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In the Spotlight: The Airbus A321XLR

In this edition of mba Aviation’s Insight Series, Ryan Cross, Analyst – Market Intelligence & Innovation, analyzes the appeal of the Airbus A321XLR to Operators.

Key Concepts:

  • Airbus’ A321XLR program builds on the success of the A321neo to bring superior fuel efficiency and narrowbody economics to intercontinental routes.
  • The XLR aircraft offers network carriers an appropriate replacement for their aging Boeing 757-200 fleets.
  • By quickly closing deals with major airlines and leasing companies for the XLR, Airbus has raised pressure on the viability of Boeing’s NMA concept.

First to Market Advantage

Airbus scored a victory with the timing of its launch of the XLR program.  Since it quickly locked down a healthy orderbook from an operationally-diverse range of airline customers, it proved the market’s appetite for a longer-ranger narrowbody aircraft with current engine technology.  The wise decision to launch the XLR dealt a blow to Boeing’s product development strategy.  Boeing was sidetracked for most of 2019 by the grounding of the 737 MAX program.  As it labors over the safe return of the MAX to service, it will probably not make a counterpunch in the first half of 2020.

For several years, Boeing executives have pondered whether to commit to the full development of the New Midsize Aircraft (NMA).  A number of loyal Boeing customers are clamoring for a modern replacement for midsize 757 and 767 aircraft.  Nevertheless, the American airframer must now reevaluate the prospects of its NMA; several would-be customers have already defected to its European counterpart.

At the start of the Paris Air Show last June, Air Lease Corporation (ALC) placed the first public order for the XLR.  John Plueger, the leasing company’s chief executive officer, described why the XLR might could squash interest in the NMA for prospective operators: “We think that [the XLR] addresses the smaller size of what Boeing envisions to be the NMA (a larger and smaller version).  It remains to be seen as to market acceptance and economic viability of that program in terms of being able to develop it and deliver it to the airlines at a price point which is compelling…  We will assess, and we are talking with Boeing as they continue to look at the NMA.” More recently, Plueger stated that the NMA’s development prospects had “diminished significantly” because of the broad range of difficulties weighing Boeing down.

Following ALC’s orderbook jump-start with 27 aircraft, GECAS placed an order for 20 aircraft in November.  By winning orders from a duo of prominent lessors plus a pair of market-making American network carriers, Airbus demonstrated the XLR’s appeal among top-tier customer base.

Range Capabilities

The XLR offers 15% greater range than the prior-generation A321LR variant, which in turn surpassed the range of the A321neo by 15%.  When configured with a low-density cabin with lie-flat seats for business class passengers, the aircraft’s range will stretch to 8,700 KM; its flight time will exceed nine hours.  The aircraft offers a 1,500 KM increase over the 757-200 and 1,300 KM beyond the LR variant. From New York, as an example, this means that the XLR can operate deep into South America and far into Eastern Europe.

Conclusions

Reflecting on the first phase of the XLR program, Airbus should take particular pride in the XLR orders it received from American Airlines and United Airlines.  Both operators fly large fleets of 757 and 767 aircraft which will reach the end of their economic life in the years ahead.  By closing those deals early in the life of the XLR program, Airbus elbowed out Boeing from orders from these market-makers.  Among the three American legacy carriers, only Delta Air Lines remains uncommitted to a midsize aircraft replacement order.  The Atlanta-based carrier will eventually need to replace up to 200 midsize aircraft.

Airbus will surely accumulate more orders for the XLR before 2023, when it intends to deliver the aircraft for commercial service. Whether or not the NMA comes to market, Airbus will continue to lure operators to the XLR with an enticing combination of narrowbody cabin capacity economics, intercontinental range, and superior fuel efficiency thanks to modern engine technology.

2018 Farnborough Airshow Results

The 2018 Farnborough Airshow generated impressive results for the commercial sector as both major manufacturers Boeing and Airbus announced a healthy number of new orders and commitments. At the end of the week, Boeing has a slight edge over Airbus with a total of 673 orders and commitments compared with Airbus’ 431. While both the aviation rivals had their share of successes at Farnborough, they will continue to face challenges to keep up with market demand, including engine productivity and overlying trade wars between the United States and China.

An Aviation Rivalry in Flux

Ten years ago, Airbus and Boeing were regularly neck and neck when it came to the backlog of firm orders. However, for the last five years, Airbus has managed to receive more firm orders than its rival, with an aircraft backlog reaching a surplus of 7,000 compared with Boeing’s 6,000 aircraft backlog, at the end of last year. Despite having the backlog advantage, Boeing is slowly increasing its numbers and threatening to bump Airbus from the leading backlog position.

With high hopes for the future, both manufacturers have stated that they intend to reach a set monthly production rate for their leading narrowbody aircraft by the end of next year. Airbus hopes for 63 aircraft monthly for their A320 Family, while Boeing plans to produce 57 per month for their 737. The planned increase in output was announced after both companies recognized the necessity for higher production rates in order to avoid losing their current orders. The biggest challenge for both entities will be making sure the engine manufacturers are able to fulfill their own production goals. Through all of this, the influx of orders and commitments prove that the market is still craving narrowbody aircraft, just as long as Boeing and Airbus can keep up with the demand.

Farnborough Orders & Results

Airbus began the week leading up to the Farnborough Airshow with a year to date total of 321 orders. Before the week closed, the European manufacturer added 93 firm orders and 338 memorandums of understanding (MoUs), increasing total orders and commitments to 431; by comparison, 105 more than the Paris Air Show the previous year. Forty-two of the commitments are for both models of the new A330neo. Another notable agreement came from JetBlue Founder, David Neeleman, who also signed an MoU for 60 A220-300s which he plans to add to a new U.S. carrier. Neeleman’s agreement came shortly after JetBlue placed the exact same order. Through the success of orders flowing in, Airbus Chief Commercial Officer Eric Schulz believes the results show a “strong market appetite for all [their] leading aircraft product families…” covering all models except for their A380, which Schulz believes is now breaking into the second-hand market.

While Airbus had a strong showing in Farnborough this year, Boeing’s time at the airshow was also well spent. Coming in with year to date orders reaching 460 aircraft, they wrapped up their week with a total of 673 orders and commitments, which was 242 more than their main competitor and 102 more than their own numbers at the Paris Air Show in 2017. Seventy-three of those orders and commitments were for their freighter aircraft. These total results cash in at $100 billion, $2.1 billion of which is dedicated to commercial and defense services, while the remaining account is for commercial aircraft. The success of the week, according to Boeing, shows “resurgence in demand for freighters and strong order activity for the 737 MAX and 787 passenger airlines.” Two new customers signed on for the MAX 10 and the 787 alone will soon reach more than 1,400 orders once the commitments from this air show are solidified.

 


Source: Cargo Facts

Evidence of Trade War Impact

An important item to note as the 2018 Farnborough Airshow came to a close is that of the total 1,104 orders and commitments, just over 29% of them were placed by unidentified customers. The first two days alone saw undisclosed customers signing for 180 A320neo Family aircraft, starting the show off on a high note for Airbus. According to Cargo Facts, it is believed that a good portion of those orders were placed by Chinese companies intentionally to mask their moves due to the growing trade war between their country and the United States.

The trade war began after the US tariffed $34 billion worth of items from China, with the looming threat of $500 billion in tariffs. Firing back, China placed tariffs aimed at specific regions throughout the States, especially hitting the Midwest. According to the Washington Post, the country at risk for more economic loss is China, as 20% of their exports are sent to the US. However, China has the ability to withstand more in the coming year due to their political system having an immensely different chain of command compared to the US. This ongoing trade war seems to be the primary reason for an uptick in unidentified customers at the Farnborough Airshow.

The implications of this trade war threaten the aviation industry in the States as well. For example, the 25% tariff on aircraft weighing anywhere between 33,000-99,000lbs greatly affects Boeing’s 737s, which is the most common aircraft in that spectrum. Additionally, 20% of Boeing’s order book is comprised of orders from Chinese organizations, which is where the anonymity of this year’s airshow comes into play. If the trade war continues, the industry could see a noticeable hit to aircraft manufacturer’s profitability, particularly in Boeing’s case.

Future Outlook

Overall, the increase in orders and commitments at this year’s Farnborough Airshow demonstrates the strength of the manufacturers and the positive outlook organizations have for the coming years. While Airbus and Boeing both had strong showings at the event to increase their aircraft backlog, their potential to reach their own productivity goals and fulfill orders remains tied to the engine manufacturers’ ability to meet the demand. Lastly, both organizations must look to overcome the market challenges presented by the US-China trade war.

China’s Trump Card: The C919

The COMAC C919

China has long been recognized as an engine for growth in the aviation industry.  Its airlines are rapidly expanding and demand for air travel continues to skyrocket, for both domestic and international trips.  Not wanting to cede the entirety of the increased demand for aircraft to Airbus and Boeing, the Chinese Government launched The Commercial Aircraft Corporation of China (COMAC) in 2008.  COMAC has since launched the C919, a 168 seat aircraft which looks to break the Airbus and Boeing duopoly.  The Chinese are not the first to attempt to break into the narrowbody passenger aircraft market.  Some have been successful, like Airbus with the launch of the A320 in the late 1980s, while others have failed, like the Dassault Mercure in the mid 1970s. While the C919 will likely not reach the heights of the A320, the aircraft has the potential to be carried to moderate success by the domestic Chinese market.

Operating Characteristics

Although the C919 has the performance capabilities to meet the needs of virtually all of China’s domestic carriers, it cannot match its western counterparts particularly in regards to range. The C919 has a max payload range of only 1,350 nautical miles (nm), which is 1,200 nm less than the 737 MAX 8 and 650 nm less than the 737-800. When both aircraft are configured to hold 168 passengers, the C919 can travel 2,430nm, while the 737-800 can travel 3,100 nautical miles, assuming an average passenger weight of 190 pounds (lbs). This range differential is accounted by the C919 having an MTOW of 165,565 lbs, nearly 10,000 lbs lighter than the 737-800, but having an empty weight that is 2,000 lbs heavier than the 737-800.

While the Boeing 737 aircraft may have the range advantage over the C919, an analysis of the schedule of Chinese operators reveals that the C919 is well suited to domestic Chinese operations. mba performed an analysis of all Chinese domestic routes currently operated by the 737-800 or A320-200 and flown at least weekly.  The results showed that the C919 would likely be able to serve all of these routes, assuming the aircraft is operated in its standard 168 seat configuration. Depending on the C919’s take-off performance, the aircraft would likely take a seat penalty at some of China’s higher elevation airports such as Ürümqi. Additionally, the C919 as well as the 737-800 and A320-200 cannot operate in cities such as Lhasa, which has an elevation of over 11,000 ft. Due to these observations, Chinese operators would most likely not be concerned about the C919’s range limitations. COMAC official literature states that the company will launch a C919ER, which will bring the aircraft’s performance closer to that of the 737-800 and increase COMAC’s presence in the market. However, no information has been released regarding the variant’s launch date or how COMAC will achieve the performance upgrade.

The C919’s suitability for Chinese operations is further explained by China’s unique geography for a country of its size. Nearly all of China’s population centers hug its east coast, while the western part of the country is mostly empty, save for a few large cities in the Xinjiang province in the northwest of the country.  There are also several other countries whose geographies are similar to China’s in this regard, which would allow the C919 to operate successfully. Brazil, India, and most countries in South East Asia would all be suitable markets for the aircraft, but major airlines in these regions have substantial orders for A320neos or 737 MAX 8s. This market saturation for narrowbody aircraft makes it unlikely that carriers in these regions will place C919 orders.

Another disadvantage the C919 has versus its western counterparts is that it has a maximum seating capacity of only 174 seats. The 737-800 and A320-200 currently have a maximum seating capacity of 189 seats.  This seating limitation will be less attractive to low-cost carriers, which operate narrowbody aircraft at maximum capacity. The ideal customer profile for the C919 is a Chinese full-service carrier, which is reflected in the type’s order book, from which Chinese low cost carriers Spring Airlines and Lucky Air are notably absent.

Certification

COMAC faces an arduous road attaining type certification for the C919.  It took twelve years for COMAC’s first aircraft, the ARJ21, to attain type certification from the Civil Aviation Administration of China (CAAC). The C919 is expected to attain type certification from CAAC in 2020, which like the ARJ21, will be twelve years after the program’s launch. Another hurdle facing the C919 is type certification by western regulators such as the Federal Aviation Administration (FAA) in the United States and the European Aviation Safety Agency (EASA) in the EU. COMAC has applied with EASA for type certification for the C919, and in November 2017, the Chinese aviation regulator, the Civil Aviation Administration of China (CAAC) signed an agreement with the FAA which grants CAAC “comprehensive peer recognition” as an aerospace supplier.  All Chinese aircraft would still be subject to certification review with the FAA, but the agreement does open the door to further cooperation between the FAA and CAAC in the future.  These developments show that western certification of the C919 is not as far-fetched as believed when the program was launched. However, even if western type certification is received, it does not necessarily mean the aircraft will be purchased by western operators or lessors.

After Market Support

Potentially limited aftermarket support is another issue that may cause many non-Chinese operators to balk at purchasing the C919. It is unlikely that COMAC will be able to develop an efficient maintenance and spare parts distribution network for the aircraft.  Interjet, the sole North American operator of the Russian built Sukhoi Superjet, has had operational difficulties caused by Sukhoi’s similar supply chain issues. Engine maintenance delays have forced the grounding of several of Interjet’s Superjet aircraft, and some of the grounded aircraft are being cannibalized to keep the rest of the fleet flying.  Even though the Superjet’s sole engine option is a western built engine (the French built Safran PowerJet SaM146) the engine’s only application is the Superjet, limiting the amount of spares available. Should non-Chinese operators adopt the C919 they would likely face similar challenges as Interjet.  The C919’s saving grace in this area is that a large portion of the C919’s components are western built.  The APU is a Honeywell HGT750, and its engines, CFM LEAP-1C will likely have significant parts commonality with other CFM LEAP engines. However, this will probably not be enough to convince operators that maintenance can be completed on C919 aircraft in a timely and affordable manner.

New Entrant Competition and Pricing

Even if the C919 had performance figures equivalent to current generation Boeing and Airbus aircraft, it would still have a hard time securing any orders outside of its home market. Operators are often unwilling to be early adopters of an unproven manufacturer’s aircraft as seen in the order book for Russian built Irkut MC-21 and Sukhoi Superjet.  The MC-21 has performance figures much closer to the 737 MAX 8 than does the C919, but it has only managed to secure 205 orders, with Egyptian operator Cairo Aviation being the only customer outside of the Commonwealth of Independent States (CIS). Sukhoi has had similar challenges marketing the Superjet, with only two commercial operators of the aircraft (Mexico’s Interjet and Ireland’s CityJet) located outside of the CIS. Commercial challenges experienced by Russian manufacturers show that there is an uphill battle ahead for COMAC’s marketing team when they attempt to sell the C919 to non-Chinese operators. Granted, once all 205 MC-21 orders are filled, the aircraft will make up roughly 40% of all narrowbody aircraft operating for Russian airlines. Should the C919 achieve similar home market penetration, COMAC will receive around 1,000 orders for the aircraft.

Pricing of the C919 is difficult to pinpoint as no commercial terms have been agreed upon as of December 2017.  All orders currently consist of a “customer agreement” in which pricing and delivery schedules have not been discussed.  List price of the C919 has not been announced by the manufacturer although it is believed to be around $68.4 million.  If the same discount that manufacturers typically give to the A320-200 and 737-800 list prices is applied, the purchase price of a new C919 would be somewhere between $28.7 million and $32.1 million, placing the aircraft at around the same price as a new Embraer E-190. This pricing is a bargain for an aircraft of the C919’s size and the aircraft may win a few customers on price alone.  The Chinese Government is also likely to subsidize the purchase of the C919 for Chinese operators, increasing the likelihood Chinese airlines would select the aircraft over its western competitors.

Tariff Effects

On April 4th 2018, the Chinese government announced a 25% tariff on aircraft imported from the United States of America with an empty weight between 15,000 and 45,000 kilograms.  It is unknown how the Chinese will define empty weight, which is key to assessing the impact of the proposed tariff. The 737 MAX 8 has an operating empty weight of 45,070 kilograms, which would put it just above the tariff cut-off weight.  However, if the Chinese government defines empty weight as “manufacturer’s empty weight” which is the weight of solely the aircraft structure, the 737 MAX 8 will undoubtedly be subject to the proposed tariff. It is important to note that the tariff on aircraft is not likely to be implemented in the immediate future, but should it go into effect there would be significant consequences for both the Chinese and American aviation industries. The C919 would undoubtedly become more attractive to Chinese operators as the pricing versus the 737 MAX 8 would only become more competitive.  There are currently only 138 orders for the 737 MAX 8 from Chinese operators, but there are 1,079 737-800s currently operating in China that will need to be replaced at some point in the future.  Since Boeing would no longer be able to compete in this segment, COMAC and Airbus would undoubtedly look to fill this demand.  However, the 737-800 fleet in China is very young, with an average age of just under five years, so the tariffs would most likely be repealed once the fleet needs replacing in significant numbers.  The tariffs would also make it difficult in the short term for American operators to move used 737NGs, as the Chinese secondary market would effectively be blocked.  Should the tariff go into effect, both COMAC and Airbus could be winners, and the C919 program may get a much needed boost.

Looking Ahead

The C919 is a noble effort by the fledgling Chinese aviation industry. The aircraft is more than capable of serving Chinese airlines in their domestic operations, which is a sizeable and growing market. This combined with bargain pricing and Chinese government assistance may drive Chinese operators to the C919, cutting into a small yet noteworthy portion of both Boeing’s and Airbus’ Chinese business. Outside of China, the performance limitations of the aircraft will hinder the sale of the C919 and therefore COMAC does not currently pose a threat to the Boeing-Airbus duopoly. However, COMAC will certainly learn from its experience producing the C919 and will certainly produce more capable aircraft in the future. As a result, both Boeing and Airbus should take the Chinese aerospace industry seriously and implement strategies to counter their new competition.

Boeing MAX v Airbus Neo: An Evolving Rivalry

When Airbus launched the A320 to compete against the 737 family of aircraft in 1984, it was competing against a mature company with a distinct first-mover advantage. It took Airbus a good number of years to catch up to Boeing’s order books, cementing both the A320 and the 737 as two of the most successful aircraft of all time, in terms of orders.  With the advent of a new generation of aircraft, we have seen a slight advantage of one manufacturer moving ahead, though it is still early days for both aircraft families. As of November 2017, Airbus commanded a healthy lead with 5,254 neos on order compared to 4,065 MAXs on order and a first-mover advantage in the 200-240 seat segment with the A321neo edging out over the MAX9 and MAX10.

Since the launch of the 737 Next Generation (NG) and the A320ceo family, the preference in the narrowbody market has shifted and resulted in the changes culminating in the MAX and neo family of aircraft. The most distinctive shifts we have observed are the general upgauging of the aircraft and a greater sensitivity to fuel prices. The upgauging of aircraft has resulted in every version of the MAX being built larger than its predecessor. Additionally, we see an upward shift in market share of the 200-240 seat aircraft in the narrowbody market. The A321neo has increased its market share to 28% from the 22% the A321ceo held in the ceo family and the MAX 9 and MAX 10 aircraft command 14% of total MAX orders compared to 8% the 737-900 and 900ER held with the NG family.

Order Book Review

Source: mba REDBOOK STAR Fleet November 2017, Boeing.com, Airbus.com

The Impact of Rapid Economic Growth

A large part of this upgauging can be attributed to the rapid economic growth in Asia. IATA estimates that the region will grow 4.7% annually, with China set to become the world’s largest aviation market by 2024 and India displacing the UK as the third largest market in 2025. While the Asian carriers have been riding on the wave of economic growth in the region, the infrastructure has been struggling to cope with the surge in demand and is lagging behind the growth of the carriers it’s trying support. To overcome these infrastructure limitations, Asian carriers are relying on larger aircraft to fly higher-density routes. A great example of this is Vietnam Airlines which has seen strong growth over the last few years but has been limited by infrastructure growth in the region. The airline operates a modern mix fleet with the smallest aircraft outside of its turboprop fleet being the A321-200 with the intention to lease 18 A321neos from Air Lease Corp and Aviation Capital Group. With the MAX and neo, we see that Airbus has had greater success in Asia, with orders in Asia accounting for 46% of the neo backlog. Boeing has taken a more balanced approach with the bulk of its MAX orders concentrated in North America at 33% and Asia coming in a close second at 30%.

Regional Overview of the MAX/neo Order Books

Source: mba REDBOOK STAR Fleet November 2017, Boeing.com, Airbus.com

Comparing Cost Advantages

The general upgauging of the narrowbody segment has worked in Airbus’ favor allowing the A321neo to pull ahead of the 737 MAX 10 due to its first-mover advantage and seat cost advantage. However, as we move down the product line we see a reversal with the MAX having a seat cost advantage over its Airbus counterpart, with the MAX 8 and MAX 7 having a $20k seat cost advantage over the A320neo and A319neo respectively. While this may intensify the competition between the MAX 8 and A320neo, the lower seat cost of the MAX 7 may come at a cost to Boeing. The lower cost per seat on the MAX 7 is a result of increasing the capacity of the aircraft which may take away some of the advantages the 737-700 gave to its customers.  The segment in which the A319 and 737-700 operate is somewhat niche compared to the larger variants, where operators care more about “right-sizing” and operating an aircraft within a narrower band of operating economics in which the aircraft is viable.  Although the bulk of the sales are still expected to come from the A320neo and MAX 8, the lower end of the narrowbody segment where the A319 and 737-700 currently operate should not be neglected.  With over 1,440 A319s and 1,125 737-700s in operation; and the average age of the fleet being 11.76 years and 11.8 years respectively, the 100-150 seat market may prove to be a pivotal market to capture even if the orders are solely for replacement rather than growth. With the new family of E2 jets by Embraer and the marketing efforts of Airbus behind the Bombardier CSeries, we could see a dilution of market share and an end to the long standing duopoly in the segment.

Cost per Seat Based on mba’s Market Values as of 4Q17

Source: mba REDBOOK 4Q17

 

In most other aspects, the MAX and the neo share very similar operating economics. The projected maintenance cost for both the MAX and the neo are comparable in the mid to long run. However, due to a longer interval for the first heavy check on the MAX, the A320neo has a higher maintenance cost for the first seven years. The maintenance cost over time for the neo is more gradual with cost increasing steadily over time. With the MAX, we see a spike at the 9 year mark as the first heavy check comes due followed shortly by a landing gear overhaul which runs on a shorter interval compared to the neo. Past this point, both aircraft have very similar maintenance cost as the MAX returns to a 6 year heavy check interval with the exception being the landing gear check intervals which is 10 years for the max and 12 years for the neo. This results in a higher cost for the MAX at the end of 20 years but will even out at the 24 year mark once the neo is due for the second landing gear overhaul. The lower cost observed with the MAX 9 compared to the A321neo is mostly attributed to the same engine variant being used on the MAX 9 as the MAX 8 while the A321neo’s maintenance cost is valued using the more powerful LEAP-1A32 and PW1133G which has a higher maintenance cost. The spike in maintenance cost at 15 years for the GTF powered A321 is due to its second engine shop visit coming due before the LEAP powered A321, but the cost eventually evens out again at the 20 year mark with the GTF A321neo coming out slightly more favorable.

Scheduled Maintenance Costs Accumulated Over the Life of the Aircraft

Source: mba aircraft maintenance cost database[1]

In addition, if the economic value of the current generation of aircraft is any indication of the value of the MAX and neo, both aircraft will have a very similar residual value curve with the MAX slightly ahead in all but the 100-150 seat segment where it closely trails the A319.

Average Historical Market Value Depreciation

Source: mba REDBOOK Historical Aircraft Values

Fulfilling Engine Expectations

As previously mentioned, an observed change in the market is that operators are becoming far more sensitive to fuel prices compared to 30 years ago. With the current fuel prices hovering around US$50.00 a barrel, the need for fuel efficient aircraft is dampened, however it was due to a spike in fuel prices that led to the inception of the re-engined aircraft families currently entering the market.  A major draw of the MAX and neo is the promised fuel burn advantage over current generation aircraft. At the core of the advertised double digit fuel burn advantage touted by both plane makers is the new generation of engines.

On the power-plant manufacturing side we see little change as the two existing incumbent OEMs, Pratt & Whitney (P&W) and CFM, continue to be the majority providers of engines in the 75-240 seat segment. Outside of the V2500 engines, most of the other P&W powered aircraft are nearing retirement, as such P&W has hedged the company’s future in the commercial aviation market on the success of the geared turbofan. So far, both the CFM LEAP and PW1100G have delivered on its promise of lower fuel burn, lower life-cycle maintenance cost and good dispatch reliability. However, the introduction of the new generation of engines has not been without hiccups. The PW1100G had two main issues that plagued its entry into service, namely a fault with an air seal and a combustor issue that P&W claims is isolated to aircraft operating in India. To compensate, P&W has had to divert some of the engines to a spare pool.  This combined with supply-chain shortages has resulted in a failure to meet its scheduled deliveries.

At the same time, CFM’s LEAP engines have not had a trouble free introduction into service. During a borescope inspection, several LEAP engines were found to have premature deterioration of the ceramic matrix composite coating on the turbine module. While both engine manufacturers have promised fixes for the respective issues, there has been a slight order advantage for CFM engines which have received around half of the neo orders and is the sole engine provider for the MAX.

The low fuel price environment and abundance of capital looking for yield in the aviation sector has resulted in a slightly tempered response to the new generation of aircraft and lease rate ranges have been wide.  The sale-lease-back market has seen rates for A320neo and MAXs in the low $300k’s in some cases, trading closer to where one would expect last off the line ceos and NGs, but also up to $400k in others, with many lease rates falling in between. The 25% swing in lease rates can be attributed to other lease parameters such as the lessee’s credit, term, return conditions and multiple aircraft placement deals; however it also shows a fragmented market with some operators unwilling to pay a premium during low fuel prices, and lessors have been willing to bend to gain market share, and others desperate for new aircraft to support fleet growth. Keeping this in mind, it is important to note that the lower rates are more reflective of the state of the capital markets and not reflective of the technical performance of the future generation aircraft.

In Summary

Despite the engine setbacks during the initial entry into service and the entrant of new competitors, the MAX and neo families of aircraft look poised to become economic successes for Airbus and Boeing. Although there have been initial leaders in the segment so far, it will not be surprising to see the competitive landscape re-adjust itself to look like the current generation of aircraft with a few new partnerships in the mix.

 

[1] Maintenance cost projected using average utilization of 737-800 and A320ceo and current estimated maintenance cost. Maintenance costs and intervals likely to change as engines mature and additional in service experience is accumulated. PW1100G excludes gearbox overhaul costs.

Airbus’s Acquisition of the CSeries Program

Airbus’ recent acquisition of Bombardier’s CSeries program has the potential to reinvigorate demand in the market for 100-150 seat aircraft.  While the CSeries is arguably the most capable aircraft of its size on the market today, Bombardier experienced marketing challenges, an effort further hamstrung by punitive tariffs levied on the CSeries by the United States Department of Commerce.

However, Airbus’ partial acquisition of the program will likely give the CSeries the marketing boost the program desperately needs and potentially allow the aircraft to evade the 300% import tariff by virtue of constructing aircraft destined for the United States in Airbus’ Mobile Alabama factory.  It has yet to be determined if Airbus will have success marketing the CSeries, but there are promising opportunities for the aircraft amidst the challenges.

Since the introduction of the 737NG, the market for 100-150 seat aircraft has seen a mix of successes and disappointments, with the smallest variants suffering the most in terms of orders. Airbus’s A318 and Boeing’s 737-600 failed to gain traction in the market, with only 129 orders received between the two. While Boeing’s 125 seat 717 was mildly more successful with 156 orders, the aircraft still fell far behind the 2,693 total orders received by the 737-700 and A319 at the top end of the 100-150 seat market.

However, even though the A319 and 737-700 make up nearly 80.0% of active fleet in this market segment, only 100 orders have been placed for the re-engined replacement aircraft. Furthermore, looking at the next generation of aircraft coming to the market, only 14.9% of orders will cover replacements for the 3,600+ 100-150 aircraft currently still in service. Even though the CSeries has outsold the MAX 7 and A319neo 7:1, there are significant opportunities for more orders from operators looking to replace aging fleets.

In addition to marketing opportunities, Airbus’s intervention may also help make the CSeries more affordable by reducing production costs.  While the CSeries offers competitive fuel burn advantages and performance capability, the high production costs hindered initial sales campaigns which did not allow Bombardier to market the aircraft at a competitive price, prior to the Delta deal.  Looking at the seat cost comparison in the chart below, the CS300 will likely be able to offer the lowest seat cost for small narrowbodies considering Boeing’s recent capacity increase to 172 on the 737 MAX 7 arguably causes the aircraft to fall out of this market segment.

Despite the optimistic possibilities the CSeries now has going for it, the question remains where and to who Airbus can sell the CSeries.  The largest operators of the 737-700, Southwest Airlines, and the A319, EasyJet, are both operators with exclusively 737 and A320 fleets, respectively, and unlikely to incorporate a new narrowbody type into their proven successful fleet models.  However, both aircraft types are popular with legacy and low-cost carriers alike and nearly 65.0% of the active A319 fleet, or nearly 900 aircraft, and 38.0% of the 737-700 fleet, or roughly 400 aircraft, are operating for airlines that have aircraft from multiple manufacturers. In addition, operators like JetBlue who currently operate regional jets but are looking for a more economical aircraft may find reason to switch to the CSeries aircraft as the program will be supported by the manufacturer of their remaining fleet.  If Airbus is able to successfully market the aircraft and maintain its majority market share of the sector, the manufacturer could be looking at sales of nearly 1,000 aircraft, breathing life into a previously struggling program.