Boeing 737-MAX-7-8-9 Artwork K65781

MIAMI — Late last week, details emerged about Boeing’s latest addition to its 737 MAX narrowbody family, the 737 MAX 10X. According to reports from CNN’s Jon Ostrower and Aviation Week’s Guy Norris amongst others, the MAX 10X won approval from Boeing’s board of directors in late 2016 to be offered to airlines. If enough airlines bite, the MAX 10X will be formally launched as a new 737 variant for entry into service (EIS) by 2020.

The MAX 10X, per Norris’ report, consists of a 66-inch fuselage stretch, much smaller than the 132-inch extension floated at the 2016 Farnborough Airshow. The increased length enables airlines to fit roughly 12 additional seats in a typical 2 class configuration, bringing the MAX 10X to 189 seats against 193 for a A321neo configured with similar specifications. At the high density end of the spectrum, the MAX 10X would still fall about 10 seats short of the A321neo’s theoretical maximum of 240 seats.

The reduced stretch of the MAX 10X simplifies the design process for Boeing, which can now retain the the existing wing and CFM LEAP-1B engine, instead of reinforcing the wing and adopting the larger LEAP-1A/1C engine variants as was proposed in previous iterations.

Boeing will still have to modify the design of the main landing gear (MLG), which reportedly will be based on the MLG design from the 777-300ER. The reduced scope of design will reduce costs and design complexity, allowing for an earlier EIS.

MAX 10X is hardly an A321neo (or MAX 9) killer

The additional seats in the MAX 10X will certainly help narrow the gap between the largest member of the MAX family and the Airbus A320neo family, particularly in terms of unit economics. Most analyses of the unit cost differential between the 737 MAX 9 and the A321neo peg the difference between 5 and 7 percentage points worth of cost per available seat mile (CASM).

In typical two-class configurations the MAX 9 seats roughly 6.8% fewer passengers than the A321neo, while the MAX 10X will be roughly 2% smaller. At the top end, the MAX 9 will be 9% smaller in single class while the MAX 10X will be just 4% smaller.

However, given that the 240-seat single class configuration will require several tradeoffs that will make inflight service hard (costing airlines buy on board money), it feels like airlines will more realistically configure the A321neo at the top capacity of the A321ceo, or 235 to 236 seats. More broadly speaking, the payoff to the 737 MAX 10X is that it narrows the CASM gap with the A321neo to a couple of percentage points.

Even with the limitations imposed on Boeing in terms of pricing due to the strength of a dollar, that small of a CASM gap can be easily overcome with a mixture of other factors including pricing, availability, freebies, throw ins, and customer loyalty.

At the same time, the smaller MAX 10X stretch is not going to flip Airbus’ advantage entirely. To date, the A321neo has outsold the MAX 9 by roughly 1,000 frames. This version of the MAX 10X is not going to close that gap, but it may stem the tide and keep that gap at about 1,000 frames longer term. That’s in part due to capability (the A321neo and A321neoLR will be able to fly longer routes and higher payloads) and in part due to economics (the larger MAX 10X with 24 more seats than the MAX 9 would have been a true A321neo “killer”).

But the problem for Boeing was that the cost of a bigger MAX 10X would have been $2-3 billion more, and may have prompted a competitive response from Airbus that stretches the A321neo by a further 10-20 seats to build an “A322neo” that would once again retain the mantle.

For Airbus, that might have also cost $1 billion plus, and it might have been a worse state of the world for both Boeing and Airbus (roughly the same competitive situation as there is today but with each manufacturer having spent more than a billion dollars in cash).

For Boeing, the big advantage may have come from being able to scrap the MAX 9 and save those costs (as it did with the increased size of the MAX 7), but because the MAX 9 is already in production, that pathway isn’t available. Overall, the MAX 10X is, to use a baseball analogy, a solid double, rather than a home run.

It’s not going to change the game for Boeing, but it will narrow the gap with Airbus in the large narrowbody space.

MAX 10X customer base a limiting factor

One other question mark for Boeing is just how much of the market has already been captured by Airbus, whether through direct orders (roughly 1,400) or re-ups by existing A321neo customers. According to Ostrower’s report, key target customers for the new jet include United Airlines, Delta Air Lines, Alaska Airlines, Air Canada, and Indonesian ultra low cost carrier (ULCC) Lion Air.

All but Delta are MAX 9 customers, and Delta has bought more than 100 737-900ERs in the last 5 years. Beyond these 5 (maybe 400-500 total sales in a best case scenario), the Chinese carriers are another natural buyer given the air traffic control (ATC) constraints that they face (another 500 odd sales). Indian airlines Jet Airways and SpiceJet, both of whom just placed MAX orders are natural upsell conversion targets (100 jets), and Turkish Airlines is a natural buyer dependent on conditions in Turkey improving (75 orders).

Beyond that, the set of customers that operate the A321ceo and don’t have A321neos (or A320neo family jets) on order encompasses Aeroflot (who is probably locked into buying only Russian jets in the current geopolitical environment), Monarch (a MAX customer but on razor’s edge with finances), KLM (technically the 737-900ER and Air France – KLM may face pressure to buy European), EVA Air (a potential buyer), Saudia (theoretically a buyer), and Cathay Dragon (who could conceivably follow in the footsteps of Singapore Airlines’ Silk Air subsidiary and flip from A320 to 737).

Even in the best case where Boeing wins 60% of these theoretical battles on the basis of availability, that represents an incremental 600-800 sales.

The MAX 10X’s limitations mean that Boeing should build a true clean-sheet MOM airplane

That leads naturally into the final notion, which is that Boeing’s upside with the MAX 10X does not represent a true solution to its problems in the middle of market (MOM) space. While on day 1 the 737 MAX 10X will be at near parity with the A321neo, over time our view is that the A321neo is the platform with more room for growth in terms of cost reduction via performance improvement packages (pips) and engine improvements (our view is that the Pratt & Whitney geared turbofan [GTF] engine on the A320neo family is less of a finished product than the CFM LEAP engine).

That plus the A321neo’s higher payload-range capabilities mean that Boeing still needs a solution to the MOM space, and our view remains that Boeing should build a clean sheet MOM plane to EIS in the middle of the next decade.