is expecting the order to be its game-changing trump card in improving its fortunes, despite the fact Wall Street was cold to the news, preferring instead a solid plan for recovery from its losses.

Still within North America, Air Canada continues to have time to address its fleet, although it could opt to place an order should its low-cost carrier plans come to fruition. It only has 37 widebody 787s on order and a very young 767 fleet. Interestingly, it too has opted for the Embraer products for its mainline service including 15 E-175LRs and 45 E-190ARs. It only has a handful of Airbus A319, 320 and 321s that are 19 years old, with the remainder a narrowbody fleet ranging from nine to 14 years.

Credence to Bombardier’s argument for <150 seats

Delta has yet to publicly make an aircraft selection to replace MD-80s, MD-90s and A320s. As it it continues to explore aircraft in the 100- to 150-seat range, the field opens up for both Bombardier’s CSeries and Embraer E195s to be considered. In fact, it boosts arguments made by Bombardier’s retiring president Gary Scott that the CSeries is designed to address a spot in market-load factor that cannot be filled with planes larger than 150 seats.

Embraer is now considering its next move in that range aircraft and is expected to announce its next commercial airliner program as early as the end of the year now that Boeing has ended its debate about whether to re-engine or go with a clean-sheet design.

The E195s have not enjoyed the success in the US as they have overseas, although US Airways and JetBlue, along with Republic Airways/Frontier have put their faith in the product with success. Despite Republic’s recent A320neo order, it has a CSeries order as well, making it the only US carrier to order the aircraft to date. Delta does, however, have exposure to Embraer aircraft, with regional carriers operating under the Delta Connection brand utilising E170s and E175s, although it has far more experience with Bombardier CRJs, who outnumber Embraer E-Jets.

Outlook: with aircraft on the table, comparisons start – but it's more than numbers

There have been only two defections so far from the Boeing B737 to Airbus A320neo programme, both minor: American Airlines, which gave 260 of its 460 aircraft order to Airbus despite a large B737-800 fleet, and Garuda Indonesia, which despite a large B737 Classic and B737-800 fleet, ordered A320s and A320neos for its Citilink subsidiary. There have yet to be the major defections seen with the last big aircraft programme, the B787, in which Boeing successfully wooed strong Airbus customers including Air Canada and Northwest. With Boeing now giving a much clearer picture on its strategy, although some technical specifications are still forthcoming, this begins a period where airlines can pit the two competing aircraft and see if and where there are comparisons.

With cockpit and maintenance commonality a purchasing factor along with delivery date availability and whatever discount the margin-pressured airframers can offer, the sole numbers the airframers cite in terms of efficiency and how their aircraft stacks up against the competition – if accurate, it should not be forgotten in a world of over-weight aircraft and false promises – will rarely be the single deciding factor.

Appendix - neo orders

Customer Type Date MoU Firm Order Engine Delivery Notes
Virgin America A320neo 17-Jan-11   30 LEAP-X 2016  
TAM Airlines A320neo 28-Feb-11 22        
ILFC A320neo 8-Mar-11 75   PW1100G for 60, LEAP-X for 40   First A321neo customer
ILFC A321neo 8-Mar-11 25   PW1100G for 60, LEAP-X for 40    
GECAS A320neo 20-Jun-11   60 LEAP-X 2016  
SAS A320neo 20-Jun-11   30 LEAP-X 2H2016-2018  
Air Lease Corp A320neo 20-Jun-11 36       Also includes 14 options
TransAsia Airways A321neo 21-Jun-11   6      
JetBlue A320neo 21-Jun-11 40       JetBlue also converting 30 of its current orders for A320 aircraft to the larger A321 model with enhanced wingtip devices.
AviancaTACA A320neo 22-Jun-11 33       Part of MoU for 51 A320 family aircraft. Biggest from a single airline in the history of Airbus in Latin America.
Republic Airways Holdings A320neo 22-Jun-11 40   LEAP-X   To be operated by Frontier
Republic Airways Holdings A319neo 22-Jun-11 40   LEAP-X   To be operated by Frontier
IndiGo A320neo 22-Jun-11   150 PW1100G   Firms up Jan-2010 MoU. Also ordered 30 A230s
LAN Airlines A320neo 22-Jun-11   20      
ALAFCO A320neo 22-Jun-11 30        
GoAir A320neo 23-Jun-11   72   2016  
AirAsia A320neo 23-Jun-11   200 LEAP-X 2016-2026 Largest single Airbus order. Will make AirAsia largest Airbus customer and largest A320 family operator
American Airlines A320neo 20-Jul-11   130     Part of order for 260 A320 aircraft, plus 200 Boeing B737 aircraft, including commitment for 100 B737 MAX
Lufthansa A320neo 27-Jul-11   25 PW1100G 2016  
Lufthansa A321neo 27-Jul-11   5 PW1100G    
Cebu Pacific A321neo 8-Aug-11   30   2016-2021 10 A320neo options. To be operated in 220-seat, single-class configuration
Garuda Indonesia Citilink A320neo 9-Aug-11   10     Part of order for 25 A320 family aircraft
CIT Group A320neo 10-Aug-11   50 PW1100G for 30, LEAP-X for 15 2016-2018 Interested in all versions
Qantas A320neo 16-Aug-11 78       Part of commitment for 110 Airbus A320 aircraft, plus 194 purchase rights and options
Transaero A320neo 17-Aug-11 8     2017 May be expanded to 12 aircraft
Total 1245   427 818      

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