Update, May 11: UBS had Boeing’s Mike Bair, the head of the 737 future program, for presentations yesterday and issued its report. Much of the UBS report is similar to the Credit Suisse and Buckingham information captured below; here’s some of the new stuff.
Our comment on the last point: Bair is wrong, of course: United and Frontier were two 737 customers to defect and Air Berlin also bought A320s; we believe there were more but don’t recall specifically.
In what is the clearest picture yet of Boeing’s intentions for program development, Boeing Capital Corp. officials met May 3 with aerospace analysts and financial types in one of BCC’s periodic meetings. What emerged from the meeting is a clear understanding of Boeing’s current thinking for the current 737 line and the New Airplane, which for this report we will identify as the 7X7.
This report is based on conversations with participants of the meeting, subsequent analyst reports that were issued and presentations to the group by Boeing.
First, let’s recall that Boeing CEO Jim McNerney said on the 1Q earnings call that Boeing will first address the “heart of the market” (145-185 seats) before addressing the 757 segment. Recall also that Boeing officials said the 737 is expected to be produced to “at least 2026,” and Mike Bair previously told us the 7X7 will not be a replacement airplane for the 737 but an entirely different and complementary airplane.
During the May 3 presentation, BCC officials confirmed that Boeing’s “heart of the market” approach is to continue to update the 737NG.
Boeing does not believe the Airbus A320neo provides sufficient all-in benefits to airlines to be a serious challenge to the 737NG that can’t be matched, overcome or at the very least have a gap that would be diminimus. Accordingly, Boeing believes there is no need to re-engine the 737 and that improvements to the airplane by 2016 will result in a further 6% gain vs. today’s 737NG in efficiencies when the cost of ownership is also calculated vis-à-vis the NEO.
Credit Suisse wrote in a post-meeting note, “BCC also spoke to product evolution, reiterating that Boeing will focus on continuous improvements to its 737NG instead of a re-engine and is exploring clean-sheet replacements for the end of the decade. Boeing conceded the NEO is a bit more fuel efficient but has similar operating costs given other efficiencies. Further, 737 should continue to compete with NEO and CSeries on price given product maturity and large installed base.”
Although Credit Suisse referred to a “clean-sheet replacement” by the end of the decade, we think there remains some terminology confusion based on our own conversations with Boeing’s Bair, comments by other Boeing officials and in talking with others attending the BCC meeting.
Buckingham Research wrote in a post-meeting note, “Boeing is considering a range of options for a new aircraft and believes the technology (propulsion, materials, avionics, etc.) will be available to support a service entry in 2019/2020 (consistent with our 2010 Farnborough Air Show takeaway). The new airplane should not be considered a replacement for the 737, 757, or Airbus narrow-bodies. Like the 707, which first replaced turboprops with turbojets, the 747, which first introduced jumbo capacity, and the 777, which first introduced 4-engine capacity with a 2-engine airplane, Boeing’s new aircraft will likely address a new market with new capabilities.”
We think this scenario outlines the basic “clarity” Boeing plans to provide at the Paris Air Show. There won’t be a program launch, and things still remain fluid. But we are certain there won’t be a re-engine of the 737NG.
Airbus’ John Leahy has publicly stated that he believes if Boeing “loses” a solid 737 customer, specifically naming Delta Air Lines, Boeing would be “forced” to re-engine. Buckingham reports in the May 3 BCC research note that Boeing may no-bid Delta, largely due to the inability to offer production slots (Boeing’s 737 line is sold out to 2016/17); there is, therefore, nothing for Boeing to “lose.”
Furthermore, we know from a variety of sources that while Boeing has a technical solution and option to re-engine the 737, the changes required to the airplane are such that we concur with the now-prevailing opinion it simply doesn’t make sense to do so.
We know from two sources that Boeing is talking with Spirit Aerosystems, maker of the 737 fuselage, about taking production into the mid-50s per month. Recall, too, that we previously reported a Boeing executive told employees the company was looking at taking production to 50/month. Such a high rate requires expansion of the Spirit plant in Wichita (KS) and probably the Boeing plant in Renton (WA). Returns-on-investment will be key considerations for expansions.
Separately, Aspire Aviation has this thorough analysis of the PW GTF vs the CFM LEAP-X.