We’re off hiatus, having completed several projects that now gives us some time to pay attention to this column.
It didn’t seem to get much pickup but on the Boeing 1Q earnings call, CEO Jim McNerney said something on the call that really perked up our ears.
First, some necessary context.
In interviews Mike Bair, VP of the 737 future product development, conducted in March with a number of journalists, including us, Bair said over and over that Boeing was leaning toward a “larger” airplane that began at 150 seats, and perhaps even 180, and went as high as 220.
This seat range covers the 737-800 through 757-300 sizes. The 757 is beginning the downward leg of its life cycle and Boeing has for more than two years noted the up-sizing of aircraft in its annual market forecasts.
Jim Albaugh, CEO of Boeing Commercial Aircraft, told us at the Farnborough Air Show last year, that he sees 180 seats as the “sweet spot” for a new airplane. This generally means that 180 seats is the optimized design, around which one stretch and one shrink is most efficient.
Boeing historically jumps and shrinks airplanes in increments of 20-30 seats. Thus, if 180 seats is the sweet spot, you’d be looking at a family of airplanes between 150/160 seats to 200/210 seats.
One hundred and fifty seats is also a key size. At 151 seats, the Federal Aviation Administration requires another flight attendant, adding to the cost of staffing the aircraft. Thus, a consideration for an airline like Southwest, an airplane with 150 seats is good while one with 155 seats is adding a lot of cost for not that much more revenue.
Geoffrey Thomas, an Australian reporter with a good track record of sources deep within Boeing, some time back wrote a piece, based on his Boeing sources, that predicted the new airplane would start at 180 seats and go all the way to 240 seats. This struck us at the time as being a bit large—we were hearing more like 160-220—but Boeing is still fluid. What was consistent between what Thomas wrote and what we and others were hearing was that the airplane would cover the upper end of the 737 line and replace the 757.
Coupled with Bair and other Boeing officials saying the 737 would remain in production to “at least” 2026, it and based on direct comments from Bair in our interview, it became clear that the new airplane would complement the Boeing family of airliners rather than be a “replacement” for the 737.
With all this as context, here’s what McNerney said on the earnings call that caught our attention:
Doug Harned of Sanford C. Bernstein & Co.: Good morning. My understanding is you’re still looking at an all-new airplane but re-engineering remains an option. Can you update us on that strategy? And I would include when a decision might come. With the timing of a new program, if you did it, would it materially impact R&D and then any implications if your rate increase plan potentially on the 737?
McNerney: Doug, I give you our current thinking, which is largely unchanged, I think, from the last time we discussed it. By the end of this year, we should have a sharper view of new airplane versus re-engine. As you know, most of the data and customer feedback is suggesting to us that the new airplane option is the most favorable, but we’ll — we’ll get to that decision on a timely basis. We’re 2019, 2020, that’s the timeframe that the market seems to want this new airplane and where we can deliver technologies that can make a meaningful difference. We see a plane that will be an orderly transition. The heart of the market is sort of an orderly transition from the heart of the market today, maybe a slight upgrading in terms of capacity of the airplane. But the real story about the airplane will be much more economical, much more efficient for customers to use. That’s what that market segment needs, and we’re in the definition process there.
Robert Spingarn, of Credit Suisse: So could we see a 737 inhabit the below 150 space and compete perhaps with the lower end of the market on price? It’s obviously a very profitable airplane. And then simultaneously maybe you do a 757 type aircraft for the above 150 space?
McNerney: I think we in all likelihood will be addressing what I termed a minute ago the heart of the market first, which is not to say that we will leave the 757 space unaddressed at all. Because it’s a legitimate market segment that we can participate in. But I think the heart of the market…tends to be in the 145 to 175, 185 range in there. [That] is — and we haven’t sorted it out totally — is in all likelihood where we’ll start. …[A]s I mentioned before, we are continually improving the current 737. And how certain sizes are feathered in first and other…complementary sizes are allowed to go a little longer on the NG, we’ve got to sort that out.
But these are the answers that we’re trying to figure out, and while we all have biases, we’ll let the data and our customers tell us exactly how to do this and you’ll hear more from us at the end of the year.
McNerney said very clearly that replacing the 757 may not be part of the objective of the new airplane—and he dropped the starting size from 150-160 seats to 145, with an upper range (with 20-seat increments) of 185 seats.
This is solidly in the 737-800/737-900 class and a slight up-sizing of the 737-700.
This can be considered as being for Southwest Airlines, Boeing’s largest 737 customer in the world.
Southwest has made it clear it still wants an airplane below 150 seats but slightly larger than the 137-seat 737-700. Coupled with 25 737-500s with 125 seats and an incoming fleet of 86 117-seat Boeing 717s, a new airplane starting at 145 seats is perfect.
A 145-seat airplane will also be a move against Embraer, which is considering a new airplane in the 125-155 seat market. This new Embraer airplane is slightly larger than Bombardier’s 100-130 seat CSeries and would be slightly smaller than the oft-talked about 160-220 seat new Boeing airplane.
And what about a 757 replacement?
As we wrote for Commercial Aviation Online, Boeing and its customers believe the 757 works best at the edge of its performance capabilities. (Airbus believes this, too.) The 737-900ER can perform 80%-90% of the 757’s missions, and Airbus likewise believes its new A321neo can do the same. Beyond that, it’s tough to make a business case for an airplane for that extra 10% or 20%, the two manufacturers believe.
Add this one additional item. While there has been a lot of talk about a “new light twin” aisle airplane from Boeing, Albaugh told the ISTAT conference last month he didn’t see the NLT as the likely solution. A 145-180 seat airplane makes very little sense in a twin-aisle, while a 160-220 seat airplane could arguably be an NLT.
McNerney’s comments compared with the messaging from Bair as recently as last month reflect the continuing struggle Boeing has in determining just what is the right sized airplane in the market.
Some final thoughts:
Bair, and other Boeing officials, currently see the new airplane as providing between 18% and 20% better fuel burn than today’s airplanes, which is only 3%-5% better than the A320neo. (Bair accepts the 15% lower neo fuel burn, including the new sharklets.) Airbus COO Customers John Leahy doesn’t see Boeing making a $10bn investment in a new airplane for only 3%-5% fuel burn gain vs the NEO, and Boeing is continuing its efforts to shave fuel burn from the 737NG, with a tough-to-achieve goal of 1% per year between now and 2019. If this lofty goal were achieved, the new airplane wouldn’t have that much advantage over the NG, just 11%-13%, at much higher ownership costs.
When you add the capital and ownership costs of a new airplane, which are projected figures that at this point Boeing may not even know since it hasn’t settled on a design, will a new airplane at 18%-20% fuel savings be reduced to an inconsequential number?
This is essentially the argument Boeing makes against the A320neo.
We don’t know the answer. But it certainly makes for an interesting intellectual exercise.