Dec. 22, 2017, © Leeham Co.: Boeing blames a subsidized, price-dumped Bombardier C Series for the poor sales of the smallest member of the 737 family, the -700 and the 7 MAX, but history doesn’t support the claim.
The US Department of Commerce clearly ignored sales evidence that the 737-700 has been “done” for many years and the 737-7 MAX was an unattractive design
that hasn’t been fixed with a redesign; airlines simply don’t want the airplane. Commerce levied tariffs amounting to 292% on C Series imported into the United States in the future.
The US International Trade Commission is currently awaiting post-hearing briefs from Dec. 18 testimony from Boeing, Bombardier, Delta Air Lines and other parties to determine whether Boeing suffered “harm” by the C Series deal with Delta and a near-miss with United Airlines.
If the ITC concludes Boeing suffered harm, the DOC tariffs stand. If not, the DOC action is moot. The loser at ITC is expected to appeal.
Boeing, which did not respond to questions for this article, advanced the theory of “commercial momentum” in its filings at the DOC and ITC. Officials argued that the Bombardier-Delta deal provided commercial momentum for the C Series. However, in the nearly a year between Delta’s deal and the filing of the complaint, Bombardier failed to record any new sale in the US—or anywhere else in the world.
Talks do not make commercial momentum; sales do, and there simply wasn’t any commercial momentum generated by the Delta transaction for the period in question.
On the other hand, commercial momentum was clear for Boeing—away from the 737-700 and 7 MAX to its own product line in the larger 737-8.
There are plenty of news articles discussing the up-gauging of the 737-700 to the 737-800, but this one nicely suffices, from the Motley Fool in May 2015: Southwest Airlines dropped its remaining backlog for the -700 and chose the -800. Southwest at the time had Boeing’s largest backlog for the 737-700. It swapped 31 orders for the larger -800, and paid more money to do so. Why? The -800 had 32 more seats in WN’s configuration and operating costs were about the same.
The same issue exists with the 737-7.
At first, the 737-7 was merely a reengined 737-700. The airplane was the same size. Ditto for the MAX 8.
Southwest, which in 2011 (as it does today) has the world’s largest fleet of 737-700s, more than 500, ordered only 30 MAX 7s because it needs the small airplane for difficult airports with short runways or hot/high issues (the latter was discussed by Delta and Boeing at the DOC and ITC).
It left the need for more than 500 replacements for the -700 on the table. Southwest instead opted to order 170 of the larger 737-8 MAXes. It’s also ordered more than 200 737800s, none of which will need replacement for at least 15-20 years. Clearly the MAX 7 won’t be replacing the larger MAX 8.
Southwest’s trend is up.
Other than an order for five 7 MAXes from a start-up airline, the only other identified customer is Canada’s WestJet, which ordered 25. Two of these orders were swapped for the larger MAX 8.
It’s believed there are about 70 orders in total for the 7 MAX.
Market interest was so poor for the MAX 7 that in 2014, observers, including LNC doubted whether the 7 MAX would ever be built. Boeing itself called the 100-150 seat sector a Bermuda Triangle, where airplanes in this sector simply disappeared.
An analysis by LNC indicated the airplanes “disappeared” because for the most part they were derivatives, typically “shrinks,” whose economics were questionable.
Boeing itself began efforts to prompt Southwest and WestJet to up-gauge to the MAX 8, sources told LNC. But by February 2016, Boeing switched strategies and decided to support the MAX 7 after all.
Redesigning the MAX 7
Boeing announced at the 2016 Farnborough Air Show it was redesigning the 7 MAX. It added two rows (12 seats) and made it a straight-forward shrink of the MAX 8, rather than a more individual design.
Flight International reported something that, today, has relevancy to the Boeing trade complaint.
“Boeing does not expect the addition of up to 12 more seats in a typical two-class seating configuration to significantly drive new demand into the low end of the single-aisle sector. The move appears to be driven by Boeing’s attempt to satisfy new requirements imposed by the 737-7’s two largest customers: Southwest and WestJet,” Flight wrote.
“We have now assessed the market. The customers have said that a bigger airplane is something we would like with that range,” says Keith Leverkuhn, vice-president and general manager for the 737, the magazine wrote.
“The redesign also happens to answer Boeing Business Jets’ long-term search in the VIP market for an answer to the 7,500nm (13,900km) capability of the Gulfstream G650ER, which dwarfs the 6,100nm range of the 737-700-derived BBJ1. The launch of the BBJ Max 7 at the Farnborough air show fills that need,” the magazine wrote.
By Boeing’s own admission, the 737-7 MAX redesign is driven by niche requirements of its two principal customers and it won’t stimulate demand.
Boeing told the DOC and the ITC that it had no sales of the 7 MAX from 2013 through 2016, when Bombardier sold its airplane to Delta. Since then a Chinese airline announced a LOI for 10 and lessor Air Lease Corp. ordered a handful. The LOI apparently hasn’t been converted to a firm order, or at least identified as such. Officials blamed the existence of the C Series.
This is disingenuous.
The original 7 MAX design, as noted, was merely a reengine of the 737-700. In the same Flight International article cited above, Boeing officials noted.
“In some ways, the stretched 737-7 restores a balance lost with the arrival of the 737NG series in 1998. At that time, Boeing lengthened the 737-800 by two rows compared to the 737-400, but left the 737-700 identical in length to the 737-300, says Randy Tinseth, Boeing’s vice-president of marketing,” Flight wrote. “As much as airlines have prized fuel efficiency in new models, extra seats rank as a close runner up.”
More to the point, there were just 87 C Series firm worldwide and none in the US during the same period. Twenty of these were to Russia’s Ilyushin Finance Corp., five to Iraqi Airways and 17 to start-up carrier SaudiGulf. None of these is an “A” list customer. Forty of the remaining sales were to Australia’s Macquarie Airfinance, a lessor.
Boeing hasn’t sold a MAX 7 since 2013. Bombardier hadn’t sold a C Series in the US from 2008 to 2016. If the MAX 7 was such an attractive airplane, why weren’t there any sales absent any C Series sales during this period?
Boeing didn’t answer this question.
The original MAX 7 design had a two-class capacity of 126 and economics that were analyzed by many to be significantly worse than the CS300. Irrespective, the trend was for up-gauging to the 737-800 from the -700 and to the MAX 8 instead of the MAX 7.
Alaska Airlines, Aviation Capital Group, ILFC/AerCap, Air Lease Corp, and non-US customers bypassed the 737-700 and the MAX 7 (and the C Series) for the larger airplanes. American Airlines selected the A319ceo/neo instead of the 700/MAX 7 when it launched the MAX program in July 2011.
As noted, United ordered 65 737-700s in early 2016, but within months swapped these to the larger 737-800 and MAX 8.
The lack of interest by these customers in Boeing’s small airplane speaks to the lack of interest/market demand.
Boeing didn’t comment about this, either.
Other questions Boeing didn’t answer:
Boeing was maneuvered into launching the MAX program when Airbus was on the verge of capturing a huge order from American Airlines for the A320neo family. The 7 MAX and 9 MAX were ill-suited cheap (by R&D standards) derivatives, neither of which were well received in the market. (Nor was Airbus A319neo, competitor to the 7 MAX.)
To address the clear weakness of the 7 MAX and 9 MAX, Boeing by April 2016 was studying the stretch of both airplanes to make them more attractive.
Boeing’s problem was not the C Series: it was an outdated product strategy and reliance on derivatives of a fundamental 1960s aircraft design. Bombardier passed the small 737 with a clean-sheet design in a sector Boeing had long-since abandoned when it dropped the 737-600 and when the market moved beyond the 737-700. The 7 MAX simply was a plane whose time had passed.
The MAX 9 was no more competitive with the Airbus A321neo than the 737-900ER had been with A321ceo. Hence, the development of the 737-10.
Faced with an out-dated 737 product strategy and unwilling to invest in a new single-aisle airplane, Boeing resorts to trade complaints to block competitors with more advanced designs.