Daily Memo: The Implications Of Airbus’ Narrowbody Plans
The art of succeeding in the global aircraft duopoly is anticipating and taking advantage of the competitor’s weaknesses.
Airbus delivered a masterpiece of that game theory with the launch of the A320neo family. Boeing was talking about launching an all-new single-aisle aircraft and was supported in that view by a substantial part of its customer base. But when Airbus managed to flip a massive American Airlines order, Boeing had no choice but to launch the 737 MAX. Airbus knew some versions of that aircraft were going to be suboptimal, therefore giving it the opportunity to grow its market share.
Sure enough, that is what happened.
Boeing, admittedly more by coincidence than Airbus’ negligence, is currently benefitting from its rival’s weakness in the cargo market that Airbus is not likely to recover from for many years, even if it decides to launch a freighter version of the A350.
Airbus recently gave guidance to the market and its suppliers about where it sees single-aisle production going. Upwards fast is the answer: A320neo family output could rise from 40 to 75 per month within four years. Meanwhile, the A220 could go from five to 14 to finally become profitable. Combined, Airbus thinks it’s possible to put out almost 90 single-aisles per month, or about 1,000 a year, just on its own.
The preliminary plan is based on the assumption that customers will want that many aircraft and will be able to afford them—which is doubtful for the time being—and its ability this time to deliver on its contractual commitments—which is a work in progress with some visible improvements for the time being.
Bigger picture, Airbus is trying to maximize revenues in what is currently its only profitable program. Both the A350 and the A330neo are currently in the red, as is the A220 program. If all goes well the A220 could turn the corner in about four years, but its margins will still be way behind the A320neo. In the widebody field, the target for now is damage control and loss containment until whenever demand comes back.
Back to game theory and strategy: Ever since Boeing started talking about developing an aircraft for the middle of the market, a significant number of people in the industry have argued that what the company should really be focusing on is developing a 737 MAX replacement sooner rather than later because the aircraft is not competitive. Now, add to this Airbus’ strategic weakness of being so reliant for revenues and profits on a single program.
If part of Boeing’s strategy was to do what is most painful for Airbus—and it should be—then it should make sure it limits those A320neo revenues as much as it can. How? If the MAX can’t do it, then perhaps a new program is the answer. From everything that is publicly known and privately discussed in the industry, Boeing still does not think it can or should develop a direct replacement for the MAX right now. That may or may not be a mistake.
Assuming that the 737-8 can continue to compete with the A320neo, what Boeing appears to be leaning towards lately in the NMA space could do part of the trick for it and become a major threat to Airbus: a large narrowbody, as opposed to a small widebody, competing with the various versions of the A321neo—which is about half of the A320neo business in terms of units and probably more than half of program revenues given its higher pricing compared to the smaller versions.
Airbus may decide the A321XLR is all it needs in this space, or it could launch the stretched, re-winged and re-engined A322 by investing several billions of euros. The bottom line is that a 757 replacement would still eat into Airbus’ strongest pool of revenues and weaken it as a consequence in other areas.
Of course, it is a gamble at Boeing’s end, too. If the 737-8/A320neo competition plays out unfavorably, it will have a weakness that is harder to eliminate once it is committed to that large narrowbody. And Airbus has some more weaponry at its disposal, too: a potential A220-500 looks like a very attractive and economical proposition that is doable with limited investment.