UBS estimates MAX break-even at 200

UBS Securities issued this note today:

Boeing is accounting for its 737 NG (Next Generation) program over a large number of aircraft with roughly 2,200 remaining in its block as of Q1, reflecting production into 2016 at planned rates. Across its block, we estimate Boeing is  booking margins on 737 NG around 20% on a pre-R&D basis. With the launch of its re-engined model, the 737 MAX, Boeing will need to either account for MAX as part of its existing 737 accounting block or create a separate block. We think Boeing is most likely to add 737 MAX to its existing 737 NG block given fairly limited design changes on the MAX relative to the NG that wouldn’t appear tojustify a separate accounting block.

We expect initial MAX production to come through at lower margins than Boeing is currently booking on NG, diluting BCA (Commercial Airplanes) margins. The inclusion of lower margin initial MAX production in the 737 block will also negatively impact EPS relative to expectations as Boeing will need to book a lower average (program) margin on its current 737 deliveries. We expect MAX costs to improve at a fairly rapid pace with our assumed breakeven program quantity at 200 implying that unit margins approach 737 NG type levels near the end of our assumed 1,000 unit accounting quantity (two years of production).

21 Comments on “UBS estimates MAX break-even at 200

  1. It makes sense for Boeing to accept lower margins on the current (and any future) backlog on the B-737NG, as well as the initial batch of B-737MAX. It is already known Boeing has sold the initial MAX airplanes at 50+% discounts, and is offering the NG at about the same levels. I suspect Airbus is doing exactly the same thing with the A-32XOEO/NEO.

  2. God may help Boeing , and Airbus too, since I don’t know his preferences !
    But to rely on the UBS previsional, may be tricky ..;
    Since their “over-performance” with the sub-primes …

    Numbers seems to be very short for a “Break even ”
    Bonjour les magiciens … !

  3. I think that the Lionair, SW and Norwegian 737 MAX aircraft were discounted above 60% to put the 737 back in the marketplace after the NEO avalanche. prices of $35-40 million circulated.

    If Boeing has to invest 2 billion for the MAX program, that is 10 million per aircraft for the first 200.

    Leaving about 25-30 million to build them. I wonder what steep discount the supply chain (Spirit, CFMI, Goodrich) gave Boeing for its last minute change of minds retrofit..

    Maybe 200 is on the optimistic side for program breakeven. Remember Dreamliner were Boeing is breaking even around a/c 1400 after selling the first few hundred at far below production cost prices..

    • I doubt all these orders will go through, with the global finacial crisis growing, EU is in a tight position right now. Maybe Airbus stands to lose more if customers start dropping off, since they hold the bigger backlog.

    • Ypu always ask this same question, keesje, while at the same time refusing to even consider Airbus is also giving away huge discounts. How much did Airbus give Norwegion in discounts to get their foot in the door of a normally Boeing customer? How much did they offer Southwest to prevent them from becoming the launch customer for the B-737-8MAX? Or to Lion Air to prevent them from launching the B-737-9MAX? How much did they offer American for their OEO and NEO order? The discounts just to AA alone would be huge in comparison to anything WN got.

      It is Airbus who started the price war with that AA order last year.

      • “It is Airbus who started the price war with that AA order last year.”


        I seem to recall that during last year’s PAS, at this time, Boeing was still saying that the 737NG was better than the A320neo. Looks like AA didn’t share that view, and only at the last minute, it seemed, Boeing was able to keep the foot in the door by offering a crudely undefined A320neo competitor. Hence, reasonably objective observers in this case would likely conclude that the offeror having a real and defined product to sell would have had the upper hand on pricing vis-à-vis the other offeror that was presenting a hastily joined together proposal.

        • Have you forgotten that up until the AA order last year, Boeing was consintrating on the NSA and not the B-737RE? Boeing had to shift gears then and begin offering what became the B-737MAX.

      • Last year, the NSA IMO was all talk and no substance. It looks as if few, if any, tangible architectural NSA designs was ever presented to customers. Consequently, all the NSA was last year was nothing but a mirage…..

        Clearly, at this time last year, Boeing was trying to buy time.
        When that strategy wasn’t successful, they had to go with something like the MAX, thus managing at the last minute to prevent AA going all Airbus on single aisles.

  4. I would say that Airbus is more likely to have problems considering the EU Nanny State debt that is going to take a decade to resolve. All those EU air carriers will be stopping delivery of Airbus equipment due to lack of financing and lack of passengers. Add to the economic problems the EU emissions tax on airlines and we are talking disaster….

    • If you think risk exists only on Europe, I think you are looking at things very narrowly. Here are some of the big NB orders that I think have substantial risk:

      AirAsia (277 A320, expanding from 62 currently)
      IndiGo (223 A320, expanding from 57)
      Norwegian (100 A320 + 174 737, expanding from 64)
      GoAir (74 A320, expanding from 12)
      Lion Air (343 737, expanding from 81)

      All of these are huge orders, and all are for 4x (or more) the current fleet size. Can all of these LCCs execute their business plans? I think not …

      If I add up the ones above, that’s 674 A320s and 516 737s, not insignificant for either Airbus or Boeing.

      • This is what I think both Airbus and Boeing are worried about, hence no investing in more final assembly plants to meet demand. I am almost sure these backlogs will inflate with time passing, banks collapsing etc.

        I dont believe in this credit driven economy anyway, a lot of air everywhere. Bubbles burst, we all should understand that.

  5. By what we have seen in other programs, they will have cost over run, delays and, eventually some technical issues to solve. If not, it will be the first time in 20 years. I have already stated that aerospace industry “lost the focus” (
    The new engine (and wing tip) will probably change lateral load factors and it may require some re calculations that could result (or not) in components being modified. Industry always are optimistic but the reality (in all recent programs) is different. I would put break even in 300 to 400 aircraft, as there is also a fierce price competition on this segment.

    • I think a key factor is excessive fragmentation of ‘modern’ work breakdown structures with incomplete interface definition, too many people (!) working on any given package, excessively ‘shared’ responsibilities, a lack of technical know-how and leadership, and decision processes dominated by financial controlling.

  6. The break even for Max is a function of the investment ~2B$ as well as the premium price (if any) ,it can get over NG ; If a plane sells for say 40M$ and makes 10% margin, it is ~4 M$; if B can get a premium in price of say 2M$, you get a margin of 6 M$. So the BE will be in the range of say 500- 350 planes . BE could be lower if there is no price war – which is not the case.

  7. If the 737MAX performance and operating costs are finally confirmed and I still
    have not heard anything yet, the MAX will be marginally efficient compared to
    the NEO, due to the forced limitation on it’s fan diameter!
    Therefore, I still believe and agree with OV-099, that the MAX was conceived
    under total panic conditions, to prevent AA and who knows how many other
    airlines, from going all the way with the NEO.
    Consequently, if Boeing had to do it all over again, I believe that they would
    and should have stayed with NA design, which would not only have put them
    in a much stronger position v.v. the NEO today, in terms of firm orders, but also
    would have arrested the stampede for NEOs, even with a 1or 2 year delay
    with their 1st delivery, compared to the NEO.
    Furthermore the NA would presumably have been based on the 787 all carbon-
    fiber design which would leave the NEO far behind, to the point where they
    would have been forced to give up on the NEO and follow suit soon afterwards!

    Just remember that AA agreed to purchase 100 MAX units, but only if Boeing
    would commit to and submit the basic configuration and operating costs data
    BY NOVEMBER 2011.I am still waiting, but I am NOT SURE AA is.

  8. KC135TopBoom :
    Have you forgotten that up until the AA order last year, Boeing was consintrating on the NSA and not the B-737RE? Boeing had to shift gears then and begin offering what became the B-737MAX.

    That’s the main point. Because they were caught unprepared they had, and still have, to be more aggressive than Airbus on pricing. Because they had been concentrating on the NSA they were not able to offer a carefully crafted design. Instead they came out with a last-minute contraption that caught everyone by surprise, starting with the Boeing sales team. And the worst part is that over and above the heavy discounts, they have performance guarantees to meet. Therefore if they don’t meet the specifications they will have to discount even more deeply. All this will have an impact on their ROI. The NSA would have been a much bigger investment for sure, but at least it would have given them market dominance, whereas the MAX will only accelerate the decline.

    • “That’s the main point. Because they were caught unprepared they had, and still have, to be more aggressive than Airbus on pricing.”

      Correct. 😉

      However, only a month earlier at the Paris Air Show, the Boeing marketing talking points were seemingly all about how competitive the 737NG really was with the A320neo. Were they really that unprepeared or was this more a case of self-delusion?

      • A super heavy case of “Ostrich” imho.

        Additionally my guess is that Boeing’s NSA gestation is not ahead of Airbus’ comparable efforts. The whole NSA around
        the corner thing currently is about creating FUD.

        But in this industry FUD is not the decissive instrument it was
        for Microsoft in the IT industry.

  9. list price 737 Max vs 737 NG shows for:
    7, + 6.8 MUSD
    8, +10.8 MUSD
    9, +12.1 MUSD

    on average 9.9 MUSD – I don’t know how the -7 and -9 sales numbers will compare, but let’s assume they sell the max for a (list price) premium of 10 MUSD
    factor in ~20% discount and learning curve and I don’t see how Boeing can break even a two billion dollar program over just 200 a/c – that’s discounting cost of financing. (not that cheap anymore since the gov’ts can’t bankroll the OEMs anymore)

    or will Boeing build the max for a lower cost per plane than the NG… anyone know about the difference on the classic to NG switch?

    • To paraphrase Helmuth von Moltke:
      No premium ever survives contact with the customer unmaimed.

      i.e. The premium is what gives first ( but may gain sales advantage )
      IMHO both airframes will not achieve much more than $2..4m markup for
      their new models.

  10. Break-even meaning what? Cash flow break-even on a unit cost base? Or business case break even accounting for R&D, capital expenditure, overhead and depreciation?

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