Has Boeing Been Too Late in Reengineering The 737?

By Markets Fool.com

With demand for narrow-body commercial airplanes going through the roof, planemakers Boeing and Airbus have come under pressure in the last few years to build new-age single-aisle planes. The twist in the tale came when in December 2010 Airbus announced that instead of a clean slate design it will fit new engines in its current generation A320 narrow-body aircraft family. The brilliance of this move did not go un-noticed and Boeing made a similar announcement for its own best-selling 737 series, eight months later.

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But by then Airbus had already secured a lead in terms of new orders over Boeing. How costly will this lead prove for Boeing? Is reengineering actually the best solution? What are the dynamics between the next generation A320s and 737s? Let's find out.

A crucial lead
In its latest market outlook, Boeing predicts that airlines will take deliveries of more than 25,000 single-aisle planes valued at $2.5 trillion. A look at the current backlogs of Boeing and Airbus indicates that already 9,050 or 36% of the future narrow-body planes have been ordered. As investors can see from the chart below, Airbus has secured a small lead over Boeing in the future market.

Source: Boeing and Airbus, chart by author.

At this point, it will be interesting to see how much of Airbus' success is owing to its next generation narrow-body dubbed as A320 neo and how it compares with Boeing. Neo stands for 'New Engine Option' and Airbus has decided to fit its A320 family of airplanes with CFM International's LEAP-1A andPratt & Whitney's PurePower PW1100G-JM engines. The A320 neo is 95% the same plane but with 20% better fuel efficiency and reduced emissions than the older version. In turn, Boeing has opted for CFM International's LEAP-1B engines to reengineer its 737 series planes.The new range is known as 737 Max and Boeing claims that it's 4% more fuel efficient than the A320 neo.

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Source: Boeing and Airbus, chart by author.

The charts show that for both the plane makers, the majority of pending orders are for next generation planes. But, the A320 neo forms a bigger portion of Airbus' narrow-body backlog than 737 Max's share in Boeing's backlog. So, the A320 neo has played a big role in Airbus' current success and has turned out to be the world's fastest-selling aircraft. Airbus' current lead in narrow-body orders can worry Boeing and its investors if the French company continues to maintain or widen it.

Was reengineering the right move?
Airbus originally wanted to make a clean slate design, but shelved the plan in 2010. With huge expenditures on built-from-scratch planes like A380, which is yet to break even, or the brand new A350, it needed a more cost-effective solution. A built-from-scratch plane would have cost Airbus $10 billion and above, while the reengineered program cost has been $1.3 billion.

Similarly, Boeing is having a tough time with cost overruns on its Dreamliner 787 program. Even after 210 deliveries, the all-new design plane is yet to book profit. Deferred costs on the program have exceeded $25 billion and left Boeing hard pressed for cash.

Both the companies wanted to maintain the demand momentum without having to invest heavily on a cleanslate design. The reengineering option fit the bill perfectly. But, eventually, Boeing and Airbus would need new planes as the life of the current aircraft cannot be extended beyond a point.

Boeing has already announced an all-new model to replace the 737 Max by 2030. So for Airbus, the question is "when?" rather than "will it?" Airbus chief commercial officer John Leahy has said that new technologies that the company is developing are expected to be ready by the middle of the next decade, and then it would decide about a completely new design.

Photo taken byThomas Becker via Flickr.

Current dynamics
The aero majors are benefiting from reengineering as evidenced from their fat order books, and both have decided to augment production Airbus will increase monthly production of A320 to 46 from the current rate of 42, while Boeing will augment 737 output to 52 from 42 today.

But, Airbus' decision to reengineer the A320 family has got the better of Boeing.The A320 neo will take to the skies in late 2015 with Qatar Airways as its launch customer, while Boeing customers will have to wait for a couple of more years before the 737 enters service in 2017. Airbus has got an early mover advantage over the 737 Max as reflected in the total orders tally (see chart 2).

In order to catch up with the A320neo, Boeing's offering more than an engine upgrade and better fuel efficiency. According toAirline Consultants.Com, the 737 Max will weigh less on a per seat basis and offer several airframe improvements. But airlines are still going for more A320neos. In 2014, airline operators placed firm orders for 752 A320 neo and 424 737 Max.

Boeing needs to gather greater number of 737 Max orders for it to maintain its competitive position in the future narrow-body market. If that doesn't happen, it could create pressure on the stock.

The article Has Boeing Been Too Late in Reengineering The 737? originally appeared on Fool.com.

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