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Boeing is expected to decide this year to proceed with not one, but two new models to replace the 737, according to a prediction made by the aerospace analyst at Buckingham Research.
If Buckingham is correct–and it was the first we’re aware of to forecast Boeing would forego re-engining the 737–this would shake things up: Airbus believes Boeing would be “silly” to come out with a new airplane in this decade because officials don’t think engine and airframe technology is advanced enough to do so, which is why Airbus is going with an interim solution in its New Engine Option (NEO) program.
Boeing believes technology will be available by the end of this decade.
Who will be right will only be known a decade down the road.
Although the research note focuses on the 737 replacement, it predicts Boeing is putting off enhancing the 777 for one-two years or more because it believes Airbus will run into serious delays on the A350-1000, the competitor to the highly successful (and profitable) 777-300ER.
Here is a synopsis from the Buckingham note:
A Narrowbody Replacement in 2011. We now think BA could launch a replacement for the 717, 737NG, and 757 in 2011 or early 2012. We also think BA could defer a decision to replace or upgrade the 777 by 1-2+ yrs. Bottom line, we think BA will forgo a re-engined 737 and replace the 717, 737, and 757 with a new aircraft family. While the R&D expense of a 737 replacement might initially cause concern amongst investors, we think it’s an overall positive for the stock and reiterate our Buy rating.
The consensus view: replace the 777, then the 737
We believe consensus largely expects that BA: 1) will not re-engine the 737NG; 2) will replace it after 2020, and; 3) will first upgrade or replace the 777 before developing a narrowbody replacement. As such, consensus 2012E likely factors in the R&D associated with a 777 upgrade.
Our view: BA could announce a narrowbody replacement this year
We maintain our view that BA likely won’t follow Airbus’ lead and re-engine the 737NG (See our May 5, 2010 note; “The 737: Replace not Re-engine”). However, we think BA could announce the launch of a replacement for the 717, 757, and the 737NG in 2011/early 2012 with a 2017/18 service entry target. We think that the technology for a new aircraft with a 25% direct operating cost improvement could be available to support service entry in 2017/2018. That’s a change from our prior view which was that BA would launch a narrowbody replacement in 2014 with a 2019/2020 service entry target.
We also think BA will defer a decision to upgrade the 777
We think that BA will defer a decision to upgrade or replace the 777 by 1-2+yrs. We believe that technical challenges will likely defer service entry of the Airbus A350-1000 beyond the scheduled 2015 date, thereby relieving the competitive pressure on BA to upgrade the 777.
Four reasons we think BA will launch a Narrowbody replacement
1) Assuming sustained higher fuel prices, we think there is a demand for a more fuel efficient airplane than any of the new market entrants: (A320NEO, CSeries, Irkut MS-21, COMAC C919); 2) BA will need to respond to the threat of share loss posed by new entrants in the market; 3) we don’t think a re-engined 737NG or A320NEO offers operators a sufficient operating cost improvement to justify the price premium, and 4) 787 development work is starting to wind down freeing up resources.
Three reasons a narrowbody replacement launch is a plus for BA
1) We estimate the annual narrowbody replacement R&D expense to BA is slightly less than what consensus expects for a 777 upgrade; 2) There is an opportunity for BA to exploit a competitive advantage as we don’t think any of the new market entrants offers operators a comprehensive solution to changing market dynamics (fuel prices, demand for higher capacity, etc.), and; 3) Given the demands of the A350XWB, the A400M, and the A380, we don’t believe Airbus has the manpower or funding at this time to launch a new narrowbody aircraft. As such, launching a new narrowbody now could give BA a potential 3-yr first-to-market advantage which was a decisive factor in the initial sales success of the 787.