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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Various media reports point to Boeing leaning heavily towards a “minimum” investment strategy in defining what the new Boeing 737 Re Engine would look like. 

That means an aircraft that receives enough modifications to handle the heavier CFM Leap56 engine with a reduced fan diameter which should make the 737 models roughly equivalent to the Airbus A320NEO with about 2% cost efficiency advantages over the A320NEO.

My problem with this is that it simply confirms the Airbus A320NEO as the right move and offers Boeing little advantage over the next 10 to 15 years and possibly puts it at a disadvantage over that time frame since there are fewer areas to incrementally improve performance of that airframe over time.   One example is that the 737 already has winglets (aka “sharklets” on the A320). 

In addition, this is the creeping incrementalism that we saw at McDonnell Douglas over nearly a 2 decade time period that led to their ultimate demise.  Aircraft manufacturers don’t win over the long term with derivatives and I’ll point out that there have been a total of 9 major derivatives of the 737 with several sub-derivatives of those as aircraft as well.  That’s an aircraft that has run its course without something game changing.

If it were to be a Re Engine strategy, it would have been far more encouraging to see Boeing design a new wing or a modification to the wing to bring additional gains.  It would have also been more encouraging to see a modification to the nose gear to permit a full on adoption of the CFM Leap56 and, possibly, even the addition of a 2nd engine choice (Pratt & Whitney GTF).   Yes, that begins to look like a new airliner but it puts Boeing firmly ahead in the narrow body game.

My own preference was to see Boeing make a move for an entirely new aircraft with introduction into service in 2018.  It would have been a difficult challenge but it is one that Boeing is in position to achieve.  It’s learning curve with new materials and design approaches has peaked. 

Offering that you couldn’t figure out how to immediately ramp up production to 40 to 60 aircraft a month is a somewhat lame excuse for backing away.  If you can build if efficiently at current production rates (in the mid 30’s per month), you can figure out how to build it at a 60+ aircraft rate when that time comes.

This, in some ways, smells like Boeing trying to maintain the older airliner to use as an replacement for aging military aircraft such as what they’ve done with the 737 in creating the Boeing P-8A Poseidon (replacement for the venerable P-3).   It’s notable that even that aircraft got a better wing in the form of having raked wingtips a la 767-400ER for longer duration, efficient flying.

My greater point is that you don’t win and you don’t grow as a company by playing “keep up” and playing it safe.  Airbus managed a coup by forcing Boeing’s hand and scaring them away from a new design.  Somehow, I severely doubt that a Boeing led by someone such as Alan Mulally would have adopted such a strategy.

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Airbus has racked up over 780 firm orders for the A320NEO since announcing its availability and even I have to say that I’m quite surprised at how fast that happened.  It would appear that airlines vocalized a desire for a new aircraft and ordered the re-engine like it was the best thing to happen since the Concorde.

There is absolutely, positively, no question that Boeing needs to get back in the game ASAP.  Theoretically, they did with the American Airlines order but . . . both Boeing and all other airlines have largely been silent on the 737RE since that order.

I was certain that we would hear other airlines grumble about being kept out of the loop or shout with joy that they, too, wanted to order the aircraft.  Instead, we learn at Southwest Airlines’ earnings call that they were kept in the loop and . . .

Nothing.  They were kept in the loop and  they endorse the aircraft but no other talk of an order.

The 737RE doesn’t have board approval to offer . . . yet .  However, in this particular case this really is a formality.  The lack of any other orders even getting mentioned as rumours tells us just how fast the AA deal was put together.  No one else is any farther along. 

I repeat, Boeing really needs to get back into the game.  Numbers are perception and Boeing knows how well it did when it was running up the 787 numbers in the early days.  Perception is as important as facts when it comes to whether or not an airline views your aircraft as leading edge.

Right now, we don’t even know what the 737-RE will be called and that’s kind of bad.

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As much as Boeing and Airbus would like to think so, they don’t.  If anything, I think they’ll promote the CSeries and I think they’ll encourage Embraer to go bigger. 

Look at the seat numbers on these aircraft.  The A319 and 737-700 seat roughly 135 or more passengers.  The A318 is a very poor candidate for the NEO and the 737-600 really isn’t offered anymore.  Neither works for mainline service very well because they’re heavy for the number of passengers they carry and their range just isn’t needed for routes requiring those passenger numbers.

Sub-130 seat routes aren’t going to be long and thin transcontinental routes.  To the contrary.  They’ll be the routes they are today and the routes we see developing even now.  They’ll be from Wichita, Kansas to St. Louis or Knoxville, TN to Chicago.  

And there is no airliner being offered that quite gets the airlines there. 

Airlines such as Southwest realize that a smaller airliner is probably necessary for growth now that they have the nation’s largest cities essentially covered.  Boeing and Airbus don’t make that airliner and they don’t plan to make that airliner.  But it’s needed.

And Bombardier is making the aircraft.  Embraer is considering what to do next when it comes to either re-engining its E series aircraft or building a new airliner (and I think they’ll build a stretched E195 with new engines, frankly.

An airliner series with practical passenger capacities ranging from 90 to 130 seats is just what these airlines need.  And legacy and SuperLegacy airlines will need them too if they don’t get their pilots to agree to revised scope clauses.

That leads us to another reason why that class of aircraft is needed.  Even if the legacy and SuperLegacy airlines get pilots to agree to new scope clauses that permit them to engage regional airlines for that 90 to 130 seat flying, somebody has to buy the aircraft and fly them. 

ERJ-140 and CRJ-200 aircraft are not going to be practical going forward.  They’ll hang on for a bit longer but they are going away because they are fuel inefficient and they’re getting old to boot.

Now that airlines know what is going to happen with both the Airbus A320 series and Boeing 737 series aircraft, they can start shopping for that next class of aircraft that permits entry into those smaller markets cost effectively.

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I wrote a long blog post early yesterday morning about American and the rumoured order it was about to make.  Then, later in the day, the rumours started flying that it would announce the order today (Wednesday).  And, boy, did they.

Let’s look at the details first:

• 460 aircraft on firm order with both Boeing and Airbus
• Boeing sells AA an additional 100 current 737NG aircraft.
• Boeing sells AA 100 737RE aircraft with the CFM LEAP engine.
• AA takes another 40 options for the 737NG and another 60 options for teh 737RE.

• Airbus sells AA 260 A320 Family Aircraft
• 130 are for current generation A320 family with the sharklets to be introduced in 2012.
• 130 are for A320NEO aircraft (with arrival in 2017 and so much for talk that the A320NEO line was sold out.)

The aircraft will begin arriving from both lines in 2013 and American Airlines thinks it will have one of the youngest fleets in about 5 years.

So what does it mean?  Well, for one, the cost to announce this order was tiny compared to a traditional order.  These aircraft will be on operational leases and it appears AA didn’t have to put much money down for these firms orders (if any.) 

This order will be of dramatic benefit for the airline when it comes to saving on fuel.  If AA had a fully modern fleet now, it’s likely it would not have lost money this past quarter.   The benefit in fuel savings on this order will take a while to be realized. 

This is the first official mention of a 737 re-engine and I think we’re going to see some gnashing of teeth on the part of some airlines over the idea that a fresh design is likely 10+ years away.  This might be good for AA, it isn’t good, necessarily for Southwest Airlines or Ryanair.

This is a big win for CFM and its LEAP56 engine and while the engine is only announced for the 737RE, it is almost certain that that engine will be chosen for the A320 family.

What this isn’t is a loss for Boeing.  The post I composed and just deleted talked about how having a single source for your aircraft wasn’t really practical for an airline of AA’s size and all other SuperLegacy and Legacy airlines operate mixed fleets already as a function of a merger.  What those airlines have learned is that neither Boeing nor Airbus has a supply chain that can meet all their needs all of the time and on time.  It wasn’t irrational for AA to go to Airbus.

However, this is a pretty big loss for Boeing in the psychological warfare arena of aircraft sales.  This will be spun many ways but at the end of the day, Boeing got bruised and is not the aircraft manufacturer who gets to crow about success today.  Expect other SuperLegacy airlines to take a long, hard look at this deal and begin to negotiate for their own SuperDeals on aircraft with both manufacturers. 

Why did Airbus win more orders?  Because AA already has a large 737 fleet.  It didn’t need quite as many 737s.  This really is an order of equals practically speaking. 

I do think the A321NEO will be the 757-ish replacement and I do not think that AA will upsize aircraft to the 737-900ER down the line.  Therefore, I think the A320 family order will be either

A) A full mix of A319/320/321 aircraft with multiple bases or

B) A320/A321 aircraft with focused bases

I rather doubt that the A319 or the B737-700 will be ordered at all.  This order is about a marginal increase in capacity over time for most routes with the 757s leaving ever so slowly over time. 

And that points out a glaring gap that I haven’t seen anyone talk about yet.  Through this order and previous small orders, American Airlines will have upguaged their entire fleet and particularly so in the next 5 to 7 years.  Presently, the smallest aircraft in its fleet will be the 737-800 or A320 at roughly 160 seats.

What serves the 120 to 150 seat range?  The MD-80’s are departing and rightfully so.  American Eagle has CRJ-700s that are configured from 63 to 65 seats and AA is currently scope clause limited on how many of these aircraft it can fly.  Now, AA has also announced that it will spin off American Eagle soon and we’ll talk about that in a future post but that only means AA can (and will) access other regional airlines for its sub-100 seat flying.

What fills the gap?  If AA manages to get a new pilot agreement that allows AA to subcontract its sub 150 seat flying, I’ll be rather shocked.  I do not think the pilots are going to cede that territory under the current contract or whatever agreement is made for the near future. 

I realize that AA has been serving markets that might demand a 120 to 130 seat aircraft with higher frequency using smaller jets but it can’t do that forever.  Is there another order for aircraft lurking in the background here?  Maybe.  The Bombardier CSeries does fit that whole very nicely and does it in harmony with this announced order.  In fact, it presently is the only airliner that does.  Embraer gets close but it doesn’t quite get there.   If I were Bombardier, I would be knocking on American Airlines’ door with a most excellent finance package for its CSeries CS100 and CS300.

There is one more question lingering as well . . .

How will American Airlines paint its A320 family?  The aircraft cannot be polished like its 737 counterparts.  I strongly suspect we’ll see a metallic silver used with the current paint scheme over that.

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One consequence of the A321NEO is that everyone is talking about it being a Boeing 757 replacement.  Everyone talks about how the 757 fleet needs to be replaced and I think quite a few people are missing the point on the 757.

It’s an aircraft conceived of in a regulated era, born in a deregulated era and an airplane that has never really been part of a family of aircraft.  It’s a red headed step child that despite its status, airlines found a use for it.  It was built with too much range, too much power and for an airline model that didn’t include hubs and frequency.

Everyone talks about airlines needing to replace their 757 fleets and its true that these airliners are now old by any standard and will need replacement in the fleet.  But the one thing we shouldn’t do is assume that the mission being served by the 757 is the mission that airlines want to use their next aircraft for.

I’m not sure there needs to be a 757 replacement.  I’m also not sure that we don’t need a 757 replacement.  The original missions that Boeing conceived of for the 757 are not the missions that airliner served primarily.  It would be a mistake to assume that airlines want to replace 1000 757s that are serving long, thin trans-Atlantic routes or trans-continental routes.  They don’t.  Airlines simply found that they could use that expensive asset on those routes and earn money.

But airlines may well have already identified how they want to serve that mission in the future and it may well not resemble anything close to the current 757.

Boeing is right to let the airlines define the missions.  The next Boeing 757-like airliner to come from Boeing will be from a family of aircraft and it never really was the 737-900ER even though that airliner can serve in place of the 757 on most domestic routes.

I don’t think we’ll ever see such a hybrid airliner made again.  Can you imagine Boeing or Airbus sizing an aircraft to fit a smallish market and then providing it with over-powered engines?  I can’t.   Building a family of airliners is about tailoring the aircraft to fit the missions very well and todays missions are very different than they were even in the 757s heyday.

Don’t expect the A321NEO to be a 757 replacement.  Expect it to be an excellent coast to coast airliner for longer, thinner routes between those cities.  I don’t think it will be used for Hawaiian and trans-Atlantic routes in great numbers although it may get employed on a few of those missions if it can work and make an airline money.

Who says airlines want to fly such an aircraft to all kinds of cities in Europe?  I don’t.  In fact, I think that airlines aren’t that interested in such routes (they may be profitable but only just so) being served by such small aircraft.  Such routes don’t yield a very attractive number of dollars on a daily basis and they do come with risks to that profit that airlines don’t enjoy (fuel stops, for instance).

I would also point out that the engines needed for a “true” 757-like replacement don’t exist today.  There are no new next generation engines in those thrust ranges at this time and I’m unaware of any real plans or needs for such in the next ten years either.

But if airlines want a 190 seat trans-Atlantic capable airliner that is efficient and reliable, they’ll communicate that to Boeing and Airbus.  The fact that Airbus and Boeing aren’t running around and chatting up such an idea kind of indicates to me that that requirement really isn’t in the top 5 airline mission requirements being talked about today.

The next generation of single aisle airliners will be different than the current generations because those missions evolve.  Airlines will be asking for something different than just a better 737-700 replacement.  They’ll be asking for a range that will serve their current and projected future needs and that will define airliner families that look very different from the Boeing 737 and Airbus A320 series.

If anything, I think the mistake Airbus made with its NEO development is that it is only offering better engines, not a better aircraft.   It won’t have a better cockpit, better seat layout and it won’t be lighter or more durable or more reliable.  That’s where Boeing can really zing Airbus and where it should.

However, for Boeing to do so, they have to, you know, announce the damn project and get on with it.

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Last Thursday, there were a number of reports (mostly based on a Bloomberg report) that said that American Airlines was in discussions with Airbus to buy 100 A320 class airliners. 

As you can imagine, this spurred quite a bit of speculation.

Many have the incorrect idea that AA is contractually committed to buying Boeing only.  They are not.  There is a gentleman’s agreement that has been followed since the 1990’s that has had AA getting preferred aircraft pricing and early slots  in return for remaining an all Boeing customer.  There is no financial penalty for walking away from this except what AA might not get in preferred positions and pricing.

And I’m not even sure that exists.  The truth is, AA is big enough to get preferred pricing and early slots regardless.  They wield enough buying power to make any aircraft manufacturer sit up and pay attention.  So it doesn’t hurt for AA to talk to Airbus.

Is the Airbus A320/A321 the right aircraft?  Quite possibly.  The A321 will do a better job of fitting AA’s requirements for a Boeing 757 replacement compared to the equivalent 737-900ER.  It will fit almost all of the missions the 757 is currently serving (except for trans-Atlantic flights) and it will do it with pretty good efficiency compared to what Boeing is offering right now.

Are they serious?  Well, I wouldn’t be surprised if this was both a warning shot over the bow to Boeing as well as a serious discussion.  American Airlines really does need a better fleet going forward and it cannot afford to wait until 2019/2020 to get started.  The 737-800 is a good fit as a MD-80 replacement but not as a 757 replacement.  Boeing’s 737-900ER has worked well for Continental but I don’t think it would work too well for American because of range and payload.

American needs better seat mile costs on its routes and it can achieve those because it can fill its aircraft with business passengers.  Diversifying between manufacturers isn’t a bad idea anyway as it makes things just a bit more competitive and the airlines probably gains from that.

This may well be the “major network carrier” that Airbus COO John Leahy has spoken of with respect to the A320NEO.  If it is and if there is an order, it will be a major blow to Boeing.  Not because Airbus invaded the United States (they’ve already done that) but because AA would be regarded as one of Boeing’s most solid customers.

I wouldn’t say this is a done deal but I would say that we now have reason 998 why Boeing should, you know, get with the program.

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On the one hand, Airbus COO John Leahy gets to make good on his prediction of 500+ committments to the A320NEO by the Paris Air Show.  He even gets to land a traditional Boeing customer (Garuda International) but at the risk of sounding anti-Airbus and pro-Boeing, there is a bit more to this story in my opinion.

First, Garuda is hardly a critical Boeing network carrier.  It stings a bit for Boeing but . . . when you have a competitive environment, customers change from time to time.  That said, we aren’t hearing about Airbus customers switching to Boeing either. 

Second, Airbus landed committments for 500+ aircraft.  Not firm orders.  Some of these committments are Memorandums of Understanding, some are Letters of Intent and some are orders.  Boeing plays a bit more fair in this area in that it doesn’t “count” something as a committment until it is a firm order. 

Third, when you look at who these committments come from, it isn’t game changing.  They are almost all from existing Airbus customers and from customers in areas where Airbus and France have heavy influence.  There is no radical shift in the landscape.   If you’re an Airbus customer and you need a single aisle airliner, you’re pretty much going to order the NEO.  That’s what has happened so far.

All of that said, Boeing is in danger of becoming a bit too secretive of its plans.  It’s clear that major Boeing customers want to see something on the table.  Moreover, I suspect that they would like to be let in on the discussions about what an airline *wants* in a new single aisle airliner / 737 replacement / 737 re-engine.  If I were a Boeing customer, I would imagine that my attitude towards Boeing at this point would be quite similar to SWA’s CEO Gary Kelly’s.  In a word:  terse.

With the announcement made on the A350-1000 (which would appear to more or less bring that aircraft into competitive range of the 777-300ER but not exceed its capability), it’s time for Boeing to bet again.  They have a firm handle on the 787-9 development and I think they’ll find it within themselves to repeat that on the 787-10.  (Although one does wonder if they’re considering enough range / payload for the 787-10 given that airlines clearly enjoy the performance of late model 777-200ER/LR aircraft. 

Boeing can’t afford to dither around much longer.  It’s time for a decision and enough time has passed to make that decision.  If they’re confident they can make a new airliner that is 20%+ better, make the bet and get going on it.

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In a deal tentatively agreed upon and subject to Frontier Pilots Association ratifying it, Frontier pilots will get an equity stake in Frontier Airlines. 

Parent company, Republic, led by CEO Bryan Bedford, has so far struggled to make Frontier truly work under its business plan.  Why?  In Frontier’s case, it was based upon lower oil prices (aka lower fuel prices) than exist today.

While Republic’s regional airline business is continuing to do well financially, Frontier’s isn’t.  It doesn’t help that it is hubbed in Denver and surrounded by two 800lbs gorillas:  United Airlines and Southwest Airlines.

Both United Airlines and Southwest have made it clear that they are there to stay in Denver while Frontier has flailed about attempting to survive.  One has to wonder if the Southwest purchase of Frontier wouldn’t have been a better deal both for employees of Frontier as well as investors.

In hindsight, Southwest’s “loss” in the bid for Frontier now looks like a far better choice and its admirable they walked away.  Now they’ve filled spots in their route map that were “must haves” and get to integrate a fleet and flight crew that more closely matches their own.

It’s notable that Frontier is struggling in its two focus cities of Milwaukee and Denver.  Frontier is bracketed with Southwest and United in Denver and bracketed with Southwest and Airtran in Milwaukee.  

In addition, Frontier lost the man largely reseponsible for producing profits at Frontier:  Sean Menke.  Menke has just agreed to go to work for Pinnacle Airlines, a competitor of Republic.

Is Frontier over?  No.  Can it survive in the long term?  Only if it breaks out of being in entrenched battles for its cities.  So far, Frontier has mainly concentrated on building new routes to lesser cities that connect back to its Denver hub and Kansas City focus city.  It needs more coverage across the United States and there are few cities that are ripe targets for Frontier’s entrance at this point.

In addition, starting new routes is mostly only possible with Republic’s E170/190 jets as it has no more A319 jets on order and only one more A320 jet due this year.  Additional A320s are to be delivered starting in 2015.

Republic Airways does have Bombardier’s CS300 on order (40 orders and 40 options) but those aircraft aren’t due until 2014 officially and they are likely to be as much as 2 years late.

One has to question whether or not a stake in Frontier has that much value over the next several years.  In the past, airlines could survive for years and still bleed money.  Today, airlines have to manage their cash very closely and Frontier isn’t generating enough positive cash flow to have a very optimistic future.  It’s possible that Republic could keep the company afloat but only with further concessions from labor and I think that is unlikely.

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Airbus has committed itself to the A320NEO series recently and Boeing continues to decide to not decide on what it will do with the 737.  All the while hinting at a new aircraft development for a 737 replacement to enter into service around 2019/2020.   Except that Boeing has also hinted from time to time that a re-engine might be in order while also saying that customers don’t want a re-engine. 

In addition, Airbus will be releasing its configuration for the A350-1000 aka 777 killer in the next few weeks.  Boeing doesn’t believe it quite meets the mark without a new wing and Airbus has said nothing about a new wing.  Right now, on paper, the 777-300ER still beats the A350-1000.  Unless Airbus releases a configuration that causes people to pause and gasp, Boeing will most likely not feel too threatened by Airbus for the time being.

And that’s why I say watch Airbus to see what Boeing does.   Boeing knows it can probably win against Airbus with a 737 replacement in the time frame it is talking about while managing to keep customers interested in the current 737 through incremental improvements that should keep the two aircraft competitive.  I’ve felt that Boeing wants to know what Airbus’ move is on the A350-1000 so it knows where to commit its resources.  If the configuration and definition for the A350-1000 moves it into competitive territory with the 777, Boeing knows it needs to get to work on improving the 777 (an exceptional moneymaker for Boeing presently) in order to not lose those customers for the next 2 decades. 

Boeing likely believes it can cover the 777-200ER territory with a 787-10 (and perhaps an incremental improvement to the -10 as an ER model later).  This leaves it free to preserve the 777-300 in its current configuration or find improvements to the existing design or even design a new aircraft family to fit above 787-10 and finish alongside the 747-8i. 

But what Boeing doesn’t want to do is commit to launching 2 new airplane programs simultaneously.  Boeing already knows what will likely happen if it does that.   

With all of that into consideration, I think that once we know the firm definition for the A350-1000, Boeing will know how to sequence its next airplane programs.  It will be either a 737RS first with a 777 replacement kicked off 3 to 4 years later or a 777 replacement first with a 737 re-engine done simulataneously and a 737 replacement coming 10 to 12 years after the re-engine. 

I strongly believe that Boeing wants to do the former sequence (737 replacement / 777 replacement) because it puts Airbus into a corner.  With this strategy, Boeing probably has an all new line of aircraft using the latest technology spanning from 150 seats to 450 seats while Airbus has the A320NEO and A350 series but with a gap between the A320NEO and A350 being filled by what will be quite the aging aircraft:  the A330.   In fact, there already is a gap, although minor, between the A320 series and the A330 series.  And make no mistake:  The A330 will begin to die in another 2 years or so as a result of the A350 and 787 developments. 

My prediction?  I think Airbus will announce nothing that threatens Boeing’s competitiveness in the 777 models.  Sometime late in the fall or early in the winter while riding on an uptick with the deliveries of the 787 and 747-8i to customers, Boeing will announce a 737 replacement program with a big airline order.  Sometime around 2017 or 2018, we’ll see Boeing announce a replacement for the 777 sized  above the 787-10 and right up alongside the 747-8i.

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One has to hand it to the Airbus PR machine and COO John Leahy.  Those guys could spin a strike as an innovative development for their aircraft line. 

One of  the latest claims from these fine folks is that the A320NEO is already the best selling commercial aircraft ever.   Not so fast.  While the NEO has racked up some good orders, much of what Airbus is counting as orders are actually just memorandums of understanding.   They are not firm orders in the sense of what Boeing would count as an order.  But it does have some good momentum and that’s great for that product.  It’s getting the kind of updates it really needs and that’s good for anyone operating the A320 series aircraft.

Yes, there is rampant speculation that the NEO could have 600 orders by this summer’s airshow in Paris but let’s see if that develops first before we proclaim world domination.

Mr. Leahy also puts forth the idea that because the NEO has the potential to last until 2030, Boeing will ultimately have to decide to do a 737 re-engine itself.  He also has decided that technology won’t be advanced enough for a new aircraft (Boeing or Airbus) until far past 2020, the date Boeing says it could come up with something to replace the 737.

Coming up with a better, more efficient airliner is a matter of engineering, not developing unknown technologies.  If there is a business case that funds the new aircraft development, then the aircraft can be built.  If anything, Airbus’ decision to do the NEO actually advances Boeing’s business case for doing a new development.  Why?  Because Airbus’ adoption of the CFM LEAP 56 and Pratt & Whitney GTF engines will encourage those companies to mature their products faster, not slower.  The faster those engines mature, the more ready they are for a newly developed 737 replacement.

Mr. Leahy thinks Boeing will re-engine.  I think Boeing will do a new development.  In fact, I think as the case for a new development gets stronger, Boeing may well pull in its date that it could be done by to as early as 2018 or just 7 years from now.  I think John Leahy desperately wants Boeing to keep the 737 because it allows the Airbus to remain competitive.  Most independent observers feel the Airbus A320NEO only manages to deliver trip costs that are equal to Boeing’s current 737, not exceed them.   If Boeing can deliver a 20%+ improvement on trip costs with a new family of aircraft in a timely manner, it clobbers Airbus’ product line right out of the door and Boeing won’t promise what it can’t deliver.

There is one thing about Airbus that really annoys me and, in my opinion, causes trouble in the aviation world and that is its bombastic claims.  I get rather tired of tossing cold water at a company that is actually producing a great, competitive product simply because they cannot be content to be a world player in the aviation world and desire to continually proclaim themselves the World’s Greatest Ever.

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Pratty & Whitney has done pretty well this week.  First off, they’ve won the IndiGo order for the Airbus A320NEO and that is a big order over time.   150 aircraft is nothing to sneeze at.  P&W already is in development on this engine for Bombardier (CSeries) and Mitsubishi’s regional jet.  In addition, COMAC has now expressed interest in this engine for its 919 developement. 

At first glance, P&W appears to be getting interest from the little knowns but that’s simply because they’re the ones with new aircraft in development.  The Airbus A320NEO adds legitimacy and the order for IndiGo’s A320NEOs solidifies it.

It does strike me that airline industry appears attracted to the perceived greater promise of the GTF.  When does the GE/Snecma CFM LEAP 56 engine start gaining interest?  It’s noticeably silent in that area so far.

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A local friend made a comment to me about Delta Airlines and their mish-mash of a fleet vs Southwest Airlines and their one aircraft type fleet.  His comment was aimed at the success difference between the two.

Well, not so fast.  When you consider airlines 30 years ago and airlines of today, there is one thing that stands out.  Fleet size.  Today’s airlines such as Airtran and JetBlue would be behemoths in the market place in 1980 with 138 and 163 aircraft respectively. 

Let’s take a look at what truly large airlines have in fleet size.  Southwest Airlines, the 800lbs gorilla of LCC carriers, has 547 aircraft of which all are 737s, yes, but which is actually comprised of the 122 passenger -500 and the 137 passenger -300/-700. 

United Airlines and Delta Airlines both have over 700 aircraft and American Airlines presently has about 620 aircraft.  Each of those three carriers have a broad range of aircraft types, seating capacities and range capabilities.

A one type fleet works well for the smaller airlines because, yes, it does allow them to save money on maintenance and it keeps things simple when negotiating with unions about how much one is paid to fly what type for what distance.

But as you grow larger, it really is better to have some flexibility.  Even Southwest acknowledges that the Boeing 717 aircraft they’ll gain from Airtran (number over 80) should help quite a bit in matching the right aircraft to the right route.  They’ve gone farther than that, though, by ordering the 737-800, a larger aircraft than they’ve ever operated before. 

If Southwest expects to continue to grow, they’ll have to move into both larger and smaller markets than they have customarily entered in the first 40 years of their life.  The fleet types aren’t what will make their lives complex when it comes to the cost(s) of maintaining them.  What they will have to contend with is the idea that a pilot of a smaller aircraft should earn less than the pilot of a larger aircraft.  They’ll have to deal with scheduling flight attendant crews of two different sizes and that’s something they’ve never had to do before.  Fortunately, the range in size between the 717 and the 737-800 is not so great that they can’t argue that all their pilots should be paid the same (and I would agree.)  The truth is, while their fleet may be different, the missions aren’t that different in terms of distance, turnaround, etc. 

Delta is succeeding with a broad range of aircraft in ways not seen before.  Yes, they have added complexity but an airline big enough to operate more than 700 aircraft should be complex.  Could they simplify?  Certainly.  Should they?  I’m not so sure.  There can be disadvantages to dealing with one aircraft manufacturer instead of two in terms of the bulk of a fleet. 

Neither Boeing nor Airbus can really supply enough aircraft to Delta on a timeline that would make sense to replace, for instance, Delta’s 563 single aisle aircraft.   It would take 40 aircraft a year to replace that fleet over nearly 15 years.  Those manufacturers have to supply a number of other airlines as well. 

Boeing and Airbus can deliver about 32 to 38 aircraft a year in their 737/A320 families.  A Delta replacement order would conceivably consume more than one month’s production capacity in a calendar year and there are a whole lot more airlines out there of size than just Delta. 

By using both manufacturers, Delta would get more flexibility in deliveries and more reliability as well.  This is true for any airline of size.  In addition, by making each manufacturer compete for those orders, the airline is liable to receive a better price on each aircraft and when you are talking about 500+ aircraft, that could well mean savings reaching into the hundreds of millions of dollars.

The days of ordering “just Boeing” or “just Airbus” may well be over for any airline of significant size.  This may be true even for Southwest in the distant future.  Boeing and Airbus are unlikely to remain in the 100 to 130 seat category and will probably cede that to the next generation manufacturers such as Embraer and Bombardier.  That doesn’t mean an airline, even an LCC doesn’t need those aircraft, it does. 

It’s notable that JetBlue already has a two fleet strategy as well as Airtran and Frontier.  Southwest effectively has a two fleet strategy and probably needs 3 different sizes to work with going forward. 

Flexibility is the key.  Routes change over time.  Some routes yield more and more passengers while others are best demoted to smaller aircraft over time.   Southwest wouldn’t be flying 737s to places like Lubbock, Texas if it didn’t need a one-stop location to continue that flight to a larger city from the Dallas area.  Southwest flights to Lubbock and El Paso on 737s continue on to other cities such as Las Vegas, Phoenix and Los Angeles. 

But when the Wright Amendment goes away, the need to fly those one-stop flights goes away.  I actually look for Southwest to start evaluating aircraft such as the Embraer E170/190 series or Bombardier C900/1000 or CS Series in the next 5 to 8 years. 

You’ll find that the one fleet strategy is effective today only for airlines requiring a fleet to fly between mainline destinations.  Once they enter into smaller markets and larger markets, two or more types are not only required but justified.

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The Airbus A320 aircraft family is just as popular as the Boeing 737 family and there are a number of huge operators throughout the world.  But the big domain of this aircraft is clearly Europe where several airlines operate big fleets.

Two Questions:

Can you name the largest European operator of this aircraft family and the largest operator of the A320 family in the world?

Find out the answer after the fold:

(more…)

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The perceived momentum that the A320NEO has is the subject of  a lot of speculation for the past month.  One comment getting repeated early and often by Airbus is that airlines don’t necessarily have a right to convert existing orders for 1st generation A320 class aircraft over to the A320NEO targeted for delivery sometime in 2016. 

Indeed, the orders it has garnered so far has been part of a larger orders for a mix between the 1st generation and NEO versions.   There are a few things worth remembering here.  First of all, 2016 is far enough in the future that airlines are only just approaching the time in which they would consider such purchases in most cases.  Second, Airbus’ really firm order for this aircraft is, so far, only from Virgin America.  Other orders are under a Memorandum of Understanding (MoU) which can remain quite fluid in terms of details.

Airbus needs the NEO to be successful right out of the gate.  Their stumbling around on the A350 is still firm in the minds of many airlines and what they’re proposing in the NEO is actually quite similar in approach to their first proposals for the A350.  If they garner enough orders, legitimacy ensues and they avoid criticism.  They also don’t want to kill their momentum on the A320 either.  The development for that 1st generation of aircraft is paid for and every aircraft they push out the door and into the hands of a customer embodies a lot of profit. 

It’s a delicate dance they have to perform for the next 12 to 18 months and keeping customers entrenched in the 1st generation A320 allows them to earn profit to pay for their other programs in development such as the A400 and A350 as well as keep face over the A380 which, at this point, appears doomed to be an unprofitable airliner. 

Speaking of the A380, one of those recent A320NEO orders includes the cancellation of 10 A380 aircraft as well.  ILFC has decided to pass on that airliner and stock up on A320 aircraft instead.  That is a smart decision for the lessor. 

If anyone believes that airlines will be forced into making new orders if they want the NEO version, they’re kidding themselves.  Airlines transfer orders from one aircraft type to another all of the time and neither Airbus nor Boeing would ever want to appear to not being cooperative with the airlines.  Keeping airlines in their camp is extremely important and not being flexibile is one way to encourage a customer to look at a competitors offerings.

John Leahy of Airbus predicts as many as 500 firm orders by this year’s Paris air show.  It is possible but I think we’ll see maybe orders for 200 to 300 aircraft and perhaps less than firm orders for another 300 by that time.  500 firm orders would be pretty impressive and I suspect it would drive Boeing crazy as well.

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Last week, Delta announced that it had agreed to buy 9 Boeing (McDonnell Douglas) MD-90 aircraft from JAL.   After these aircraft are refurbished, they’ll start entering Delta’s fleet next January.  Delta’s President, Ed Bastian, refers to these aircraft as “capital efficient” for Delta and it does simply add to Delta’s existing fleet of 19 aircraft.  In fact, Delta now plans to add a total of 39 MD-90 aircraft going forward.  These will primarily replace aging and inefficient DC-9-50 aircraft.

Capital efficient means that the cost to acquire these aircraft combined with the remaining lifecycle costs including fuel makes them worth operating for Delta.  In addition, these aren’t your grandfather’s DC-9s.  These aircraft have current generation IAE V2500 engines that are fairly fuel efficient compared to brand new aircraft presently.  They also replace fuel guzzlers and represent a net gain going forward as long as fuel prices remain somewhat stable (and by stable I mean out of the $4/gallon territory.)

Delta has so far pursued a strategy of making do with what it has and employing older aircraft longer and this is somewhat in conflict with most other airlines’ strategies.  As fuel has climbed in price over the past 4 years, airlines have, if anything, accelerated their purchases of newer, more efficient aircraft.

Is this the right strategy for Delta?  Well, as an interim strategy, it works.  These aircraft are good for a variety of routes that can largely transit 3 timezones out of 4 in the continental United States.  There are a finite number of them available (only a bit over 100 were ever built) and in the near future I suspect that many won’t be worth buying when considered against a new Boeing or Airbus aircraft.  From a financial standpoint, these are good buys for Delta and should work for them well over the next 4 to 8 years.

Delta’s fleet is pretty varied since its merger with Northwest Airlines a few years ago and while they have made an excellent show of managing this fleet, there are a number of types that could be pared down over time.  Reducing the number of fleet types would allow Delta to be even more flexible with its crew resources and more cost efficient when it comes to maintenance needs.  Remember that every fleet type requires an inventory of parts and employees trained to service that fleet type.

This doesn’t mean that I advocate that Delta buy Boeing only or any other manufacturer exclusively either.  With its fleet size, it could quite rationally settle on both the Airbus A320 and Boeing 737 aircraft and operate them simultaneously.  The same is true for long haul aircraft.   It could probably employ both Embraer and Bombardier regional jets as well.   However, for each category (regional jets / single aisle / medium to long haul aircraft), there should be at most two basic fleet types. 

In fact, by working with multiple manufacturers, it can speed deliveries, fit the most perfect aircraft to a variety of routes and maintain efficiencies in maintenance and repair at the same time.  What I don’t see happening is Delta operating Boeing and Bombardier CSeries as mainline aircraft.  I think Delta will play it smart and use the manufacturers that have proven products in each category. 

I think that over time, we’ll see Delta order Airbus A320NEO aircraft to replace existing aging Airbus A320s.  I think we’ll see an order for Boeing 737 replacement when and if Boeing offers a replacement officially.  I think we’ll see Bombardier CRJ900/1000 aircraft come online to replace older CRJ700/900 aircraft and I think we may well see Embraer E170/190 jets for other areas of the country such as shuttle-like operations.  In the long haul category, it’s not inconceivable to see 787 orders pulled forward again but for a mix of both 787-8 and -9 aircraft.  I think we’ll see them pick either Airbus A350s or 777s for their larger trunk and long haul routes.  I might give the 777 an advantage here to become a single type for that category as Delta could very efficiently operate both 777-200LRs and 777-300ERs in a nice mix.  They’ve already got very new 777-200LRs (and ERs) that are using the same GE engines the -300ER would use.  I’m not sure the Airbus A350 quite fits in as well as one would like it to when it comes to the trunk route / long haul category.   I do believe firmly that the 747s will ultimately go away and not be replaced.

Look for Delta to be making more and more announcements about its fleet over the next 2 years.  I believe its strategy will be incremental rather than huge orders for a particular family of aircraft and it will be done with strong emphasis on preserving its capital going forward into the next few years.

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Frontier Airlines has announced new services to Knoxville, Provo and Sioux Falls using the A319 for the former and the E170/190 jets for the latter cities last week.  Each will receive service from its Denver hub.  In addition, Frontier is adding additional service to Minneapolis / St. Paul and San Antonion from Kansas City which are both cities it already serves from Denver. 

I genuinely like the Embraer E170/190 jets for service to smaller cities as it offers a mainline type service to cities that traditionally would be served by cramped 50 seat regional jets used by other airlines.  It’s a nice service product and Frontier’s owner, Republic, gets to remain flexibile in how it deploys its fleet of those jets. 

I do wonder if Frontier isn’t kind of dancing out of the way of real competition though.  Its newest routes don’t strike me as something the airline is doing to fight against its LCC competition out there.  Nor do these new routes strike me as low hangling fruit for an airline like Frontier as well.  For instance, while I can understand flights from Provo and Sioux Falls to Denver, I struggle with the idea that there is a great deal of demand in Knoxville for a route that goes to Denver even if traffic can flow ownwards to other destinations.

As much as Frontier is a western states airline, it does seem to somewhat ignore opportunities on the west coast where it would seem its service product ought to thrive against the competition.   Mostly I’m struggling to see the strategy here.  2010 was definitely a “rebuilding” year for Frontier and perhaps its plans will become more clear as 2011 unravels.

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I was amused last week by a comment originating from Airbus that they believed that Boeing would actually re-engine the 737 rather than proceed with the new build replacement so frequently talked about lately at Boeing.  Amused because while I do think the Airbus decision was right (in that it did offer good gains and it was what they could do between now and the middle of the next decade) but also because the 737 is reaching a level of maturity in efficiency that the Airbus A320 hasn’t come close to yet. 

I always kind of marvel out how just a 1 or 2 percent increase in efficiency can yield such huge savings for airlines.  Not because I don’t understand but because it takes such determination to find these savings.  Engineers at Boeing have been doing this for a long time on the 737.  It wasn’t just adding winglets but lots of tiny things adding up to small percentages of efficiency gains that net big dollars in costs savings.   The driver for this initially was to compete better with the A320 but the truth is that a good aircraft manufacturer always pursues these incremental gains over the product lifespan. 

But as time goes by, there are diminishing returns for the effort (read: work) that has to go into finding these gains.  The latest generation of Boeing aircraft have seen those pursuits for nearly 15 years and they (Boeing) have been relentless in their pusuit.   Finding those gains going forward for the next 10 years is going to cost a lot more for a lot less gain. 

There are always outside new developments.  Just last week we learned that easyJet is painting their aircraft (Airbus A320) with a new paint technology that is much thinner than previous paint techniques.  Provided the paint proves to be durable over an appropriate lifespan, easyJet expects to see efficiency gains of 1 to 2 percent due to less weight an and an aerodyamically smoother surface across the aircraft.  Provided the process isn’t terribly more expensive and it is as durable, this could save countless airlines a great deal of money over the ownership of an airplane.

No matter what each manufacturer does in its product line of significant note such as re-engining or designing new aircraft, the relentless pursuit of small incremental gains in efficiency will always go on and never more so than for the kind of airliners that the A320 and B737 represent.

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In the latest financial results, most underperforming airlines attributed their lack of success to rising costs and specifically fuel costs.  Fuel costs did rise but let’s return to early fall when airlines were gleefully setting expectations for the winter season. 

Many airlines were so confident that they actually raised prices and talked confidently of record profits.  The problem is, the traffic didn’t materialize in many cases and I would attribute that to the fact that demand for the winter/holiday season is very dependent on price.  A few airlines did see that and held their prices or even had some sales.  Notably, Southwest Airlines kept a close eye on their demand and lowered prices were necessary. 

But the development that no one has talked about much but which is showing up is a rise in capacity.  That rise in capacity isn’t showing up in great numbers with new routes or increased frequency nearly as much.  Instead, it is coming from an increase in the size of aircraft on some routes.  Airlines are upsizing some routes and also increasing capacity through the aircraft they’re adding to the fleet to replace older aircraft.

Delta, for instance, has retired its smallest DC-9s in favor of Airbus A319 equipment.  American Airlines is replacing MD-80s with 737-800s.  Southwest is adding 737-800s to its fleet in about 1.5 years.  US Airways is adding A321s to replace 737-400s.  At first glance, these “replacements” are perceived to be a 1 to 1 exchange but in reality they’re often as much as a 10% increase in capacity per aircraft. 

The creeping rise in capacity shows that the industry isn’t necessarily in agreement on capacity restraint going forward and that could foretell a collapse in prices as these airlines chase customers to fill their aircraft.  I don’t think we’ll see huge losses in the next year but I do think we’ll see an erosion of profitability.   The airlines who possess fleet flexibility should fare better than those who are largely locked into large blocks of fleet types.  Think Delta vs American Airlines. 

Mergers didn’t solve an excess of capacity.  Not really.  They did bring some costs down but neither of the two big mergers had much overlap and capacity was therefore not really reduced much in that sense.  Since there are no merger candidates with much overlap in existence right now, I don’t think this problem is going to go away very soon.  The real solution is to actually let an airline go out of business.  The only candidate for that is American Airlines and they have lots of maneuvering room left presently. 

Look for capacity to be a bigger talking point among financial analysts over the next 3 months and particularly at the end of the next financial quarter.

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Boeing’s CEO, James McNerney, reiterated Boeing’s view that re-engining the 737 even in light of Airbus’ A320NEO announcement is not the pathway to success for Boeing.  They continue to believe that if a new 737 replacement is forthcoming in the 2019/2020  timeframe, customers will wait.  I agree.

However, if customers are asked to wait until 2025, I’m not so sure.  There is only so much more additional performance that Boeing can get from either the airframe or the engine on the 737.  Let’s not forget that, in many respects, the current 737 lineup continued to perform well against the A320 in part because of the development of the winglets and the evolving refinement of the CFM engine.  Additional gains are going to be increasingly difficult to find.

Also of concern is McNerney’s announcement that research and development will be going down over the next couple of years and that they intend to cut back on some of their engineering resources which are extraordinarily high (say McNerney) at present while retaining their core capability.   While I understand the cravings for normalcy, this worries me. 

To really get a 737 replacement out in the 2019/2020 timeframe, it’s time to get started now.  You have effectively just 8 years to redesign another technically innovative aircraft that will compete for 20 years or more.  Schedule is more critical in accomplishing this than budget is.  It takes time to design innovative technology and implement it into a product that must be 99% reliable “out of the box”.   Boeing’s schedule for doing so is, in some respects, already eroding.

I think there is more time to consider options for the 777 line than there is for the 737 replacement.  Enough airlines and, in particular, 737 customers have signaled the very strong desire for a better airplane. To act as if you have all the time in the world or even little competition for these people is a bad idea.  Even Southwest acknowledges that they can handle transitioning to a new type and they don’t mean just transitioning to a new Boeing. 

There are 3 SuperLegacy airlines who’ll be shopping in the next 1 to 2 years for fleet replacement and 2 LCC carriers who need to find new efficiency gains in their fleet (Southwest and Ryanair) who could literally place enough orders to pay for the 737 replacement.   Having something that will significantly beat the A320NEO in the stated time frame that also provides for future efficiency and a product line capable of lasting 20 years is almost a necessity rather than something to study for another 2 years.

The 737 replacement won’t be an evolution of the 737.  It will be much more a revolution for single aisle aircraft much as the 787 is for medium capacity, twin aisle aircraft.   Furthermore, I think you would want to have that program on firm footing and about to produce new aircraft as you begin to enter into engaging on a 777 evolution or replacement later in the decade.

So what’s the hold up?

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