Countdown to 737RE or NSA: Odds now favor Re-engine

It’s been a slow but steady shift in Boeing’s thinking that became evident during the pre-Paris Air Show briefings: Boeing is warming to the idea of re-engining the 737. According to sources with direct knowledge of the situation, it is likely officials will choose to do so and push out development of the New Small Airplane (NSA), with an EIS for the latter in the early half of the 2020 decade instead of 2019 or 2020 that Boeing has been talking about.

Pressure on Boeing to act and do something is mounting. Aviation Week has this story about the thoughts of Herb Kelleher, co-founder and former CEO of Southwest Airlines (now retired, but still advising Southwest when asked). Kelleher urges Boeing to “be bold” and launch a new airplane with a 2018 EIS but if not, go ahead and re-engine.

The competition at American Airlines, where Boeing is hoping to head off an Airbus order for this customer that has bought only Boeing aircraft since 1996, is a factor in Boeing’s move toward a re-engine, but not a deciding one. (Reuters has this analysis.)

According to our information, officials are planning to make a recommendation to the Boeing Board of Directors at its August meeting. Clarity, to use Boeing’s oft-chosen word, should come to the market place shortly after that, but no Authority to Offer (ATO) is immediately expected.

We previously reported that re-engining the 737 was very much alive, despite a long history of Boeing saying that while it was technically feasible, officials didn’t see the value proposition. Even earlier, we reported that not only was the trend shifting in favor of the 737RE, there was some thought that Boeing might do both a 737RE and the NSA.

According to our information, Boeing recognizes that it has to replace the 737. But shifting priorities toward favoring twin aisle derivatives of the 787, including the 787-10X, and protecting the 777-300ER franchise now that Airbus has refined the A350-1000, would stretch resources if the NSA were launched sooner rather than later.

Also, Boeing has yet to deliver a single 787 or 747-8 and it appears that deliveries this year will be far fewer for each than the 25-40 (equally split) Boeing has forecast on the year-end and first quarter earnings calls. New guidance is expected next week on the 2Q earnings call July 27.

Furthermore, as we previously reported, Boeing and CFM have found a way to shrink the fan size of CFM’s new LEAP engine a few inches, just enough to avoid raising the nose gear, reducing the work statement on changes required to the 737 to accommodate the new engine, and reducing R&D costs by 10% to 20%.

Boeing recognizes that it has to do something. While airlines, including Southwest, apparently prefer a new airplane, a re-engined aircraft will keep Boeing competitive with the Airbus NEO and in their view be 8% more economical on cash operating costs than NEO, an assessment Airbus dismisses out of hand.

A 737RE certainly would not be the game-changing, bold move Boeing needs to regain market leadership lost with the 787 delays. The balance of power would continue to remain roughly equal with Airbus. But the 737RE could help stem erosion from COMAC and Irkut, which are developing airplanes in the heart of the market, the 150-200 seat class. While neither COMAC’s C919 nor Irkut’s MS-21 are expected to be a major threat to Boeing or Airbus, sales in their respective home markets of China and Russia means billions of dollars of sales lost to Airbus and Boeing, affecting cash flow and profits.

Which brings us to production. Boeing’s Jim Albaugh, CEO of Boeing Commercial Airplanes, last week acknowledged what we reported way back in January: that Boeing is considering boosting production of the 737 even higher than the announced 42/mo planned by 2014. We reported in January Boeing was looking at 50 per month; Albaugh upped this to 60/mo last week, saying studies are underway.

Airbus is also looking at increasing production of the A320 beyond the 42-44/mo its previously announced.

For Washington State, choosing a 737RE will be good news, for production will remain in Renton where the 737 is assembled and competing for the NSA will be put off. Increasing production to 60 per month would also be good news—and bad. Renton has the room to go to 60 per month by utilizing the third 737 line now dedicated to the 737-based P-8A Poseidon, which when full production is up will only be assembling two per month on a line capable of 21. Line 1 is already at 21 a month and Line 2 is stepping up from its current 10.5/mo to a full 21 by 2014.

But this also means that when Boeing inevitably proceeds with the NSA, Washington will have to compete (which was going to be the case anyway) and room at Renton will be tighter than if Line 3 weren’t full. It’s certainly possible that as demand for the 737 drops, Line 1 then becomes available to transition to an NSA—but for Washington, it is not guaranteed to new airplane by any stretch.

We filed a story with Commercial Aviation Online that was published today. It has a bit more detail and a comment from a Boeing spokesman. We can post that story here tomorrow.

29 Comments on “Countdown to 737RE or NSA: Odds now favor Re-engine

  1. While I’m not the biggest fan of Leahy, and he has been wrong a few times (especially regarding the B787 back in 2004), I will give him credit for calling this one if Boeing offers the B737RE over an NSA.

    If for arguments sake Boeing goes with the B737RE, I have two questions:

    1)how will it “stack up” against the A32XNEO(i.e. B738RE vs. A320NEO), etc.
    2)how does Boeing address the A321NEO situation-where it is perceived to be an excellent B752 replacement?

    • Boeing believes the 737-800 today is 8% better on cash costs (including ownership) than the A320. Boeing also believes the 738 today is 2% better than the A320neo promises to be in 2015 (though it must be noted Boeing allows A320neo only 13% improvement in fuel burn vs 15% claimed by Airbus, and Boeing factors in PIPs for 737 and none for A320). Boeing figures the 737-800RE will regain the 8% cash operating cost advantage over A320neo.

      Needless to say, Airbus thinks Boeing is sniffing exhaust fumes.

    • Where/when did Leahy err significantly in respect to the Dreamliner ;-?

      • “Talking in rapid, well-crafted sentences, calmly but firmly, he trashed the 7E7 and all the “hype” Bright has spun around a jet that represents Boeing’s only hope for a commercial-airplanes future.

        “I can’t see where this big demand is supposedly coming from,” Leahy said. “It may be more in the category of wishful thinking than firm orders.””

        http://community.seattletimes.nwsource.com/archive/?date=20040721&slug=farnborough21

        There are many other comments from him regarding this.

        • Is that really all that wrong?
          Dreamliner sales success is predominantly due to selling at rock bottom prices.
          .. combined with a vastly successfull marketing campaign, a perfectly staged
          meme invasion, child of the generally highflying expectations in the years
          ahead of the looming GFC.
          Boeing will not make a single cent profit on all sales they have made or could make
          in the near future.
          As TopBoom regularly expounds on : Boeing is in the business for profit.
          But they would not have sold much at a reasonable price ( cost + ).

          Dreamliner as a business success is a hollow facade, a Potemkin project.

  2. Thanks for the response. I will go with Airbus on this one. The order book for the A32XNEO speaks for itself and I’m sure the carriers did their homework.

    Regarding #2, you did do an excellent study on the A321NEO (“A321neo best to replace 757: AirInsight”), I’m still not so sure on what Boeing should do regarding it….

  3. http://www.ATWonline.com is reporting this morning that AA has reached a financing agreement with AerCap Holdings for 29 firm 738s, and 6 options to be delivered in 2013-4 if exercised.
    This sounds like AA previous order of 35 posted on B’s web site.

  4. @Christopher Dye aka CubJ3: Indeed. In a previous press release on this, it was clarified that the AerCap agreement covers 26 737-800 ordered previously, plus 3 newly ordered ones, plus the 6 options you mentioned.
    http://finance.yahoo.com/news/American-Airlines-Enters-Into-prnews-317926774.html?x=0&.v=1

    Regarding the 737RE: the decision to re-engine rather than try and save the 737NG all the way to 2019/2020 makes sense in my eyes. Regarding NSA – I would expect an estimated EIS of 2020 to be bandished initially (just to kind of keep to the rhetoric we’ve seen on NSA so far), which then gets pushed out to 2023 at least, depending on engine technology available – there’s little point in doing an NSA and then putting the same engines on it that the 737RE already has. Also, there would be little point in having a 2016 EIS 737RE (which is realistic, if a bit optimistic) and then bringing out a competitor four years later.
    IMHO, all of that is.

  5. Boeing said the Airlines wanted a new aircraft, they saw no business case for a re-engine, the NEO was just catching up, they were planning no discounts on the 737 and it was there to stay for a looong time and the best 757 replacement is the 737-900ER.

    They also say a compromised new engine on the 737 will do better then the NEO.

    Should we even quote them at this stage?

  6. No, Keesje……….we should just blindly believe everything Airbus says instead…..:-(

  7. Question: The NEO has done impressively well since it was launched. But where are all the orders from non Airbus customers? I heard one switched, but looking at those planes, they seemed to be the old 737 types, for which they should be replace by any newer planes at this time, including even the Chinese one. By the looks of if, whoever wants a new 737 right now would have to buy it from someone else or wait a few years before getting one, Unless Boeing can produce way more than what they building right now.

  8. UKair :
    “Boeing Corporate President and CFO James Bell indicated Tuesday that the manufacturer is unlikely to re-engine the 737, saying the potential fuel-burn improvement over today’s narrowbodies does not look “sufficient enough” to justify a “business case” for doing so.”
    http://atwonline.com/aircraft-engines-components/news/boeing-cfo-says-737-re-engining-unlikely-0831

    ..and the article also states:

    “He (Boeing Corporate President and CFO James Bell) emphasized Boeing has not “dismissed” re-engining”

  9. as far as single aisle production slots are concerned, it’s a seller’s market

    good news for bombardier cseries

    boeing may well get the 737rg out of the door

    before the 320neo

    with a simple low-cost reengine with minimum wing modifications

    for 2015 for the 739er

    then proceed with the 797 for 2020 at 150 passenger level

  10. At last, B is getting there , posturing not withstanding ;perhaps they were waiting for the engine <70 inches specifically designed by CFM for 737 RE with enough ground clearance, which will need minimum modifications ,from an engineering stand point.
    The real question is-how much of fuel burn trade off it is vs the 70 inch engine vs lower change work statement and its costs.If this means, that B would still beat Neo by the said 8% total cash operating costs , good enough.
    That will give them a breather for another 4-5 years for getting the 300 ER to come up ahead of -1000; then would come the new narrow body.
    Question: why so much of laboring for the past three months on RE or NSA? Now AA is close to a good look at 321 Neo , next will follow Delta and so on.Boeing needs to defend better its portfolio and make up its mind faster.
    Hope they do not miss the big orders finally coming from the US legacy carriers.

    • VS Problem is that if they don’t do something more with the ground clearance they will not be able to use the GTF My understanding is that the 737RE and the NSA are two different planes, altho often conflated in the blogishpere. The latter is an all new, medium range 180-220 seater with payload range matching the 752. It is intended to cover the segments served by the 739ER/RE, A321classic/neo and 752, and defeat A321neo as a 752 replacement because it will have the 752’s pay/range while the neo will not. (US Air has publicly asked A to get that range for the 321neo.) The 737RE would mainly apply to the 737-700 and -800. If you are an LCC, you might want this, if you are a full service airline, you might go with the NSA and the 737RE. By delaying the NSA, B may be giving up this potent competitor in the 752 replacement derby. If that is true, won’t they want the GTF at least on the 739RE to make sure they can compete with the A321neo?

      One option may be a greater improvement to the 737 than just RE (new wing, landing gear, etc.) which makes it the clear choice over the A321 neo to replace the 752. This may make sense financially if they can deliver by 2015 and keep selling them up to at least 2030, which A will let them do because they will not replace the A320 until then.

  11. Karl :
    Question: The NEO has done impressively well since it was launched. But where are all the orders from non Airbus customers? I heard one switched, but looking at those planes, they seemed to be the old 737 types, for which they should be replace by any newer planes at this time, including even the Chinese one. By the looks of if, whoever wants a new 737 right now would have to buy it from someone else or wait a few years before getting one, Unless Boeing can produce way more than what they building right now.

    Most NG-customers have received their aircraft in the 2000s, and a replacement is not imminent. I think keeping the customer base is first priority (and Boeing is on the edge of failing this objective), enlarging it is another issue. Also remember there are new competitors, especially on the lower end (C-Series), but also on the middle and upper end in the end of the decade – MS21, C919.

    • Personally, I do not see Boeing enlarging their customer base, irresepective of what they do now. The irony is, I also do not see them losing much of their base either, irrespective of what they do now, barring they do nothing for the next 2 years.
      I do bleieve that both Boeing and Airbus will lose some customers to the newcomers (Russia and China due to politics, and Bombardier due to the C-Series offering better numbers than the big boys’ smaller aircraft), but none of this will be a huge killer in this or even the next decade.

  12. I left a comment on the prevous post about my beliefe that Boeing would be best served by doing a re-engine now and following up with a successor/complement to the 737 family around the same time that Airbus would do so. Reasons for this conclusion are in that comment.

  13. Scott, Airinsight has a piece favorably comparing the A321neo to the 739ER. Why not compare it to a proposed 739RE, particulary now that it seems B will not do the NSA by 2020, the larger of which was to have been a 757 replacement.

    • The A321 with sharklets in its current engine offering form has an advantage over the 739ER and considerably better economics.
      That is also clearly evident by the market reception that the A321 has over the B739.
      That delta is only going to get bigger with the neo which will increase its fuel efficiency by at least 12%.
      By the looks of things the market has followed suit with that.

  14. The “up to 15%” improvement in fuel burn includes up to 3.5% saving with Sharklets*. The engines co-incidentally have a 15% improvement in their efficiency but this translates to a smaller fuel burn gain overall. Regardless of whether Airbus figures are correct, I would expect Boeing’s improvements to be about 4% less (discounting the Sharklets improvements as the 737 already has winglets; the new smaller fanned engine on the 737 will be slightly less efficient then the new engine on the A320).

    The 737 will be relatively worse off compared with the A320 after both planes are re-engined, although the 737 will be much closer than if it weren’t re-engined at all. The NSA is still an issue for Boeing

    * See slide 32 in this presentation

  15. I saw a GE article claiming given BPR was responsible for more then 40% (47%?) of the fuel burn improvement for their new NB engine. That’s one of the reasons the decision is complicated for Boeing. An NEO sized fan would be best, but practicle unfeasible. The impact of fan size every else equal is not marginal at all.

  16. FF :
    The “up to 15%” improvement in fuel burn includes up to 3.5% saving with Sharklets*. The engines co-incidentally have a 15% improvement in their efficiency but this translates to a smaller fuel burn gain overall. Regardless of whether Airbus figures are correct, I would expect Boeing’s improvements to be about 4% less (discounting the Sharklets improvements as the 737 already has winglets; the new smaller fanned engine on the 737 will be slightly less efficient then the new engine on the A320).
    The 737 will be relatively worse off compared with the A320 after both planes are re-engined, although the 737 will be much closer than if it weren’t re-engined at all. The NSA is still an issue for Boeing
    * See slide 32 in this presentation

    It is interesting that the presentation said that a fan of up to 81 inches can be accommodated.
    Is PW going with that diameter with the Leap X going with 78 and if so how would a 737neo sporting a 66 inch fan compete with that?

    • But, isn’t the 66″ fan on the LEAP engine even an improvement over the 61″ fan on the CFM-56-7B engines on the current B-737NGs?

      Right now we don’t even know if the CFM-56-LEAP is the engine Boeing is thinking about (but it is the most likely choice), or even if it is going to be the exclusive engine power on the B-737RE.

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