2019 Outlook: Boeing’s decision on NMA is the headline to watch

Discussion
NMA

The big event to watch is the widely expected program launch of the New Midmarket Aircraft, or NMA.

Concept rendering via Google images.

Already dubbed the 797 by everyone except Boeing, the business case still hasn’t been closed.

Given the price airlines and lessors say they want to pay for the airplane–$65m-$75m—it’s long been thought the business case will have to rely in part on aftermarket contracts with Boeing Global Services.

But JP Morgan, which met with Boeing CEO Dennis Muilenburg and CFO Greg Smith Dec. 4, reported that the NMA business case stand on its own.

Market intelligence tells LNC that Boeing is beginning to center on a price of about $80m. This is about midway between the Airbus A321LR ($60m-$65m) and the Boeing 787-8 ($115m).

The NMA concept continues to be a 225-270 seat airplane with ranges of 5,000nm and 4,500nm respectively. An ovoid fuselage shape is preferred, as is composite construction.

Boeing continues to study a metal fuselage alternative, since composite is more expensive, but the latter remains the more likely approach and it is what the supply chain is betting will be the material.

Disposing of composite waste has long been a problem, exacerbating with the creation of the 787. The toxic waste, hexavalent chromium (made famous in the movie Erin Brockovich), is a byproduct of composites.

Earlier this month, Boeing announced a partnership with ELG Carbon Fibre to recycle composite waste.

The announcement pointed to the 787 and 777X programs, but its relationship to the NMA is important. With plans to produce the NMA at a rate of between 20-30 airplanes a month, according to market intelligence, this is the prototype construction for the eventual replacement of the 737. Production of the 737 heads to 57/mo next year. Boeing is studying rates as high as 70/mo.

(Boeing is taking 787 production to 14/mo next year and is studying a rate of 20/mo, according to market intelligence.)

The inability to figure out how to achieve high rate composite production was cited in 2011 as the reason Boeing did not proceed with a composite replacement for the 737. (In reality, Airbus forced Boeing’s hand to proceed with the 737 MAX when it was on the cusp of winning a huge order from American Airlines, which had been buying exclusively from Boeing for more than a decade.)

Boeing claims the market demand for the Middle of the Market airplane the NMA is to serve is between 4,000 and 5,000 aircraft over 20 years. Airbus, Pratt & Whitney, Rolls-Royce, key suppliers and others (including Leeham Co.) see the market as closer to 2,300 aircraft.

With Airbus expected to capture 50% of the market, the challenge to close the business case is apparent, separate from the cost and price.

Furthermore, the launch of the 737-10 in 2017 and modifying the production of the aft fuselage of the 787-8 to bring its cost down encroaches on the MOM sector, squeezing demand for the NMA.

Additionally, with an expected program launch this year and an entry into service in 2025, Boeing’s own sales force worries about cannibalizing the MAX and the 787-8 demand.

These are just some of the many issues that remain to close the business case for the NMA.

Still, the market expects to see the Boeing board grant Authority to Offer the NMA for sale in March and a program launch at the Paris Air Show in June.

777X enters flight testing

Boeing new 777X enters flight testing next year.

Boeing 777-9. Source: Boeing.

The airplane is a derivative of the 777 Class, but with major improvements: a new, huge composite wing, new engines, bigger windows, cabin pressurization down to 6,000 ft (the same level as the 787) for greater passenger comfort, a slightly wider interior (by narrowing the space between the cabin walls and the fuselage), this is Boeing’s answer to the Airbus A350-1000.

But the market so far has been lukewarm to the airplane.

There hasn’t been an order for the airplane since June 2017 (as of this writing). Before that, the last order was in 2015. Sales have stalled at 326 and the customer concentration is huge: 72% of the orders are with the Big 3 Middle East airlines, Emirates (150), Qatar (60) and Etihad (25.) The latter wants to cancel some of the orders as it restructures. Etihad and Emirates already rescheduled some deliveries.

Airlines LNC has talked to say the 777-8, the ultra-long range model, is not economically attractive. (Boeing claims it has better operating costs than the A350-1000, but neither the airlines nor LNC’s analysis supports this claim.)

The 777-8 is a niche airplane for its ULR capability. Historically, ULR aircraft have sold fewer than 100 units. It carries fewer people than the A350-1000 and it’s a heavy airplane to have the structure for all the fuel that makes it a ULR aircraft.

The 777-8 isn’t expected to sell well.

Its largest sibling, the 777-9, nominally seats 425 passengers in three classes. This places it between the 777-300ER/A350-1000 and the giant Airbus A380. It’s slightly smaller than the all-but-discontinued 747-8I.

It’s a no man’s land for aircraft.

Boeing claims a market of 1,200 for the 777X-size airplane over 20 years. (This figure won’t be found in Boeing’s Current Market Outlook. It comes from a conference presentation years ago, a figure also presented by GE Aviation in one of its conference appearances, and from market intelligence inside Boeing.)

LNC believes the market is closer to 800, which is shared with the A350-1000 and continuing sales of the 777-300ER (though the latter is winding down).

Boeing sees a surge in demand beginning in 2020-21 as 777s and A340s age. But with continued market fragmentation with the proliferation of the 787, A350, A330neo and even the A321LR/XLR and 737-8, the need for the large airplane like the 777-9 diminishes.

Market fragmentation is precisely the phenomenon Boeing foresaw as the long-term demise of the Very Large Aircraft, mainly the A380, and one reason for the business case of the 787.

Continued market fragmentation is also a key element of the business case of the NMA.

This chips away at the business case for the 777-9, which LNC already believes one-third smaller than Boeing’s forecast.

All this aside, the flight testing for the 777X and its folding wingtip, novel for a passenger airplane, is an important step for Boeing.

EIS is planned for 2020 with Emirates Airline.

Boeing-Embraer JV

The proposed joint venture between Boeing and Embraer, in which the latter’s commercial operations will be spun off into a new company (NewCo) with Boeing, is expected to win all regulatory approvals by the end of 2019.

This has strong implications for Boeing. It’s pivotal for Embraer.

LNC has written about this several times in 2018. It will go into detail in the 2019 Outlook under Embraer Dec. 28.

737 MAX

There really aren’t any significant milestones next year for the 737 MAX program.

The 7 MAX and the 737-8 MAX 200 both enter service in 2019. These are sub-types that account for only a sliver of the nearly 4,500 MAX orders in backlog.

A mere 70 7 MAXes have been ordered by three airlines. Ryanair and VietJet are the only identified customers in the Ascend data base for the MAX 200, with 260 orders. “Unannounced” has another 113 orders.

There could be more for both types, since a large number of MAX sub-types in the backlog haven’t been identified.

But the EIS of these two sub-types is merely another step in the MAX program. The 10 MAX EIS is slated for 2020.

After this, it’s just a matter of churning out the airplanes and raising production rates.

767/KC-46A

First delivery of the KC-46A aerial refueling tanker was supposed to be in October.

Delayed several times already and a few billion dollars over budgets, the program has had its share of development problems. But delivery at long last should happen in early 2019.

The civilian 767 program continues as a freighter, based on the -300ER airframe.

With aging airplanes, even by freighter standards, in the global cargo airline fleet, the 767-300ERF is proving to have a healthy extended life. Boeing plans to boost the production rate of the KC-46/767F line next decade to 4/mo as the tanker program ramps up and cargo airplane orders increase.

This program isn’t sexy but with the tanker moving to delivery and full rate production, accompanied by new orders, the KC-46A will help keep the 767 line open for years to come. Whether the KC-46A becomes a positive cash contributor has yet to be seen.

The contract was awarded on a fixed price basis. So far, Boeing has taken big losses. Boeing sees the program as profitable over the life of the program, but it’s unclear how much of this will come from the airplane or the aftermarket.

The 767F, on the other hand, is healthy and profitable. FedEx and UPS have a continuing need for this airplane. Amazon’s Prime Air has long been rumored to be interested in placing a large order.

The 767F will never see sales similar to passenger airplanes, but with the line amortized, this program should be nicely profitable.

787

The only news of note for 2019 will be boosting production to 14/mo.

Boeing is studying rate 20, according to market intelligence. LNC hasn’t heard of a timeline and it may be little more than a Rate Readiness Assessment Boeing routinely does. But it also could be a step in understanding how the NMA could be produced at between 20-30 airplanes a month.

In any event, don’t expect anything dramatic in 2019 from this program.

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