Images of 787 Assembly Area from Overhead Crane_People shots working on AC_MCF15-0051 Series_9/3/2015_RMS#288265 Photo: Boeing

MIAMI — How will Boeing solve its problem with the Middle of the Market (MOM) airplane? This is perhaps the question in global aerospace in the run up to this year’s Farnborough Air Show, and the first six months of 2016 were peppered with a variety of stories in the aviation and mainstream press addressing exactly this issue. But there remains a wide degree of uncertainty over how exactly Boeing will proceed.

The area of the market in question is for an aircraft somewhere between 180-250 seats in a standard two-class configuration, roughly the area occupied by Boeing’s 757 and 767 programs. The MoM aircraft would also require a functional range (roughly 75% of design range) of at minimum 3,000 nautical miles (5,556 km.) and ideally something in the range of 4,200 – 4,500 nm (7,780 – 8,330 km.) This would position Boeing’s MoM airplane effectively to compete with Airbus A321neo and the long-ranged A321neoLR, the latter of which can fly routes out to a range of about 3,900 nm (7,220 km.)

The most recent developments in the saga of Boeing’s MoM aircraft point towards a clean sheet aircraft as Boeing’s approach. For example, this article from the Wall Street Journal’s Jon Ostrower, which posits a “twin-aisle jet accommodating between 200 and 270 passengers, with seven-across seating in coach class” with a composite wing made partly of carbon fiber reinforced plastic (CFRP) akin to that on the Boeing 787. A seven abreast airplane would almost assuredly have to feature two aisles, as a 3-4 configuration, beyond technical constraints, would also breach evacuation rules from regulators such as the Federal Aviation Agency (FAA) since 4 or 5 seats together are required to be flanked by two aisles for ease of exit in case of emergency.

Ostrower’s article also notes that Boeing has not yet made a final decision on its MoM approach. Also on the table is the 737 MAX 10X, a stretch of Boeing’s re-engined 737 MAX 9 that would feature the CFM LEAP-1A engine from the Airbus A320neo family and a revised wing. But Boeing is also apparently considering building both variants at the same time. And there’s also the chance that the increasingly risk averse Boeing board chooses to do nothing at all until the end of the decade and a potential launch of a new small airplane (NSA).

There are clearly several questions and themes to explore here, so with that in mind we’re going to try a new approach to discuss Boeing’s MOM. You can think of it as a cross between one of the normal columns in this space and a FAQ, with a little bit of a lighter tone (don’t worry, the underlying analysis is still based on the same facts and research that we normally provide —whether that’s a positive or negative is left to the reader). As this is definitely a new approach for us, we would appreciate your comments and feedback on whether you like it and what can be improved.

*Note* – Large swaths of this column are sarcasm, and with that…

Why does Boeing need to address the MOM Space?

Because the MoM threatens to make Boeing an irrelevant aircraft manufacturer in the 21st century; a veritable Fokker or Sud Aviation. Haven’t you heard the latest commentary on the matter from John Leahy, which we absolutely must take as gospel? Pretty soon Boeing’s shareholders will be resuscitating Hoovervilles on the banks of Lake Michigan outside Boeing HQ in Chicago as they are rendered penniless before the almighty power of the A321neo…

In reality, the situation for Boeing isn’t quite that bleak. Our best model (and guess) does indicate that the 737 MAX 9 is indeed an inferior aircraft vis à vis its direct Airbus competitor, with a shortfall of close to 1,000 nm (1,850 km.) of effective range, several tons of payload, and anywhere from 5-10% in terms of cost per available seat mile (CASM). Other analysts such as Leeham News have independently reached the same conclusion. The proof is in the numbers, as the A321neo has a commanding 70% share among large narrow bodies, with the 737 MAX 9’s figures arguably inflated.

The good news for Boeing, as we outlined in our large breakdown of the 737 MAX and A320neo programs earlier this year, is that the vast majority of MAX and neo orders (more than 5,000) are for the core 737 MAX 8 and A320neo. Our analysis also confirmed that the 737 MAX 8 actually holds the edge over the A320neo in many of the same categories the A321neo dominates, including CASM.

The 737 MAX 8 and A320neo are more or less at parity since the MAX’s launch date (the A320neo) did have a head start, so the 737 MAX is not necessarily a dead program. But the A321neo’s space, the MoM space, is increasingly where the market is headed thanks to demand growth and an acute failure to invest in airport and air traffic control infrastructure (particularly in Asia). There’s a case to be made that over the next 10-15 years, some 30-40% of incremental orders for the MAX and neo will be for MOM aircraft, which favors Airbus and its superior A321neo. So the 737 MAX is very much so a one-variant aircraft family, and our view is that the A320neo family will retain anywhere from 55-60% market share over the MAX as a result.

So what are the plus points of a 737 MAX 10X?

It’s probably the least complicated solution, from a technical and financial perspective, as we estimate it would cost anywhere from $1.5 – $3 billion to develop. It would likely be available earlier than a clean-sheet MoM aircraft (the entry into service [EIS] for that plane is being tentatively penciled in as 2025) with EIS somewhere in the 2020-2021 range. The 737 MAX 10X would offer commonality for existing customers of the 737 MAX like Southwest, Copa and allow them a viable pairing for the 737 MAX 8. In fact, right now several customers have opted to pair the 737 MAX 8 with the A321neo, and Boeing would dearly love to keep those customers entirely with the MAX.

The 737-10X would also benefit from the economics of stretched aircraft, which are almost always more efficient than their shorter base models. In that way aircraft are a lot like NBA players: Ray Allen is a great shooter and scorer at 6’5 but when you stretch him to 6’10 and call him Kevin Durant, he becomes immeasurably more effective (let’s pause to pour one out for the 29 NBA teams not named Golden State for oh, the next 7 years). The headline is that stretched aircraft are highly efficient and as a result we believe that Boeing could supersede the A321neo’s operating economics by several percentage points (3-5%).

That sounds great. So when does the 737-10X enter production?

Unfortunately, it’s not just Boeing in the market today, and the biggest flaw with the 737-10X, a cheap, cost-efficient, and relatively simple derivative, is that it’s not hard for Airbus to do the same thing with the A320neo platform. In fact, the A320neo is a younger and easier to stretch platform, and Airbus would likely respond to the 737 MAX 10X with a stretched A321neo, an A322neo of sorts. Because the A322neo would not require quite the same modifications to the wing and landing gear as a 737 MAX 10X, Airbus could conceivably build it for as little as $1 billion in incremental investment and restore its dominance in the MoM space.

To extend the basketball analogy for a moment, in this case Airbus would respond to Kevin Durant by taking Andre Iguodala (a fabulous 6’5 defender) and stretching him into the 6’9 Kawhi Leonard, negating the advantage of Durant (perhaps this is just wishful thinking on the part of this Spurs fan). Sadly, our view is that the 737 MAX 10X is dead on arrival.

So then Boeing has to make a clean-sheet MOM right?

More or less, but it’s not as simple as new Boeing CEO Dennis Muilenburg clicking his ruby red heels three times and wishing the MoM (797?) into existence. For starters, we believe that the MoM would require at least $8 and realistically $10-12 billion to develop, which is a major cash outlay even for a company of Boeing’s size. Beyond the raw technical challenges of building a clean sheet airplane (neither Airbus nor Boeing covered itself in glory with the A350/A380 or 787 respectively), the engines that would enable this plane simply don’t exist in the market today.

Pratt & Whitney is working on a variant of its geared-turbofan (GTF) engine that would operate with the right level of thrust, while Rolls-Royce is also working on an UltraFan engine concept with similar capabilities. But neither engine is expected to be operational before the end of the decade, and in the case of the UltraFan not until 2025 at the earliest. So there would be a high degree of uncertainty for Boeing and a long (basically decade-long) lead time in developing this aircraft.

The flip side, is that these new technologies would enable Boeing to build a MoM aircraft that blows the A321neo out of the water (12+% CASM advantage even pricing in improvements to the A321neo) and is positioned to dominate so called long and thin routes as well as high volume trunk routes in Asia and North America. Ignoring any snark about this being a “767 MAX” or retread, our view is that Boeing would be able to retake the MOM market (or at least restore parity in the space) with the currently proposed clean sheet.

So when does Boeing break ground on a new assembly line in Renton or Charleston?

Well first and foremost, by the time Boeing’s MoM has its EIS it’s entirely feasible that an outsourcing happy Boeing management team will have outgrown even Charleston and relocated production to more “business-friendly” locales such as Dhaka, Medellin or that regulation-free utopia Mogadishu.

But the truth of the matter is that it’s not certain that Boeing’s board will sign off on the outlay of such a large sum of money, especially with Airbus’ current pricing power with a weak Euro enabling the European manufacturer to cut potential MoM prices via its own discounting and reduce the return on investment (ROI) for Boeing’s project. And before you go and condemn Boeing’s board as some unholy combination of Scrooge McDuck, your broke cousin that’s always asking for money, Mitt Romney (the worst billionaire to ever run for preside… never mind), and that dude that was playing the violin as the Titanic sank, keep in mind that the explicit role of a Board of Directors is to maximize returns for shareholders (the owners of a company).

There’s a very real argument that Boeing should instead return the $8-12 billion that a clean-sheet MoM directly to shareholders, and unlike most, we see that as a valid view. Frankly, even if it cost Boeing parity in the narrow body space, Boeing would still be close to Airbus in terms of revenue (thanks to a slight edge in the wide body space) and highly profitable. There’s nothing wrong with being a very successful second fiddle, and to use a different sports analogy, Rafael Nadal was not Roger Federer but he was one of the greatest tennis players ever and even dominant over Federer in his lane (the French Open for Nadal; wide bodies for Boeing.)

But our view is that Boeing should build the MoM plane because that will return the most cash to shareholders in the long run. Strategically speaking, even if the 737 MAX 8 and A320neo remain the “heart of the market” for the next 8-10 years, at some point the MoM space will ascend. The long arc of commercial aviation history, from the Douglas DC-3 to the Lockheed Constellation to the McDonnell Douglas DC-9 to the MD-80 to the present, says that the size of the core narrow body plane in mainline fleets is on an ever increasing trend. Boeing needs a solution for that space, and a clean-sheet MoM is its best bet.