Posts Tagged “737NG+”

737RE Survey Results

By |

As the chart illustrates, the survey has pretty much run its course. As of this writing, we have 233 responses. Recognizing this is not a scientific survey we also need to accept the responses come from a primarily qualified audience given this site’s traffic sources. So we would tend to consider these results as worthy for consideration. Let’s look at each question.

Over 60% of respondents believe the 737RE will be an economic success for Boeing. This is good news for the firm and with such a strong response one wonders why Boeing did not make the decision to do the re-engine sooner? Respondents clearly feel confident in the airplane and Boeing’s ability to make it work. Given the iterations of the 737 since 1967 this is understandable.

2017 is when most respondents see the 737RE entering service.  American, as first customer, expects its first 737RE’s in 2018. Given OEM program delays this is a sensitive issue. But the RE, depending on just how many changes Boeing decides to go for, should be considerably less complex than the NSA. Rumors of a 787 style flightdeck and obviously accommodating the bigger engines are the main changes.  The 737 already has wing 4% larger than the A320 which helps provide 9% more fuel. Boeing’s 737 wing is said to be up to 5% more efficient than that on the A320.  So we would expect Boeing to ensure wing advantages are maintained even with newer, bigger/heavier engines.

Having discussed the 737’s advantages in its wing, it is interesting to see that nearly 60% of respondents (who we assume know of the 737’s wing) still  do not see the 737RE being more economically efficient than the A320neo.  This could be due to Airbus removing one toilet in back of the cabin, and adding a row of seats, plus the fact that the neo will not need to compromise its fan diameter for either of the two engines offered. We may also be seeing here the expectation that Airbus will improve the A320 wing somewhat to close the gap with the 737.  Moreover, Airbus could make use of newer materials to reduce the neo’s weight – the A320 is supposedly heavier than the 737.

This question obviously is an attempt to understand market reaction to the evolving situation now that we have an neo vs. RE world.  We see nearly half the respondents believing the RE will not be helpful to Boeing’s market share. 47% of respondents think Boeing’s market share will decrease.

The result in this chart needs to be contrasted with the previous one. Here 53% of respondents do not see existing 737 customers switching away from Boeing.  Yet in the previous chart suggests Boeing will not lose market share.  Doing a cross-tabulation of these two questions provides some additional insight.

Among respondents who believe that Boeing customers will switch, two thirds also believe neo will be more economically efficient. Among respondents who think Boeing customers will not switch, fewer believe (still over 50% though) the neo will be more economically efficient.  Interestingly, among the non-switch respondents, the number who believe the RE will be economically competitive with neo is 57% greater than those who do nor think the RE will be as economically competitive.

We hope you enjoyed this poll.

Read more »

737RE Poll – prelim results

By |

Note this survey is not scientific. That said, this site’s traffic is highly focused in terms of traffic sources. Our readers are typically from within the industry.  Therefore as much as we need to start with a disclaimer, we also want to say that what we see in the results is not something to ignore.  The opinions are worth noting at the very least.

As of this writing, there are 210 responses. In a perfect world, with a random sample of responses, this response rate should provide a confidence level of between 6% and 7% given site traffic since we posted the poll on Friday. With that backdrop, here is what readers have shared so far.


Read more »

Podcast – Reviewing the American Airlines Order

By |

A three way call with Ken Herbert from Wedbush Securities, Jon Ostrower from Flight Global and Michel Merluzeau at G2Solutions. The consensus was surprising – we did not select these people because of their similar views, yet that is how it turned out.


Read more »

Boeing’s Narrow-Body Strategy Appears Flawed, but Necessary

By |

Our colleague Scott Hamilton scooped the industry on Boeing’s plan to re-engine the 737 for 2017 as well as move forward with an all new airplane for 2021-22.  While it is admirable for Boeing to attempt to stem the tide of Airbus’ incredibly successful neo, with more than 1,000 orders in the few months it has been offered, does offering a re-engined aircraft that will be economically obsoleted a mere four to five years later by a new model make sense from any perspective?  We suspect Boeing’s all new aircraft will be pushed to the right, giving Bombardier, COMAC and Irkut an opportunity to compete with 21st century aircraft with 21st century engines, with the CSeries being the most advanced.

Boeing’s two pronged strategy appears foolhardy for several reasons, but necessary given continuing issues with the 787.

  1. According to reports from Seattle, the re-engined model will be economically obsoleted by an all new model 5 years after introduction.  Can Boeing possibly recover the development costs for a re-engining program in only 5 short years?  We know several Boeing customers are demanding better fuel economy in today’s high cost environment, and Boeing would likely lose several customers without a RE offering, as evidenced by the surprise launch at the 11th hour to save the smaller portion of the American Airlines order.  Given the success of the neo, were this a little league game, it would have already been called using the “mercy rule” given the disproportionate order volumes in 2011.  Boeing had to take action, and it will be interesting to watch DL and WN.
  2. When Boeing is ready to deliver its new aircraft in 2022, Airbus will announce its all new aircraft, for introduction around 2027, that will likely be even more efficient as the game of leap-frog continues between the manufacturers.   Thus, Airbus would re-gain the advantage shortly after Boeing introduces the new airplane, and have ten years of production to recover the costs of neo before a new model is introduced rather than the five years at Boeing.
  3. Producing both airplanes together makes no sense, unless Boeing is planning to bifurcate the market between old and new technology aircraft at different price points.  The problem is regardless of the attractiveness of each, Airbus will be able to price its aircraft to the point of economic indifference, and reduce the price of neo to match the economics of the all-new aircraft.  An all new technology aircraft should have at least a 15% reduction in total operating costs (like the CSeries) over today’s models, while neo and 737RE are about 8% better.  Boeing will end up with an expensive airplane it will need to discount somewhat to compete with neo, and Airbus will certainly match any low price point for the 737RE.  The profitability of the current cash cow will disappear with dual price points and an increasingly competitive marketplace with 5 rather than 2 players.  This industry does know how to prepare financial models, and price to the point of economic indifference.
  4. Boeing needs cash to cover continuing difficulties with the 787 program, for which additional delays will soon be announced. Production difficulties continue with rework and “traveled” work due to continuing supply chain problems, and Boeing has a long way to go to stabilize and increase production rates to meet its backlog.  While the first 787 will be delivered this year, we understand through confidential sources that only 3-5 aircraft will be delivered this year, and with more than 20 aircraft subject to significant rework, cash flow will remain negative for this program well into 2012.  With a slower production ramp-up and further payments to customers for delays likely, positive cash flow for 787 may have to wait until 2013.
  5. The 737RE, for a five year time period, is a stop-gap measure to keep cash flow coming, as the existing 737NG is proving to be simply not competitive with the A320neo family.  Since the 737NG is the most profitable program at Boeing, with development costs long written off and amortized over a large volume, it is even more significant to cash flow.  The handwriting one the wall indicates that with Airbus taking most of the market, Boeing’s backlog could have quickly dried up without a competitive offering, and it would have continued to lose key customers.  Without the RE, Boeing may have lost the entire AA order, which would have been a disaster for a customer with a “preferred pricing” agreement in place that ensures they pay no more than anyone else.  The other preferred US customers, through merger, are now significant Airbus customers, making those campaigns even more difficult because of fleet commonality benefits.  Airbus has captured market leadership, and Boeing is now reacting to Airbus rather than innovating to maintain its market position.
  6. Buckingham Research indicates that the 737RE could offer both the LEAP and GTF engines.  For a five year period, that would entail a significant investment, and given the exclusive contract with CFM, we believe only LEAP will be offered on a 737RE.  Boeing would need to extend the landing gear by at least 4 inches to accommodate the GTF, which would be a more expensive modification than LEAP.  We see the GTF as unlikely, despite its superior growth potential and economic advantages over LEAP, due to the larger fan size that would be difficult to accommodate.
  7. Both Airbus and Boeing are targeting the Bombardier CSeries.  Bombardier is a master at stretching airplanes, as evidenced by the 3 stretched models of the CRJ that doubled its original capacity.  The fact that it has reserved trademarks for CS500 and CS900 has not been lost on Airbus and Boeing, who recognize that the CSeries offers a 15% reduction in total operating economics, not simply fuel burn.  As the first true 21st century airframe with 21st century engines in the narrow-body class, Boeing and Airbus are forced to compete on price – and the best way to lower prices is to increase volume to amortize fixed costs over a more units.  Plans appear to be in place at Both Boeing and Airbus to increase capacity to 60 aircraft per month.  The goal – price the Bombardier CSeries out of the market and not allow a foothold in the traditional duopoly turf.  The key question is will it work, or will the mild mannered Canadians up the ante with more aggressive campaigns of their own.
  8. High production rates in fragile economic times present a potential problem — a supply bubble that will eventually burst.  While many carriers, US operators in particular, need fleet replacement, financing those aircraft is another question entirely.  With Airbus offering lease financing with its AA contract, will Airbus and Boeing become lessors, and end up with the residual risk on interim airplanes?  I wouldn’t want to finance either an A320neo or 737RE knowing that economic obsolescence is planned within a decade – but that’s what manufacturers will be asking the financial community to do.  It almost like “Psst — want to lease our new Edsel?”

What happens when the last of the carriers order, and new technologies become available?  Residuals plummet, and somebody holding EETC paper will get burned badly.  My advice to financial institutions is to carefully balance portfolios and NOT overload with neos and REs, which will have a limited life before economic obsolescence.

Our judgment:  Boeing is between a rock and a hard place.  While it would love nothing better than to launch an all-new airplane, the experience with 787 indicates that the company is simply not ready for another new technology development.  The answer is to drop back into punt formation and run a fake punt through a re-engining program. But unless Boeing plans to push the all new aircraft significant to the right to allow the 737RE to have a ten year role in the marketplace, we believe the investment will not generate an adequate return. While a re-engining program could potentially stem the tsunami of the Airbus neo, it is clearly a stop-gap measure that shouldn’t further exacerbating Boeing’s cash flow issues with 787, 747-8, and the need to do update 777.  Is this another strategic error by Boeing, or is there a message implied that an all new airplane may be a lot further off than 2022.  2027-2030 would make a lot more sense, and enable the company to evaluate non-traditional designs.

Read more »

The Coming Feeding Frenzy

By |

American Airlines did a brave thing today with its amr-aircraft from Airbus (260+365) and Boeing (200+100).  If you are a fleet planner at United, Delta or Southwest, your stomach just took a very unpleasant turn. The US domestic fleet (except at US Airways and Continental) tends to the aged side. These airlines missed out the last order wave because of poor financials plus a soft demand.  However the cost of fuel and rising MRO costs are forcing hands – they cannot wait much longer and must renew fleets. This is what Airbus and Boeing have been waiting for – the coming feeding frenzy.

Well its here now. But American was not only brave, it was strategic too – it has bottled up just about every production slot Airbus and Boeing could have.  Boeing has the P-8 line which can be harnessed (it will have to) to increase 737 production to reach a goal of 60 per month.  Airbus has a China factory but that won’t be used for this frenzy we think – it is much more likely that Airbus will now go ahead with its Alabama factory, originally planned for the tanker. This will allow Airbus to also reach about 60 planes per month.

There will clearly be a lag before we see 120 single aisle planes coming out of factories every month – 2016 or maybe even 2017.

US airline fleet planners must be choking to realize it will be closer to 2020 before they can hope to get their hands on new more fuel efficient airplanes.  American has a lock on delivery slots for 737NGs and REs – plus Airbus’ neo production is surely stretched into the mists of 2018 by now.  This strategic move by American could mean it operates the most fuel efficient, and quietest, fleet for years before the US competition catches up.

The pressure on Airbus and Boeing to hire will be prodigious. Supply of the skills required is limited and the pool they are going to shop in is the USA. This is possibly the happiest day at aerospace unions in decades. There is going to be mountains of work and labor rates are going to be higher – Airbus and Boeing demand will ensure this.  Unions will know that the other airlines will be part of the feeding frenzy within months so they are going to be busy for years. Throw in the myriad parts suppliers and you can only imagine the limited supply of skilled labor  – its time to get work in aerospace again! This is an industry that forgets slumps faster than a sardine forgets the last circle it swam. Its all sunshine and morning in America today.

As much as Boeing celebrates yet another 737 rebirth (we cannot see the Boeing board turning down the RE now) they have to be fuming – they lost exclusivity at American and worst of all, Airbus has not only won a foothold at American, this foothold is now probably a beach head in Alabama.  In fact, this American order could be seen as a loss for Boeing – they could and should have had it all, but for the dithering on NSA vs. RE.

There is even more to consider. If airlines cannot get their hands on the “neo “versions of single aisle planes, what are they to do? Ryanair is toying with COMAC and now may just take the plunge.  Others will likely follow that lead. There is also IRKUT’s promising MC-21 on the upper end to consider.  At the lower end, the American order has to be excellent news for Bombardier which now represents not only the new technology (and the original disruption creator of the feeding frenzy) – it crucially has production capacity and delivery slots. Delta and Southwest are now surely going to revisit the CS as an option.

American’s order is a tectonic plate shifter.

Read more »

Another thought on the 737

By |

At the Paris show, which is now in its final business day, we can expect Team Airbus to roll out their biggest deals.  We have been hearing of a blockbuster AirAsia deal for 200 neos plus 100 options.  Until its announced it is just a rumor.  But other sources triangulate to make us feel confident Mr Leahy is in for a busy day. (more…)

Read more »