Boeing is leaning toward a new airplane to replace the 737 rather than proceeding with a re-engining program, an aerospace analyst wrote in a report issued today.
Richard Safran of the boutique Buckingham Research came away from Boeing Capital Corp’s annual investor’s update with an analysis that is a potentially paradigm-shifting conclusion that Boeing will forget about the widely-assumed plan to re-engine the 737 to meet an expected decision by Airbus to re-engine the A320 family–itself a decision largely driven by competition from Bombardier’s CSeries.
Safran’s report also cites “channel checks” with unidentified airlines, lessors and bankers to reach his conclusion that Boeing is likely to proceed with a new airplane. We know from our own conversations that key Boeing customers want a new airplane rather than a re-engined aircraft, so Safran’s report is consistent with what we are hearing (or vice versa, depending on your viewpoint).
Here is what Safran said:
At the conference, BA discussed its narrowbody strategy and the 737 upgrade. Despite BA’s discussion, we think current thinking could be leaning towards a new airplane. If BA opts for a new design, we would view BA stock more favorably as that could defer the substantive R&D and CAPEX spending on a narrowbody product until after 2013 (assuming a 2019-2020 service entry). That improves BA’s earnings and cash flow in 2011-2013 when aircraft deliveries and earnings are projected to grow.
The possible Airbus response to a new BA narrowbody
Foregoing a 737 upgrade could put BA at a short-term disadvantage should Airbus proceed with an A320 upgrade that enters service in 2015. However, if BA opts for a new narrowbody, Airbus will likely scrap its upgrade and proceed with its own new airplane. Despite severe cash flow problems caused by the A380, A400M, and A350 R&D, we believe Airbus will be able to finance an A320 replacement. Despite the WTO findings in the US case against illegal subsidies to Airbus, Airbus will seek Reimbursable Launch Investment (RLI) for an A320 replacement program. Any new Airbus program would be on a similar timeline to a new BA program, eliminating any perceived near-term disadvantage to BA and likely maintaining the status quo.
Back to our take:
Boeing CEO Jim McNerney hinted on the first quarter earnings call that a new airplane seemed to be gaining favor at Boeing.
If this turns out to be the decision, Boeing will be rolling the dice on several levels:
- After the disastrous design-and-production process for the 787, with the billions of dollars of cost overruns and customer penalties, few believed Boeing “had the stomach” for a new airplane program at this time and many believed the issue of how to respond to the Airbus 350 threat to the 777 was the more pressing need in any event. To proceed with a new 737 is a gutsy move.
- Boeing is gambling that Airbus will be committed to an A320RE program and a new 737 will leave Airbus at a competitive disadvantage;
- Boeing is gambling the WTO decision on illegal subsidies to Airbus will preclude the cash-strapped company from proceeding with a timely A320 replacement; (Safran addressed this in his note);
- Boeing is gambling that enough new technology will be available before the 2020 decade to make a new 737 a viable produce; and
- Boeing is gambling the open rotor engine, which as of now is forecast to maybe be ready in the mid-2020 decade, isn’t going to be the answer (and we know from talking to non-Boeing engineers that there is a belief this may well be the case).
There are other factors, of course, not the least of which Boeing is reasonably convinced at this stage that there isn’t yet a business case for an RE program.
We also know from our discussions that there is a major split in Airbus whether a business case exists for the A320RE, with CEO Thomas Enders among the biggest skeptics. EADS CEO Louis Gallois seems to be more favorably disposed toward an A320RE and Airbus’ commercial chief, John Leahy, also seems to be more favorably disposed toward an RE than he was two years ago.
(Parenthetically, Airbus has its annual Innovation Days technical briefing with reporters next week and we’ll be there. Clearly this will be a topic of discussion.)
If Boeing proceeds with a new airplane, this will upend all the previous conventional thinking for the current decade and assumptions that a new airplane would not be forthcoming until the second half of the next decade. Airbus will have no choice but to respond; Bombardier’s CSeries forecasts may be dramatically upended; Embraer, which to now has largely been left out of the conversation, vexed as it is by what to do in response to the CSeries, ponders its product strategy; and the emerging competition from China and Russia with their respective C919 and MS-21 airplanes will be rocked back by far better product offerings from Boeing (and, inevitably, Airbus).