Airbus and Boeing face pricing squeezes that are the result of their continuing price wars and two products that need price cuts to maintain sales.
The fierce single-aisle battle between Airbus and Boeing, and to a much lesser extent, between Airbus and Bombardier, puts pricing pressure on the A320ceo and to some degree the A320neo.
Airbus and Boeing each blame the other for a price war that has put pressure on margins for the in-production airplanes, but market share battles are only part of the issue. There is the need to keep the production lines humming for these airplanes in advance of the transition to the re-engined A320neo and 737 MAX, particularly as the Big Two up production rates over the next few years.
Airbus announced plans to increase rates on the A320 line to 46/mo by the end of 2016 as the new Mobile (AL) line becomes operational. Although the A320neo is scheduled to enter service in October 2015, initially the Mobile plant will churn out A320ceos. Boeing is boosting production of the 737NG to 47/mo in 2017 and alerted the supply chain to prepare for a potential rate hike to 52/mo by the end of this decade. The new 737 MAX is scheduled to enter service in July 2017. Airbus and Boeing each plan a two year transition period during which the current airplanes will be produced with the re-engined models.
Our Market Intelligence tells us Airbus is already planning to take its Mobile production from 4/mo to 8/mo, the planned capacity of the plant, as early as 2017. This would give Airbus 50 A320s per month, still shy of the prospective 52/mo of the 737 MAX. Airbus’ Tianjin plant, currently producing at 4/mo, has the capacity to go to 8/mo, for a system total of 54. But Boeing has the ability to go to 63/mo should the supply chain be able, and for the moment Airbus is tapped out at 54.
Cutting prices and bundling sales of the current airplanes with the new airplanes is necessary to stimulate demand of the A320ceo and 737NG. But this isn’t the only reason there is pricing pressure.
Fierce market share battles are another. Airbus saw plenty of opportunity to flip 737 customers to the new A320neo and took every advantage to do so. It had the logistical advantage: the A320neo will enter service nearly two years ahead of the MAX, which was launched seven months after the neo. The fleet renewal demand of American Airlines was so great that Boeing alone could not supply American on a timely basis.
Having lost its exclusive supplier position at American, Boeing wasn’t going to lose the next competition, at Delta Air Lines. Delta was only interested in today’s airplanes, taking the conservative position that the Pratt & Whitney GTF and CFM LEAP engines are unproven technology. Delta, once an exclusive Boeing customer, became an Airbus operator with the merger of Northwest Airlines, and Northwest’s management was now in charge at Delta. So a Boeing win was not a given—but neither was an Airbus win; the management likes dual-sourcing. In the end, the former NWA fleet planners and management chose Boeing. If one believes Airbus, it was because Boeing offered the 737-900ER for 10%-15% less than that offered for the A321ceo. Delta later also ordered the A321ceo, but only 30 airplanes compared with the 100 737-900ERs ordered from Boeing.
At United Airlines, another Airbus/Boeing operator after the merger with Continental Airlines, UAL was run by the former Continental management, a solid and exclusive Boeing customer. Legacy United had become a loyal Airbus customer. Legacy United ordered the Airbus A350 XWB and the new UAL expanded this order, but when it came to renewing the fleet with a major in-production order, the Boeing-centric United management chose the 737-900ER over the A321ceo. One officer told us the 737-900ER was a slightly “better” airplane than the A321ceo (and also remarked the A321neo is better than the 737-9) but that Boeing won the deal on “commercial terms.”
Airbus and Boeing have challenges in the wide-body arena as well. Sales of the A330 have stalled. The A330 received a tremendous boost by the disarray of the Boeing 787 program and a boost from the delays in the A350 development. Helped by near-term availability to backfill these program delays, A330 sales were also boosted by willingness to cut the price dramatically. With tooling and amortization long-since paid off and completed, Airbus has tremendous room to drop the price. Sales were routinely in the $90m-$100m range and occasionally reported to be even lower than this. One Boeing salesman claims Airbus has recently sold the A330 for $65m, but we haven’t been able to confirm any price remotely close to this. We’ve heard of one special-case transaction in the upper $70m, but even this is anecdotal.
A330 sales have stalled. Airbus has huge production gaps beginning in 2016. Customers are waiting to see what Airbus is going to do about launching the re-engined A330neo. The A330 Regional, intended for the Chinese market and with hopes for 70-200 sales, hasn’t materialized even with deep price discounts.
Boeing is facing the prospect of cutting prices on the 777-300ER to keep this production line going until introduction of the 777X, which has an EIS of 2020. Boeing claims it will maintain pricing, but we already hear of deeper discounts than have been the case when sales were robust. There have been only 10 orders so far this year for the -300ER. We fully expect pricing to fall as the 2017 production gap gets closer.
We also expect Airbus and Boeing to cut production rates of their aging twin-aisle lines.
As for Airbus vs Bombardier, the pricing pressure faced by Airbus is one of its own choosing. Although Airbus officials publicly denigrate and dismiss the viability of the Bombardier CSeries, we know from our Market Intelligence that Airbus engages in extremely aggressive counter campaigns where Bombardier appears to be making headway with its CS300, which competes with the A319. Customers we talk with, and our own economic analysis, tell us that the economics of the CSeries is far better than the A319ceo or neo. Airbus declared in 2010 that it would not ignore Bombardier as Boeing had ignored Airbus in its early days. Accordingly, we are told that Airbus offers the larger A320ceo at a hugely discounted price to customers ready to order the CS300, a price that Bombardier can’t match; and that Airbus is also offering to arrange acquisition of cheap, used A319ceos (lease rates below $100,000/mo) as an alternative to the $300,000/mo for a new CSeries. The tactics have worked in several campaigns.