Published in April 2016 issue
By Vinay Bhaskara
“It flew beautifully,” said Captain Ed Wilson, Chief Pilot for the Boeing 737 program. “We were amazed at how quiet the [737-8 MAX] cabin was. I took a walk through the cabin mid-flight and was impressed.”
On the other side of the Atlantic, and a few days earlier, Airbus’ low-key delivery event eased the global aviation industry into an era that we have dubbed as the ‘age of incrementalism’, in which the major original equipment manufacturers (OEMs) avoid massive capital investments and reduce their exposure to the risks involved in the development of clean-sheet aircraft by sheltering in the safe harbor provided by re-engined ones.
Airways contributing editor Andreas Spaeth was present at the new Airbus’ inaugural flight, from Frankfurt (FRA) to Munich (MUC), and noted how, “on takeoff, the A320neo is audibly quieter tan earlier models.”
In today’s aerospace market, the competition between the A320neo and the 737 MAX is a defining contest. Both aircraft types are evolutions of the best-selling products of the two major commercial aircraft manufacturers. How this battle plays out will have fundamental implications for the balance of power between the most important aerospace players in global aviation. And timing is everything.
HOW DID WE GET HERE?
The concept of re-engining an existing airframe while minimizing structural changes has been around since the beginnings of the jet era. De Havilland replaced its Comet 1’s Ghost engines with the more powerful Rolls Royce Avon ones on the Comet 2. Sud Aviation made its Caravelles Super by replacing the Avons with Pratt & Whitney JT8D turbofans.
In the late 1970s and early 1980s, Boeing offered the 707-700C, retrofitted with four General Electric/Snecma CFM56 engines, to those carriers that wished to retain their 707 fleets, but customers were lukewarm. McDonnell Douglas was more successful (Airways, January/February 2016) in transforming 110 DC-8-60s into -70s by equipping them with those same engines by 1988. Even the Boeing 737 had already been the subject of a previous engine change.
After getting lapped by the launch of the Airbus A320 in 1989, Boeing fired back in 1997 with the 737 Next Generation (737NG). Airbus had sold close to 2,000 A320s before the 737NG’s entry into service (EIS), but Boeing rapidly narrowed the gap. To date, the 737NG has logged 7,033 lifetime orders against the A320’s 7,940.
In 2006, Airbus launched the A320 Enhanced (A320E) program, which introduced engine upgrades, aerodynamic improvements—such as large curved wingtip devices named ‘Sharklets’—weight savings, and a new cabin design; all intended to gain efficiency, improve fuel burn, and hence attain more range and better operational costs.
Airbus soon realized that engine technology had progressed to the point of being able to deliver operating cost reductions ranging from 15 to 20%. So, in December 2010, the European manufacturer launched the A320neo, the suffix standing for ‘new engine option’—the then-current configuration would henceforth be known as A320ceo (current engine option).
During the same time, Boeing had been studying various replacement options for the 737, including a clean-sheet design dubbed the Y1. In November 2009, Boeing filed a patent application, which envisioned an elliptical composite fuselage, signaling that the concept could become the 737’s successor. Initially, Boeing’s intention was to launch this new small airplane (NSA) soon after the Dreamliner’s EIS and to begin development in the early 2010s. However, with the 787 program being plagued by a variety of technical challenges, Boeing deferred any decision to 2011.
By 2010, having largely gotten the 787 under control, Boeing was clearly leaning towards launching the NSA. Even after Airbus had launched its A320neo with 30 firm orders from Virgin America (Airways, June 2014) in December 2010, Boeing didn’t blink. As the ‘neo’ was winning customers among the existing ‘ceo’ operators, Boeing reasoned that its own loyal customer base would be willing to wait a few years for the NSA, which promised even better operating costs and tangible aerodynamic improvements.
Even though the A320neo order book continued to expand, Boeing seemed to remain committed to the NSA. However, when American Airlines (AA)—a traditional and almost exclusively Boeing mainline customer—placed purchasing options for 280 A320neo family aircraft, along with a slew of A319 and A321ceos, the alarms went off in Seattle. With a key customer essentially in danger of jumping to Airbus, a scrambling Boeing decided to reengine the 737NG and to push back the Y1’s launch to 2030.
Boeing’s planned new entry was initially named the 737RE (reengine). The initial reception was mixed, with some customers being disappointed that the company was not proceeding with the NSA. However, others quickly expressed an interest in the 737RE. Boeing pitched the aircraft to AA and Southwest (WN), with an offer for 737-800NGs to help the manufacturer achieve relative parity. Boeing moved quickly on the then renamed 737 MAX—its board formally approving the program’s launch in August 2011.
Boeing did not initially disclose the identities of its 737 MAX customers. Only on November 17, 2011, were the names of two customers released—Lion Air (JT) and leasing firm Aviation Capital Group (ACG)—and the existence of 700 commitments from nine clients was also revealed. Then, on December 13, Southwest—the world’s largest 737 operator—announced that it would be the launch customer for the 737 MAX with a firm order for 150 aircraft plus 150 options. This would be the fourth time WN had launched a 737 variant, as it had in 1984 with the -300, in 1987 with the -500, and in 1997 with the -700. In all, Boeing had 948 commitments and firm orders from 13 customers for the 737 MAX.
COMPARING THE PRODUCTS
The A320neo and 737 MAX each come in three variants. Interestingly, both families of aircraft opted to drop the smallest versions from their prior generations (the A318 and the 737-600). According to Airbus, the A320neo features 95% commonality with the A320ceo, and comes with two engine choices: the CFM LEAP-1A and the Pratt & Whitney PW1100G GTF. The latter belongs to of the family of Geared Turbofan (GTF) engines that will power most new-generation aircraft, including Bombardier’s CSeries, Embraer’s E-Jet E2s, the Russian-built Irkut MC- 21s, and the Mitsubishi Regional Aircraft (MRJ).
CFM International will be the sole supplier for the Boeing 737 MAX, which will feature the slightly smaller LEAP-1B. As it was starting with an older, and thus less optimized, airframe, Boeing had to invest more in aerodynamic improvements to squeeze in additional fuel efficiency, including the wing integration of the LEAP engine’s nacelle and a new advanced-technology winglet featuring a split tip. Combined, these improvements will deliver a 2% additional fuel economy to that provided by the new engines. Boeing also had to lengthen the MAX’s landing gear to accommodate the LEAP-1B’s larger fan diameter: 69.4-inch (1.76m), as opposed to the 61.8- inch (1.56m) of the 737NG’s CFM56-7B engines.
“When standing next to a neo’s engines, the difference from the A320ceo becomes obvious,” Andreas Spaeth claims. The A320neo’s engines are understood to save at least 15% of fuel consumption and cut down on both noise and vibrations.
RANGE AT A GLANCE
The 737-7 MAX has a maximum range of 3,350nm (6,204km), whereas the A319neo’s actual (not advertised) range is estimated to be of 3,650nm (6,759km). After discounting these figures by the standard 15%-25% for factors like fuel reserve, additional payload, and headwinds, the stillair operating envelope for both these aircraft remains within the 2,500–3,100nm range, comfortably enabling them to opérate all of their missions with a full payload.
The 737-8 MAX has an estimated maximum range of 3,515nm (6,509km), whereas the A320neo’s actual (not advertised) range is estimated to be of about 3,300nm (6,110km), reversing the range advantage held by the A319neo over the -7 MAX. Theoretically, the -8 MAX could fly the longer-haul flights, such as the transatlantic ones of an LCC like Norwegian (DY), that the A320neo could not.
Lastly, the 737-9 MAX has the same range as the -8 MAX, whereas the A321neo’s actual (not advertised) range is estimated to be of 3,650nm (6,759km). Both can comfortably operate all of their missions with a full payload. However, the A321neo LR (long range) expands the A321neo’s range advantage. The -9 MAX is performance-limited from ever achieving its full range potential.
ENGINES AND AVAILABILITY
In spite of these head-to-head advantages for members of both families, ultimately the overall contest is likely to be shaped by factors external to Boeing and Airbus. The primary one comes in the engines that will hang under the respective wings of each aircraft, between CFM LEAP and PW1100 GTF.
CFM has a major point in its favor because there is substantial execution risk on the Pratt & Whitney Geared Turbo Fan (GTF), the more innovative and thus more unproven technology. For a small example, look at the software and certification issues that pushed back the initial A320neo deliveries. LH took the first A320neo instead of Qatar Airways (QR) because it can operate it near its Lufthansa Technik maintenance center and attend to any eventualities rapidly—whereas, the Doha-based carrier can’t. QR also balked because the GTF engine has to run in idle for three minutes following start-up; until that time frame has passed, the aircraft can’t taxi under its own power. QR won’t take the aircraft until that drawback is fixed. And Airbus has paid a penalty.
The broader point is that there is some execution risk on the GTF, and that has been signaled by the market: despite the GTF’s positioning as the preferred platform, CFM has 53% market share on the neo alone and (by default) combined market share of 79%. So in the near term, orders may well come down to who has better availability. This has swung back and forth between Airbus and Boeing over the last few years, and the two manufacturers are racing to add production to their core single-aisle programs.
Airbus will raise A320 production rates to 50 aircraft per month in early 2017 and to 60 by 2019. Boeing has committed to 52 aircraft per month with the capacity to go up to 60 as well. With an uncertain engine situation, availability could actually be more decisive a factor in neo versus MAX contests than the turbines beneath the wings.
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737 VS. A320 ORDERS
A comparison of current 737NG and A320ceo numbers is a reliable lead-in to the contest between MAX and neo; the high degree of commonality that exists between the current generation products and the re-engined ones provides airlines with a strong financial incentive to stay with the same manufacturer for their next-generation fleet. Since its introduction, the 737NG has narrowed the gap with the A320ceo, but still trails overall because of the nearly eight-year head start enjoyed by the Airbus family.
The A320ceo family has the overall edge, but the 737-800 has actually outsold the A320ceo. This makes sense, given that the -800 is by far the best-performing member of the family, offering 12 extra seats and a superior cost per available seat mile (CASM) versus the A320ceo. The A321ceo holds similar advantages versus the 737-900ER, and that is reflected in its dominance over its Boeing competitor. In the matchup of the new planes, Airbus is well ahead with 4,471 orders for the A320neo against the 3,072 of the MAX. Airbus’ head start of nearly a year helped but, even since the MAX had won its first order, the neo has outsold its Boeing counterpart 3,327 to 3,072.
AIRBUS’ RISK-TAKING IS PAYING OFF
Although the 737-800 (and -8 MAX) have a nominal advantage in operating costs over the A320ceo/neo, Airbus has a (not-so) secret weapon up its sleeve that has more than evened the playing field: inertia in airline fleet planning. When an airline already has a large fleet of a certain type of aircraft, it is very likely to place replacement or growth orders for that same type—due to the cost savings offered by the commonality of all the divisions of the type.
Thus, the majority of carriers have ported over from the NG to the MAX and from the ceo to the neo. At the same time, Airbus has practiced aggressive salesmanship, especially in offering special deals on the A320 to startup airlines, particularly LCCs, which had traditionally been ignored by both manufacturers. Sometimes, the strategy failed, but just as frequently, it generated tangible success and growth. The two top customers for the A320neo are ULCCs IndiGo Airlines (6E) and AirAsia (AK), with 430 and 304 aircraft on order, respectively—about 16% of the neo’s overall backlog. These are two successful and profitable airlines in some of the fastest growing regions in the world. Boeing, while making a few similar bets, such as with India’s SpiceJet (SG), has been less aggressive in courting such customers, and is now paying the price.
FUEL PRICES WILL DELAY ORDERS
The recent rout in oil prices will no doubt take a bite out of the sales prospects of both aircraft families. The impetus for the A320neo and 737 MAX came at a time when oil prices were of over $90 per barrel. At those prices, the cash savings in operating cost per seat miles over the NGs and ceos was meaningful—about 8% among direct analogs (i.e. A320neo/737-8 MAX versus A320ceo/737-800) for jet fuel prices of more than $2 per gallon, and over 10% for jet fuel prices exceeding $3 per gallon. However, when fuel is priced at $1 per gallon, those savings drop to about 6%. At that point, other elements, such as pricing and capital deployment, loom larger for airlines looking to place replacement orders.
With oil prices as low as they are now, the A320neo and 737 MAX have shifted from being ‘essential’ purchases to ‘nice to have’ ones. If airlines get A320neos or 737 MAXs at the right price today, that’s great; but they will generally be just fine operating the 737 NGs or A320ceos that they’ve already paid for. The big exception is probably represented by those carriers that need to replace their Boeing 757s, particularly those flying longer-haul routes. Such carriers, including the US legacy ones and Icelandair (FI) (Airways, September 2014), will require replacements sooner rather than later. That favors Airbus, with its A321neo and A321neo LR—though Boeing can compete with its 737-8 MAX, as it did at Icelandair
HOW WILL THINGS PLAY OUT?
This relative advantage neatly encapsulates the overarching setup for the battle between Boeing’s and Airbus’ re-engined jets. The 737- 7 MAX and A319neo are frankly inconsequential: Bombardier’s CSeries and Embraer’s E-Jet E2s fill their niche better, and the market’s 100-150 seat segment is now even more limited tan before. In a vacuum, the 737-8 MAX is a smidge superior to the A320neo, but other factors—such as commonality, mission profile, and availability—could tilt any particular contest in favor of Airbus. In the long run, we expect the 737-8 MAX to either match or (very slightly) outsell the A320neo. But that match will be superseded by the dominance of the A321neo over the 737-9 MAX.
Despite Boeing’s protestations about the ‘heart of the market’ being around the 737-8 MAX (which, technically, is still true), airlines today buy families of aircraft and, if the A321neo-sized family is a critical part of a particular airline’s order, then it will be hard for that airline not to choose Airbus. At larger carriers, with enough critical mass to support narrow-body subfleets from two different manufacturers, we expect the 737-8 MAX and A321neo combination to frequently win the day. But overall, the dominance of the A321neo leads us to project that, in the long run, the neo will claim a 53%-55% share of the market versus the MAX; a narrower margin than today’s, but still a tangible victory.
Airbus’ victory will likely push Boeing into finally launching the NSA (bringing the irony full circle) once it will have developed a middle of the market solution to combat the A321neo. In general, we know that competition will intensify and that the endless B vs. A battle is far from over. Airbus delivered its first A320neo, and Boeing successfully put its 737 MAX to the skies (at an incredibly quick and smooth pace). So all eyes will be placed on the Singapore and Farnborough air shows for further orders while statistics begin to show which airplane is operating as promised. Engine performance, turnaround times, delivery pace, and whether both MAX and neo concepts will live up to the expectations… only time will tell. Sit back, relax, and enjoy the ride.