Richard Aboulafia of the Teal Group has criticized Boeing and Airbus plans to ramp up production on their single aisle airliners and the man has a strong point.  Current demand isn’t from growth, it’s simply from the need to replace aging airliners and the thoughts of ramping up production to 50+ per month does smack of hubris. 

Some airlines do desperately need newer, more economical airliners.  American Airlines is a great example and they’ve made their order.  However, what makes sense for AA doesn’t necessarily make sense for another airline.  Take Delta, for instance.  Delta has a fairly mixed fleet with both Boeing and Airbus products.  What it doesn’t really have anymore is that 70’s/80’s fleet of aircraft with really inefficient engines a la MD-80s and what it does have in that category, it’s getting rid of fast.

But what about the MD-90s, you ask?  Check out what engine is on that aircraft.  It’s an IAE V2500, the same that is sold today on the Airbus A320 series.  What Delta is keeping isn’t nearly as old and inefficient as you think and the aircraft are far less capital expensive than new aircraft are.    Simply put, Delta is replacing exactly what needs replacement and not buying one aircraft more than necessary.

Other airlines are evaluating the options for what they need in the next 15 to 20 years.  Southwest has a fairly new, fairly efficient fleet of 737s and it will want to keep buying new aircraft, too.  But what does it need?  Right now, it needs the 737-800 and it needs it now rather than later.  It needs replacement aircraft for the remaining 737-300/500 aircraft in the fleet and that is being achieved with 737-800s (which  replace 737-700s which then replace 737-300/500 aircraft.)  But does it need the 737-MAX?

Well, yes and no.  It needs the MAX but the airline also is put into an odd position in that it is likely faced with the following scenario:  It will maintain a large fleet of NextGen 737s for the next 10 years or more.  If it buys the 737-MAX, it will need to hold onto those aircraft for about 20 years.  Assuming it can take deliveries in 2017, that means the MAX stays in the fleet for as long as 2037 or longer.  However, Southwest knows that a new single aisle airliner will be available around 2025.  That’s the airliner that it really needs to go deep on.  So, at best, the MAX is an interim solution for airines like Southwest (and Ryanair and others) and you don’t go deep on interim solutions. 

The same is true of the A320NEO.  For most airlines, going deep on the A320NEO is the wrong decision.  Well, for the committed Airbus customer, going deep on the A320NEO isn’t quite as foolish because it is fairly obvious that Airbus *won’t* have a replacement for the A320NEO as soon as 2025.  More likely, Airbus wouldn’t roll such an aircraft out until 2030.  This is why you’re seeing fairly strong orders for the NEO from existing Airbus customers. 

Right now, both manufacturers have deep, deep order lists.  They want to extract as much value from those right now as possible because they know that as soon as they do introduce new airliners, those orders will change quickly.  The market will become flooded with cheap, relatively new “classic” single aisle airliners with a new single aisle airliner introduction.   When the market is flooded with those aircraft, the manufacturers have a much harder time selling customers into their newest and best.   So they want to slim those lists down as much as possible right now. 

The folly is that ramping up production comes with fairly high costs and the only way to justify those costs is to be able to show that you’ll have an order list that will sustain those high production rates.  The manufacturers think the NEO and the MAX will garner enough orders to justify those production rates.  That’s the part that is suspect.  Yes, initial orders are high(ish) but consider this:  Annual production of the 737 and A320 already exceeds 800 aircraft a year.  That’s a lot of aircraft and it wasn’t that long ago when Boeing and Airbus could hardly find a buyer for the planes they were producing.  I’m talking about 2002/2003 time periods which were a result of September 11, 2001 attacks that reduced air traffic dramatically and killed the finances of airlines around the world. 

So, is a growth to 40 aircraft plus or minus a month justified?  Probably.  Almost certainly.  Is growth to 50 or more per month justified?  No and I don’t think the manufacturers are going to commit to that presently.  Right now, Boeing can reach to the high 40’s without too much trouble.  Airbus would struggle with that without making a much larger investment in a new line (such as in the United States.)

The A320NEO and 737MAX aircraft are interim solutions.  That’s it.  Initial orders will reflect some pent up demand to replace aircraft but it’s unlikely that the pace will continue in a sustained manner.  In fact, airlines are being much more prudent in their orders by ordering a few here and a few there to just keep pace with their conservative needs.  We won’t see a need for production rates at 50 or more per month until a manufacturer gets off its duff and builds a new single aisle aircraft.

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