Re-engine, new or do nothing?

A second aerospace analyst has weighed in with the opinion that Boeing is likely to choose a replacement for the 737 rather than a re-engine solution.

Heidi Wood of Morgan Stanley published this note today, as Boeing’s investors’ day begins.

The bottom line – Another New Plane Ahead – BA’s Going To Do A New Single Aisle: We believe Boeing will be announcing a new narrowbody replacement to the well-worn and highly popular 737 instead of the less costly, but inferior solution of re-engining.

This means a $13B-type R&D effort ahead in lieu of a possible $2-3B R&D for re-engining, which was previously in our model. We are now lowering outyear estimates to reflect a projected new narrowbody 2012 launch and 2017-2018 entry into service (EIS, first delivery). We believe consensus earningsexpectations will be revised down significantly on higher R&D.

Why An All New Plane? We expect Airbus to announce an A320 re-engining sometime before yearend; BA will likely announce its plans around the same time. It is not generally known, but on a re-engine to re-engine equivalent basis, we believe the Airbus A320 ends up w/ a 8-10% better fuel burn than the 737, rendering the $3B R&D cost to re-engine largely ineffective. The 737 has been refreshed three times already since its first inception in 1967. And with 5 low end single aisle competitors ~mid-decade, we think BA is prudent to be pre-emptive with an all-new airplane.

Joe Nadol of JP Morgan and Joe Campbell disagree, thinking a re-engine is more likely.

So does Boeing rival Airbus, where COO-Customers John Leahy suggests all the talk about a replacement 737 is Boeing disinformation aimed at muddying Airbus’ waters.

Leahy believes Boeing would be foolish to proceed with a new airplane with a 2019-20 EIS (that predicted by Buckingham Research; Wood predicts 2017-2018, which we think is perhaps a year or two two soon), only to be followed by an all-new, much more efficient A320 replacement in the 2025-27 period.

Airbus is betting that the Open Rotor engine will be the solution rather than the PW GTF or CFM Leap-X engines, which are being considered for re-engine solutions.

At the Airbus Innovation Days, Leahy displayed several charts that showed fuel burn improvement and residual value data to make his case for a re-engine program.

There is concern over the impact of a new, derivative airplane on residual values. Leahy pointed to the transition from the Boeing 737 Classic to the 737 New Generation as the example why RVs won’t plummet with the introduction of a New Engine Option.

The following chart further supports Leahy’s contention that current generation values won’t plunge with an A320 NEO offering.

Finally, Leahy displayed this chart concerning the prospect of a 737 NEO.

Bombardier believes it will still have advantages with its CSeries over either an Airbus or a Boeing NEO. These charts are from their ISTAT presentation.

BBD vs RE

16 Comments on “Re-engine, new or do nothing?

  1. It’s really a timing issue as both airframe manufacturers plan to bring out brand new models within the planning timeframe.

    If they bring out their new model later, they have an option of interim release with a new engine. They may eventually get a bigger sales benefit from a further improvement in engine technology in the medium term.

    If they bring out their new model sooner, there will be a gap because it won’t be worth doing an interim release. On the other hand they get the sales benefit of new technologies sooner.

    I suspect R&D costs won’t impact the decision much one way or the other as the big expenditure on the brand new plane will take place sooner or later anyway. The considerations are sales benefit, backlog and short term program constraints.

  2. Interesting; I believe, Airbus continues to milk its cash cow 320 , and extending it with a marginal investment.It hopes as the slides show, Boeing will follow a low risk strategy and maintain competitive status quo, with some incremental advantage to 320.
    hence Boeing should attack the 320 portfolio with a new model-after all it is in this position vs 320, not going for a new model but refreshing the aging 737 (though they did a great job there)
    Open rotor 15 years from now is something that can wait for Boeing ; 15 years is a long time the way tech is changing.
    Go Boeing with a new model and make 320 less profitable, which is a body blow to Airbus, weakened already by a bleeding 380 program.
    It is no more a two player “share the spoils game”- with new players coming in at the margins.

  3. The bigger question may not be if, but where a new single aisle is to be built?

  4. I see no reason why Boeing is in any rush to pursue a new clean 737 except to keep up with the competitive comparative marketing language.

    Boeing’s future is with the widebody 787 and until that production line is solid and secure there is no need to try to protect the 737 single aisle . There will be ample time and technology to direct Boeing’s entry but in the meantime it has to focus on the widebody superiority it has and protect that franchise. They have several thousand 737 to produce in the meantime and much time for research and evaluation.

  5. Vaidya, I’m not sure. Yes, open rotor is a big gamble. But let’s play out the scenarios:

    Manufacturer A (coincidentally) decides to do an interim refresh and sees what happens with open rotor before choosing an engine for the brand new plane. Manufacturer B goes ahead with a new plane using the best engine technologies available now – not open rotor

    Scenario 1: Open rotor fails to live up to its hopes. Manufacturer B gets a head start using the best existing engine technologies before Manufacturer A. Manufacturer A can mitigate the advantage because it already has a big backlog of exitsing plane orders and it can plug the gap somewhat with the refresh.

    Scenario 2: Open rotor changes the game on engine technology. Manufacturer A’s plane will instantly obsolete Manufacturer B’s new design. Manufacturer B will have to start again with another design as open rotor probably won’t fit the existing fuselage.

    Assessing the risk for Manufacturer A, the downside of scenario 1 is smaller than the upside of scenario 2.

    This, I guess, is what John Leahy is going on about.

  6. NASA has been working open rotor blade design for a number of years and don’t be surprised if turbo props make a come back in the future with new blade designs and materials, green fuels work really good with gas turbines.

  7. Who thinks the Suppliers want to be stretched any more than they presently are.

    The best thing for everyone is to talk a big game or talk no game but in any event, go as slowly as possible and protect what cash, backlog, and franchise they already have.

    Technology will announce its presence and engines may or not develop as expected. The longer and more assured the choice is, the more favorable will be the risk reward outcome.

    There is no need to be the first on the block. These are investments for the long run and there is time to enter the fray with the appropriate plane

  8. The way I see it, we begin with the near certainty that if Boeing offers a next-gen narrowbody, Airbus will respond with its own new aircraft program. We will never see Airbus sit on a re-engined A320 into the mid-20s while Boeing is delivering an all new aircraft. So if Boeing goes that direction, so will Airbus.

    However, neither maker wants to spend on a new program, and by delaying a decision until the end of the year, they get to look at what Bombardier garners with CSeries at Farnborough. Rumor is that Bombardier is sitting on orders to make a big splash at the show. But if the company announces only a small number of new orders, the pressure is off Airbus and Boeing. There’s really no go reason to come up with a narrowbody replacement at this point aside from the pressure CSeries puts on the A319 and 737-700.

    • I tend to agree that Airbus will follow suit and find the money to produce a next gen narrow-body by 2020 if Boeing goes ahead with a new design. After all Airbus remembers very well what happened when Boeing canceled the open rotor 7J7 project in the 1980s while Airbus reconfigured the A320 to a turbofan design and went ahead with project. Airbus went from having zero percent of the narrow-body market to 50% while Boeing took it’s time studying alternatives and only introduced the 737NG in 1997 nearly a decade after the A320.

      Given their past experience I don’t believe that Airbus will allow Boeing a decade or more of being the only airframer with a true composite next generation narrow-body. They’ll find the cash to produce a next generation A30X and cut the gap down to no more than a couple of years for Boeing rather than a decade or more if they went ahead with the A320 re-engining program.

  9. • I don’t see how straight re-enginings will improve the 737/A320 sufficiently to make them worth the high costs, which Vero Venia has outlined in a recent post. The fact is, neither airframer even wants to re-engine, given those costs. Each wants to continue producing hundreds of these planes per year, with their paid-for, amortized, established supply chains and production systems, and keep the money rolling in. Perhaps this explains Boeing’s hints that they may go “clean sheet;” It prevents AB from re-engining A320s because Boeing’s new plane would make them obsolete very shortly after delivery begins in 2015 or thereabouts. The result of Boeing’s (empty) threat is that both airframers avoid re-engining and preserve the lucrative status quo both want.
    IMO, the need for re-engining will only arise if and when it becomes clear that new tech for a clean sheet design will not produce the efficiencies needed to make a new plane viable by no later than first half of the next decade. This tech must include some kind of fueslage lift body design, BWB or perhaps a variation of MIT’s new design which The Guardian and I believe Flightgobal reported this morning, because this is the only way efficiencies necessary to make the plane viable can be attained.
    In other words, in every way it makes sense to wait and see what the burgeoning avaition tech industry produces before committing to any change in the 737/A320 status quo. Otherwise, Boeing and Airbus will only be repeating Airbus’ main strategic mistake with the A380. I do not mean the production glitches that have delayed deliveries. I mean the fact that Airbus conceived the A380 at a time when commercial passenger aviation was in a state of seismic change so that no matter how good Airbus’ business case was for a huge new plane, it was suspect because so much was in flux. These changes included four engine long haul giving way to twin-engine ETOPS, growing demand for point/point service with planes much smaller than the proposed A380, and the rapid development of new construction materials and GenX type engines. Had Airbus waited five years, they would have found that the 747 pax, which the A380 was to kill, was dying on its own, and they would be dominating the twin-aisle, medium wide body market. Hopefully Boeing and Airbus will not make the same error with their two terriffic narrow bodies.

  10. Why are Airbus so paranoid about what Boeing will do? Shouldn’t they be trying to tap their customer base to see what they want?
    I really dispute Morgan-Stanley’s assertion that a re-engined 320 will have 8-10% better fuel burn than a re-engined 737.

    • I think the pressure is actually on Boeing now and potentially on Airbus later.

      It looks to me that the 737 and A320 are equivalent in costs and desirability to customers now. Airbus have a greater scope to improve their existing model: adding winglets to A320, which Boeing have already done for the 737; switching to GTF engines gives the A320 a bigger boost because they can use a wider diameter and therefore more efficient engine; they have yet to do a major upgrade on the A320 fuselage and wings and may have more easy performance wins available to them.

      Airbus are at least going to add winglets so this puts pressure on Boeing. Do they hold out by running down their backlog? Do they mitigate their disadvantage by doing a re-engine anyway? Do they go for a brand new design sooner?

      There seem to be few votes for a re-engine, so let’s assume Boeing go for a new model sooner. This now puts pressure on Airbus. Will they bring forward the release of their own new model or will they hold out for the open rotor gamble? And if the latter, do they think a re-engined model will compete effectively in the short term?

    • There is a basis to the 8-10% better fuel burn.
      1. The IAE engine is already 5% more efficient than the CFM engine on the 737 for sectors above 400nm.
      2. The sharklet will give it another 2-3%
      3. A re-engine with GTF will give it another 5-10%.

      So the 8-10% difference might be conservative.

      A new Boeing model will not put pressure on Airbus but on engine manufacturers, who actually sell to both. Boeing will actually show its hand so Airbus can be a few % points better a couple of years later.

  11. If Boeing do go ahead with a new design, I see them producing a layout that would allow an open rotor engine installation to be its first re-vamp after initial service entry.
    Definitely suggests a rear engine layout?

  12. Even if Boeing decides to go with a new single aisle design, I would not be surprised if Airbus does not follow suit. Some at Airbus seem to think that they still made a mistake by not staying with their inital A350 concept. With a single aisle, the composites will play a much smaller role as far as weight savings is concerned and the engine technology will play a much larger role (than with the long range programs, whereby engine technology was touted as the single biggest factor in fuel savings for the 787 & A350).
    The question is, will Airbus still go ahead with a re-engine program now and then a new clean sheet design in less than 10 years, even with the threat of Boeing going for a new clean sheet design now?
    There is more than some “head games” being played by Boeing with these ponderings of a clean sheet design, but is it all smoke and mirrors? It is just a big pker game between the 2 now with the added pressure of the airlines weighing in with their opinions.
    One thing you can bet on, the wings of Boeing’s new single aisle won’t be as close to the ground as those of the 737!

  13. You tech-no-nuts need to think about price. Engines, performance are great, but if you can bring the overall price down and keep your quality with better performance, it’s not just a better mouse trap but a cheaper one and how mite you do this? Especially given that your up and coming competition from Asia and South America will do precisely that! Single Aisles are people movers not long haul limos.

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