Opinion: A Boeing Death Spiral? Think Again.
The fates of Airbus and Boeing could not have diverged more sharply over the past three years. Airbus has a winning product and a commanding lead in the single-aisle segment and a strong A350 widebody program. Boeing is reeling from the multiyear hangover of the 737 MAX grounding, a lengthy pause in 787 deliveries driven by supplier quality issues, production issues with the KC-46 tanker and extensive certification delays to the 777X program. But Boeing’s situation is not as dire as it may appear. A closer look at the fundamentals of the OEMs’ respective product offerings and financial positions reveals a more optimistic picture for Boeing.
Any analysis of Boeing and Airbus should start with the dichotomy between the 737 MAX and the A320neo. The A320neo was introduced in 2010 to offer customers significant fuel savings with a fraction of the nonrecurring expense of a clean-sheet program. Boeing followed with the 737 MAX, and it has been playing catch-up ever since.
Comparing the performance of the model variants, the MAX 8 is a strong performer, and Boeing maintains a slight market-share lead over the A320neo in this size category. Boeing’s struggles have primarily been in the larger single-aisle segment, where the A321neo has captured most of the market. The A321neo outperforms the 737 MAX 9 in both passenger count and range. Boeing’s forthcoming 737 MAX 10 addresses the passenger count gap, but it is still at a range disadvantage.
The prevailing wisdom is that continued route fragmentation will provide a tailwind for the longer-range A321 and A321XLR. However, in a post-COVID-19 airline environment, the higher cost per available seat mile of long-haul narrowbodies compared to widebodies will prevent a wholesale shift toward narrowbodies for medium-haul travel. The range of the MAX 10 is sufficient for most operators, and the MAX is well positioned for the post-pandemic demand environment.
The 737 MAX has endured three terrible years with the lengthy grounding, the impact of COVID-19 and the slow production ramp-up. Yet through this crisis, it has surprisingly maintained more than a 44% share of the backlog, compared to 56% for the A320neo family excluding ASC606 accounting rule adjustments (a share that has increased since 2015). While we should be careful not to extrapolate Boeing’s 2021 sales success, Boeing is gaining some momentum. Airlines and lessors had every incentive to cancel MAX orders, and indeed Boeing has been hit with thousands of order cancellations since 2019. While Boeing will never reach market-share parity with the A320neo, continued momentum will allow it to remain within a 45-55 or 40-60 range and justify continued rate increases (see chart).
Some fear that Airbus will leverage higher rates to extract concessions from suppliers and produce aircraft at a lower price. This could lead to a market-share “death spiral” for the 737 MAX. However, Airbus’ rate increases are constrained by the supply chain rather than by customer demand. Many suppliers have expressed skepticism about the ability of the supply chain to raise rates to 65 per month by mid-2023. These constraints give suppliers some leverage to resist price decreases and keep Airbus from fully realizing these savings.
In fact, Boeing has historically been significantly better at generating cash than its rival. In 2018, the last year unaffected by either the 737 MAX grounding or COVID-19-induced delivery issues, Boeing generated $13.5 billion in free cash flow. In contrast, Airbus has generated less than $4 billion in free cash flow in its best years (2019 and 2021). While the dynamic has certainly changed in the last few years, Boeing can quickly generate positive cash flow as MAX and 787 deliveries resume.
Turning to widebodies, although demand has been severely affected due to COVID-19, Boeing maintains a market-share lead, with 59% of the backlog. The extended 787 delivery pause is concerning, but when deliveries resume this year, Boeing’s results should receive a boost. Despite lower production rates, the consolidation of the production line in North Charleston, South Carolina, should allow Boeing to avoid too great a margin hit.
While Boeing still has existential questions to answer, including when to launch a clean-sheet program, fears of a “death spiral” are overblown. Boeing needs to work to regain the trust of suppliers, customers, employees and the flying public while executing on steady rate increases and meeting its commitments. This will be difficult, but there are plenty of reasons for optimism about Boeing in the years ahead.
Glenn McDonald is a principal at AeroDynamic Advisory.
He is based in Ann Arbor, Michigan.
Move back to Seattle, put the engineers back in charge and pray to the NTSB Gods for no bad news.