Boeing could launch 737 replacement this year: analyst

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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.

8 Comments on “Boeing could launch 737 replacement this year: analyst

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  3. What technologies are you thinking about that will bring such a significant operating cost reduction? A 15% fuel burn improvement is worth only about 4.5-5% by itself (if fuel accounts for 1/3 of operating cost). Where do the other 20% come from? This appears to be very ambitious to me. If (based on current experience) the programme would take 6 years to deliver a plane ready to enter service, the technology would need to be well down the R&D path NOW to be available for it. What is it then?

  4. And (sorry I forgot) – why is Airbus not seeing this technology, and why do they believe that re-engining is the right option for an EIS only 2 years earlier? Something does not compute, at least for this outsider to the industry.

  5. Interesting proposition. I would say delivering a 737 replacement in 2017/18 is challenging. In the same way as delivering the 787 by May 2008 was “challenging”. But if they announce 2017 for entry into service, the new Boeing will severely disrupt the NEO, regardless of when they actually deliver it.

    The other thing this says is that upgrading the 777 isn’t worthwhile. Either the plane is successful enough as it is or Boeing can’t improve it enough for it to be worth the investment. While I agree a 2015 EIS date for the A350-1000 is also “challenging”, this proposition suggests a replacement for the 777 somewhere about 2015. The A350-1000 won’t be that late.

    • FF :Interesting proposition. I would say delivering a 737 replacement in 2017/18 is challenging. In the same way as delivering the 787 by May 2008 was “challenging”. But if they announce 2017 for entry into service, the new Boeing will severely disrupt the NEO, regardless of when they actually deliver it.

      Only if they achieve the 20-20% operating cost improvement compared to current. If they don’t not, Airbus could simply decide to expand on the NEO revision to close the gap, by e.g. adding a new wing, and making other marginal improvements, along the line of what Boeing did with the 737NG. If they do that successfully, they could end up exactly where they were before, at rough parity in the market.

  6. I’m skeptical that Boeing will build new because their number 1 priority is the 787. They need to get the 788 out the door and ramp up its production rate, and get the 789 and -10 delivered on time, all by 2017, the same period during which they would be developing a 737 replacement. B’s remaining 787 challenges and costs will be huge and highly unpredictable, and include to name a few: What will it take to reset their 788 suppliers? How much would it cost to buy out Alenia if it came to that? Will testing reveal further botches of the 788 design like the electrical one that will delay delivery? Because B left both design and manufacture to so many subs, they cannot be sure now what problems like the electrical one will crop up during the remaining testing. What will it cost to get SC up and running? Where will they get the skilled labor to build the whole 787 line? Will they have labor problems and have to pay more in wages? What compensation will they owe their customers and suppliers like Spirit with whom the just settled big time?

    If B has learned anything from their 787 debacle, I hope it is that honest risk assessments are vital. Any such assessment of 737 clean sheet replacement program would conclude: (1) Because the challenges and costs of the 787 program going forward will be huge and likely highly unpredictable, B needs to husband all its resources to meet those challenges, (2) the challenges and costs of a 737 clean sheeter will also be high and unpredictable and (3) and therefore B should not pursue that design now because it risks draining resources from the 787 so that B will not be able to reach its vital 787 goals. The truth is that B is in the same position with the 787 as AB is with the A350. Nothing must threaten the viability of those programs, and tough choices will be made to see that that does not happen.

    Also, B does not need to do a clean sheeter to keep its 737 mket share. All they have to do is improve the 737 so it is a viable competitor with the neo. This may not be expensive and time consuming if B’s 737 project team has already done most of the work. In any case, improving the 737 will be far less expensive than the clean sheeter, and the costs and challenges likely more predictable. It may even present B with the chance to improve the 737 so it out performs the neo (new wing and other stuff in addition to new engines). Best of all, it pushes the 737 replacement to 2025-2030, leaving sufficient time to sell enough improved 737s to make money notwithstanding the costs of the improvements and attend to the 777 a needed.

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