Budget Airlines Get Top Billing From Aerospace Giants

When Boeing Co. was developing the latest iteration of its most popular jet, it devised a modified version with an extra emergency door that allowed it to add seven more seats.

The reason for the spin-off: to win an order from Ireland's Ryanair Holdings PLC.

The rollout of the 737 Max 8 jet, which Boeing aims to start delivering this month, shows how the aviation industry increasingly caters to the discount airlines that once relied heavily on second-hand planes.

The list of early buyers still includes stalwarts like American Airlines Group Inc. and low-fares pioneer Southwest Airlines Co. But some less-familiar names such as Indonesia's Lion Air and Norwegian Air Shuttle ASA have placed huge orders for Boeing's 737 Max jet, a single-aisle plane that analysts expect to generate as much as half the aerospace giant's profits over the next 25 years. The rival Airbus SE A320neo jet that started flying commercially last year is just as crucial to the European plane maker's profitability.

Boeing and Airbus have built up a record backlog of more than 11,000 orders for the workhorse short-haul jets over the past five years, and are sold out of most models through the end of the decade. With growing demand from discounters and established airlines seeking more efficient jets, plane makers say they are raising annual output of single-aisle jets from around 1,000 in 2016 to almost 1,300 by the end of the decade.

The manufacturers were initially dismissive of low-cost carriers but now embrace them, said Tony Fernandes, chief executive of budget carrier AirAsia Bhd, which has more than 400 Airbus jets on order. "We have seen a big difference from the manufacturers," he said.

The biggest new jet orders are now coming from budget carriers as their growth continues to outpace that of legacy carriers like American. Budget airlines' share of the global fleet reached 25% last year, rising from just 7% two decades ago.

The industry transformation started by Southwest in 1971 has changed airline strategy worldwide. Carriers used to buy multiple types of jets so they could tailor them to different routes. Now, they focus on one or two types to simplify their business, packing them with as many seats as possible to lower costs.

That has pushed aircraft makers to find a sweet spot for their new jets that satisfies airlines that are fixated on costs and less willing to split deals between more than one plane maker.

Building new jets requires billions of dollars in investment, and potential sales increasingly have become winner-take-all battles for Airbus and Boeing, said Klaus Heinemann, a veteran aviation financier who backed a number of discount carriers and recently stepped down as chairman of Finnair Oyj, Finland's flag carrier.

"It's a bigger gamble," said Mr. Heinemann. "If you get it wrong, you really get it wrong."

The discount airlines, for instance, took a central role in the design of the 737 Max, as well as the Airbus A320neo family, which both have new and more fuel-efficient engines and other features that make them cheaper to operate.

The discount carriers also are gravitating to the largest version of the jet they have selected as markets mature and passenger numbers increase. A third of the Boeing jets sold are configured with the maximum number of seats permitted by regulators, said Randy Tinseth, vice president of marketing at Boeing Commercial Airplanes.

Airbus began delivering its A320neo jetliner to customers last year, and with a head start it has so far outsold the Boeing Max jet. The competition has increased urgency at both companies to add more seats and cost-saving features.

Adding an extra emergency door allowed Boeing to boost the capacity of the 737 Max 8 jets offered to Ryanair to 197 seats from 189. Ryanair carried more than 100 million passengers last year, making it Europe's biggest airline by that measure.

Airbus has tinkered with the interior layout of its jets to fit more seats at the behest of the discounters, shrinking the size of bathrooms and galleys.

Kiran Rao, executive vice president for strategy and marketing at Airbus, said it also plans to introduce larger overhead bins. That would allow passengers to more easily fit carry-on bags and avoid airline staff having to spend time looking for space and moving some luggage into the hold when planes are packed.

Meanwhile, Boeing is in talks with airlines, including big budget carriers, about an even longer version of its 737, which would seat around 230 passengers.

But the discounters' big orders and pursuit of simpler designs to reduce maintenance costs is putting pressure on prices, said Mark Hiller, chief executive of Recaro Aircraft Seating GmbH & Co., one of the world's biggest aircraft seat makers. He said budget airlines want skinnier and lighter seats that take up less space and save fuel, but are also more durable to withstand the beating when passengers get on and off planes.

While the discounters look to cut costs wherever they can, including by installing seats that don't recline and windows without shades, they are also willing to invest more upfront than some legacy rivals to secure more efficient aircraft operations.

"They may actually buy more equipment than a regular carrier," said Kelly Ortberg, chief executive of Rockwell Collins Inc, which makes avionic systems and recently bought B/E Aerospace Inc. a big maker of aircraft interior fittings.

Write to Doug Cameron at doug.cameron@wsj.com and Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

May 13, 2017 07:14 ET (11:14 GMT)