Boeing’s thinking still up in the air on New Small Airplane

Boeing promises “clarity” at the Paris Air Show about its New Small Airplane (NSA) program, but aside from settling on the performance it believes is required, little clarity has truly been achieved inside Boeing.

We learned last week key insights to Boeing’s thinking–and the divisions still remaining–within Boeing about the direction to go with the NSA. Our information comes from within Boeing, but the sourcing remains unidentified because the sourcing was not authorized to speak to the press. This information was obtained entirely separate from the pre-air show press briefings held June 2-3, which are embargoed to June 19 (Paris time)/June 18 Seattle time.

Information has been cross-checked with others and with statements made by Boeing executives in the public domain.

Re-engine, New airplane–or both?

The public debate, as well as the internal one, is whether to re-engine the 737 or proceed with the NSA. While last week we discussed with our sourcing the relative merits of one or the other, much of this information overlaps with what we learned during the air show press briefings and thus, we will hold these details in honor of the embargo to June 18/19.

However, what was new is that there is a faction that believes Boeing should do both–and the rationale as to why.

The rationale: This comes down to production capabilities and remaining competitive with the Airbus A320neo program.

Company officials have publicly said they are looking at rates of 60 and even 70 per month for the NSA. The current 737 rates will go to 38 a month by 2013, and we were told last week Boeing is all but certain to make the decision within 30 days to boost production further to 42 per month by 2013 or 2014.

Update, 7:11am: Boeing announced that it is taking production to 42 per month in the first half of 2014.

If the NSA begins delivery in 2019, ramping up to rates of 60-70 per month will take years, which is why production of the 737NG will continue “to at least 2026.”

The faction that believes Boeing should re-engine the 737 while also proceeding with the NSA thinks this is necessary to remain competitive with the A320neo.

Boeing believes the A320neo only brings the airplane to parity on operating costs to the 737-800W (winglet) and that when ownership costs are considered, the 737-800W has an advantage of about 2%. The 737-800W has about an 8% cash advantage, all-in, over today’s A320, Boeing has publicly said.

Boeing’s assumptions do not include Airbus undertaking Performance Improvement Packages for the A320 family. Nor, do we believe, do they include contractual improvements for the engines Airbus has negotiated with Pratt & Whitney and CFM for the neo by 2019.

Finally, Boeing focuses on the 737-800W vs the A320/320neo but it does not publicly compare the 737-700 and 737-900ER with the current A319 and A321 or the neo versions. Privately Boeing officials concede these other two 737 models do not compare favorably with the current and neo Airbus models, and airline fleet planners we’ve talked to say the same thing. With Boeing making a big push on the 737-900ER these days, the A321neo in particular leaves the -900 at a disadvantage.

In addition to our own information last week, on Monday this week Heidi Wood of Morgan Stanley had this cryptic reference in her note:

We highlighted early in the year expectations for a rash of hundreds of A320NEO orders likely throughout the show, & now Airbus is getting bolder, claiming potential for order upsets with BA customers. We still expect 500-800 orders by 2011 year-end for the A320NEO, pressuring BA for its single aisle decision: re-engine, new airplane or both?

She raises the question of Boeing proceeding with a re-engine and a new airplane. Her note did not elaborate. We also checked with another Wall Street analyst, who had additional information, reflected in this post.

Our Boeing sourcing says that there is a view that if the 737 is going to be produced well into the 2020 decade, it needs to be re-engined to remain competitive with the neo.

But this is only part of the equation.

Where will the NSA be built?

One thing Boeing is clear about is that the site selection for the NSA assembly hasn’t been addressed yet. Mike Bair, VP of the Future 737 development, told us this in March and said that Washington State will have to compete for the airplane. Our sourcing said the same thing, and in an interview Monday by Dominic Gates of The Seattle Times with Jim Albaugh, CEO of Boeing Commercial Airplanes, Albaugh also said so.

But one question is clear: with Boeing planning to build the 737 until at least 2026, will there be room at the Renton plant to transition from the high rates of the 737 to the ramp-up of the NSA? Or will Renton be maxed out on production, requiring Boeing to look for another site?

Within Boeing, here are some of the views we were told:

  • There is a faction that wants to move production away from “labor,” meaning being captive to the unions and specifically the IAM. Company officials are tired of the repeated strikes by the union and believe production stability is paramount. (How this might be affected by the current National Labor Relations Board complain originated by the IAM remains to be seen.)
  • There is also a faction that believes locating the NSA assembly line in Puget Sound has advantages that outweigh the risk of dealing with the IAM. The proximity to the current supply chain and the professional talent of the assembly line workers (the IAM 751 local) and the engineers (the SPEEA union) provides value that can’t be matched elsewhere.
  • Boeing executives largely consider IAM 751, the local in Puget Sound, not to be the problem. Rather, the problem is viewed as with the IAM International, which has the muscle and calls the shots in labor negotiations, driven in part by the International’s national agenda as opposed to the needs of the IAM 751 local.
  • Although Mike Bair told us in March he continues to favor the creation of a “super site,” where assembly and the supply chain are largely on one massive production site, we were told last week this concept hasn’t yet been seriously looked at, let alone considered as a serious option.
  • Another issue in site location is the risk of a natural disaster in Puget Sound, where earthquake faults are plentiful, that may lead to a business decision to locate the NSA elsewhere. The question then becomes, is “elsewhere” in Washington State or some other state?

Airplane specifications

What will the NSA look like? This information will be in our June 18-19 reporting. Suffice to say that this remains up in the air as well.

18 Comments on “Boeing’s thinking still up in the air on New Small Airplane

  1. Could it be we have to see the whole story in conjunction with what Airbus will tell us about the A350-1000 on Saturday? Depending on the final(?) A350-1000 spec, Boeing might have a reason to move the risky 737RS effort a few years back in favor of a 777 evolution programme and go with a 737 reengining programme – one that requires minimal airframe changes.

  2. Why? the A-350-1000 still has an expected EIS of something like 2017, or so. If Boeing gets started on the B-737RS/NSA this year, or in 2012, they still have time in 2014 to launch an improved B-777 to compete with the A-3510.

    • Boeing alrwady sad hat desgn work for the NSAwould not start before 2014 and you need at least 5 years to EIS – just look at the 787. The 777RS would not be ready before 2025 then.

  3. Means in clear language:
    We do a re-engine starting now.
    We probably do a new aircraft sometime in the future, but reduce the necessity for immediate action.

    Or say it this way:
    We are doing and re-engine and we will not do new aircraft, but we don’t say the latter until 2014 or so.

    You can easily paint it green by calling it “technology evaluation period”, “talk with major customers” or “getting the leapfrog technologies into a new aircraft”. Name it as you want, Boeing basically announces that it will re-engine and therefore shelf any new aircraft for this decade. Period.

  4. At some point you have to wonder whether a part of Airbus’ success is due to the ability of management to make money without creating a hostile relationship with its workers. I don’t know anything about labor relations at Airbus, but they seem to be able to do okay even without locating in right-to-work states.

    • Really? I might remind you that had EADS/Airbus won the KC-X contest they were planning to build their plant in the ‘right to work state’ of Alabama. They did have a choice of building in any US state, including those without right to work laws and have (nearly) forced union membership.

      • Well, that’s not really the complete and accurate story, is it?

        From the point of view of EADS/EADS-NA, the Democrates were on nearly all accounts beholden to the Boeing Company and to it’s powerful supporters (i.e. congressional as well as the IAM etc). If EADS wanted to get anywhere they had to try getting GOP support in Congress in order to try fight off the “Buy American” legislation etc. Therefore, going to the GOP, which more or less “controls” the South, was certainly a no-brainer.

    • At least Germany is a right to work state. Afaik France doesn’t have mandatory union membership either.
      This is a “Good Thing (TM)”.
      We do have legislation against exessive workforce shedding though.

    • did you miss the A320 line in china?

      and though Germany doesn’t have mandatory unions – I thought they did have mandatory employee representation.

      • Which is completely different to unions that can decide who can work in a certain profession or not ( which from my viewpoint is the medieval aspect).
        Here your qualification stemms from the national apprentice/schooling system. Unions are the functional equivalent to political parties
        _and_ unions are industry specific.
        Additionally health care, pensions, worker safety, holidays
        and stuff are things managed statewide under a legal framework.

  5. It’s more a question of timing, I think. To avoid a gap in orders at the start of the next decade, Boeing have either to re-engine or get their new model out into full production by the end of this decade. Re-engining is less risky. In that case I believe Boeing will still introduce their new model before Airbus, but perhaps not by 2019

  6. OV-099 :Well, that’s not really the complete and accurate story, is it?
    From the point of view of EADS/EADS-NA, the Democrates were on nearly all accounts beholden to the Boeing Company and to it’s powerful supporters (i.e. congressional as well as the IAM etc). If EADS wanted to get anywhere they had to try getting GOP support in Congress in order to try fight off the “Buy American” legislation etc. Therefore, going to the GOP, which more or less “controls” the South, was certainly a no-brainer.

    We had this election in Nov. 2010, where the Democrats lost control of the House. The GOP took control in January 2011, well before the contract award was announced by the USAF.

    So, yes, it is the complete story.

    • Sorry, try again. EADS-NA chose Mobile as the planned KC-X FAL in 2005.

  7. Interesting article insights.

    I would not be suprized if Boeing goes for a re-engining for similar reasons.
    * the high production rate will shrink the current backlog to 0 in about 2016. I’m not convinced airlines will continue to buy 737NGs with 4-5 new families around. (CS, 919, MS21, NEO, Emb 5 abreast) for delivery after 2016
    ** It buys Boeing time to wait for a next generation of engines/materials, just like Airbus.
    *** If Boeing waits until 737 sales start to drop, they’re too late.

    IMO Boeing learned from the 767-787 replacement. Development of the Dreamliner started when the 767 sales had already evaporated, handing over Airbus the segment for more then a decade (A330) and forcing them to make unrealistic promises to the airlines. They’ll avoid that this time.

  8. Boeing sees all the drawbacks of a new design, basically what John Leahy pointed out (the points have been around for long, he was just the most prominent person to address them). At the same time, the public statements of BCA leadership has brought Boeing in a position where just “canceling” a new design would cost credibility, and also shareholder value.
    It is known that the B737NG benefits less from re-engine than the A320 due to its physical limitations. Therefore going “just re-engine” after making so much noise on a new design means loss of face. Therefore I would think that NSA will be around for some time, but that it will not be started soon, if ever.

    The designs emerging from China and Russia will probably be disappointing, both from the pure performance point of view and from the view of operational reliability, manufacturing quality and long term durability. It only threatens both A & B to lose market share in China and some of its economic colonies (which are few and small in number of aircraft).

    Both CSeries and Embraer 5-abreast will attack a market that has been weak for some time, namely the A319/B737-700 sector. I guess the majority of future single aisle sales of A&B will be A320/A321 and B737-800/900 respectively.

  9. 75 NEO’s for Go Air, in the wake of Indigo’s massive NEO order a few weeks ago.

    Jet Air is also rumoured to out for new NB’s.

    India is busy..

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