Replacing the A320, 737

We attended the joint anouncement April 28 by Boeing and CFM International for the enhancements to the 737NG, something we had forecast in an article for Aviation and the Environment magazine way back in December. Except for the possibility of re-engining the 737 with the Pratt & Whitney Geared Turbo Fan (a prospect that was only evaluated and not forecast in our AE piece), we were right on the money.

We attended the announcement representing Commercial Aviation Online, a member of the Flight Global group of publications, so CAO gets exclusive rights to our stories for a few days. After that, we can post them here.

Given CAO’s specialized objectives of aviation finance and aircraft values, our stories focus on these. We also include a reaction from Southwest Airlines, which (as reported in the December AE article) wants significant advances well before an entirely new airplane can be developed.

What we can discuss here at this time is something we talked about during our presentation last week before the Economic Development Council of Snohomish County.

We were asked why Airbus and Boeing weren’t moving more quickly to develop replacement airplanes for the A320 and 737 families. Setting aside the sharp drop in fuel prices during the fourth quarter last year and the current global economic challenges, the answers are as follows:

No engines, yet

First, the replacements will be driven by engine technology that needs 15%-20% better fuel burn than today’s engines. Airbus and Boeing can design the slickest airframes, but even the 787 airframe gains are estimated to be about 4%; the major advances come from the new Trent 1000 and GEnx engines. Engine development for the A320/737 just isn’t “there” yet and won’t be for many years to come. PW’s GTF is in testing and promises 12%-15% gains with en entry-into-service in 2013. This is still short of the 15%-20% airlines and the airframers want but would have satisfied Southwest’s interim goals of 10%-15%. PW believes a follow-on development can boost the savings to 15%-20%.

But the GTF is controversial technology that PW has been developing for 20 years. The gear-on-gear inherently is hot, creates friction and adds to maintenance. PW believes the efficiency is superior and the problems can be overcome. But we understand Airbus and Boeing have yet to be convinced this is the “right” technology, even as both remain abreast of the development.

CFM International, the sole-source engine provider on the 737, believes the GTF technology is just downright inferior to the LEAP-X and Open Rotor technology it is pursuing–hardly a surprising view as a fierce competitor, but one for which CFM officials make interesting arguments. The LEAP-X is a more traditional engine compared with the GTF or Open Rotor but one which CFM believes will offer the 15%-20% fuel advantages over today’s engines airlines want.

But CFM is truly intrigued by the Open Rotor, which may offer a 26% fuel burn advantage. This level cannot be ignored, but the technical challenges are daunting. Open rotors are noisier than high-bypass engines on today’s airplanes. The rotor diameter is huge, some 14 feet in some configurations. (The GE90 on the 777 is 12 feet.) Where do you mount the engine? And on and on.

The LEAP-X target date for engine certification is 2016, with an EIS on a new airframe perhaps around 2018. The Open Rotor is even later.

So the engine technology is many years off.

Airbus tested the GTF for PW on an A340-600 and the data not only went to PW but also to Airbus’ own R&D department. Although Airbus last year consistently said it has no plans to put the GTF on the A320, John Leahy, the COO-customers, softened his previous statements when speaking at the company press conference during the Farnborough Air Show. We understand there is a high-level split opinion within Airbus whether to re-engine the A320.

Boeing’s view of this prospect is contained within our CAO articles, so the reader will just have to wait before we can post that here.

So this sums up the engine issues.

Delays, Cash Flows and Problem Programs

The other reason we told the EDC that moving ahead sooner than later with replacement airplanes comes under the general heading of FUBARed programs. (Google FUBAR if you don’t know what this means.)

At Airbus, the A380 is still a major problem. Production issues still aren’t sorted out (we just spoke with an airline that visited Toulouse) and the cash flows from this program are far from where they should be. Presumably the A380 remains cash flow negative.

The A400M–well, this is worse than the A380. This program is a total mess, and Airbus faces billions of Euros in charges for late airplanes, cost overruns and potential cancellations. This, with the A380, represent Airbus’ FUBAR programs.

Airbus is sinking billions of Euros into the R&D of the A350, with a planned EIS for 2013. After the problems with the A380 and A400M–and late histories with certain models of the A340, and watching Boeing’s challenges–the pressure is on to get the A350 right the first time and on time, and (unlikely though it may be) on budget.

The last thing Airbus needs now is to launch an entirely new airplane program for an A320 replacement, at a cost of billions of Euros.

Besides, Airbus is embarked on an A320 enhancement program of its own.

Boeing has similar issues. The 787, 747-8, KC-767 International and Wedgetail (based on the 737 platform) are all in deep trouble. A customer for the 747-8 believes we haven’t seen the last of the delays in this program because the A-team production, engineering and assembly talent is still assigned to the 787. This customer expects additional delays are inevitable.

All of these programs are sucking up cash for development and penalties.

In addition, the Defense unit’s homeland security virtual fence along the Mexican border is late, unworkable and over budget. DOD Secretary Robert Gates targeted Boeing’s C-17 program for termination after airplane 205 next year; this program alone represents 9% of Boeing’s Earnings Before Interest and Taxes (EBIT), according to JP Morgan. Another Boeing program on Gates’ hit list accounts for 7% EBIT. These are big numbers.

Then there is the reduction in cash last year ($9bn to $3bn) in part because of the IAM strike (other cash drains: all the delayed programs outlined above). And, Wachovia noted, Boeing faces a $2bn pension requirement in 2011 even if stocks recover to pre-crash levels last September.

The last thing Boeing needs right now is a 737 replacement program that will require billions of dollars.

The FUBARs are why Boeing isn’t too anxious to replace the 777, either.

So that’s why neither Airbus nor Boeing want to go charging off developing a new airplane. Besides, the 737 and A320 are selling well. Why screw up a good thing?

5 Comments on “Replacing the A320, 737

  1. Scott, I recently read some article about Airbus possibly working with the Koreans on a 90 seater, with the Koreans eagerly anticipating moving up to a 150 seater. On top of that, some time ago, I read a statement made by Lous Gallois concerning his belief that Embraer would participate with Airbus in a future A320 replacement program.

    Could this be some way of cutting the costs, being able to remain focused on the widebodies and still get a major piece of the single aisl market?

    Cheers,
    John

  2. I expect Boeing will remain cash poor for many years to come.

    The feeble refresh of the 737 pretty much confirmation of that.

    That BA has also apparantly completly dismissed the geared turbofan as an viable option is also interesting, and places the risk/reward ball back in Airbus hands. This is probably the correct choice.

    Still, it’s a dissapointment that this is the best that a company like Boeing can do. It reminds me of the last few years of McDonnal Douglas. I’m not the least bit impressed and rhis would appear symptomatic of a bleed in not only cash, but innovative spirit and technical expertise as well.

    It also gives me cause to re-think my belief that Boeing will move out of Washington State.

    If all they can afford is some heavy makeup for the old girl 737, how on earth could they afford the capitol expenditures, delays, and incidental costs of moving entire production lines, even with local government largesse?

    Frankly, the path from here to there is now a lot harder to see.

    My guess is that you will see a similar minor refresh on 777 as well at some point, but no new widebody to replace it before the end of the next decade.

  3. There is no incentive for both companies to spend billions they don’t have. Their plates are full and we will have to wait until at least 2015 before anything happens.

    Airbus: Struggling with the A380 ramp up, developing the A350X, A400M catastrophe. Although interestingly a minor point would be that Airbus was only a ‘sub-contractor’ on this project up to now. The whole activity was led by MTAD (part of EADS). Now EADS wants to bring MTAD under Airbus and give them the responsibility for the A400M. It remains to be seen what will happen. If the whole project is cancelled… don’t expect any new developments any time soon!

    Boeing: With such a huge backlog of the 787s + the 748 delivery, there is no need to start work on the 737 replacement.

    I completely agree with this conclusion: “737 and A320 are selling well. Why screw up a good thing?”.

  4. Pingback: Odds and Ends: Supply chain demands; Southwest hints?; Retrospective on A320/737 replacements | Leeham News and Comment

  5. OCTOBER 2013—- “The last thing Boeing needs right now is a 737 replacement program that will require billions of dollars.

    The FUBARs are why Boeing isn’t too anxious to replace the 777, either.

    So that’s why neither Airbus nor Boeing want to go charging off developing a new airplane. Besides, the 737 and A320 are selling well. Why screw up a good thing?…”

    Interresting lookback … however, SEARS, Penny, Microsoft, and a host of others also had the same kind of problems. Vision ended at the end of the nose. While BA has inadvertently stumbled ahead- the FUBAR process for the 787 hit new records for delays and screwups. The question NOW in 2013, is did BA really learn anything?

    Interesting in that Alan Mullaly is on the A- list now for CEO of Microsoft. And Bair is out the door.

    Those who do not learn from history- do not learn from history !!

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