To date, Airbus and Boeing have split three of the five announced 737 Max customers: American Airlines, Aviation Capital Group and now Norwegian Air Shuttle.
Norwegian's order for 100 737-8s is a big boost for the re-engined jet as it grows its firm backlog and hardly a surprise as the northern European airline is one of Boeing's stalwart narrowbody customers. Though accompanying that order were 100 more Airbus A320neos.
Fundamentally the "minimum change" Max is a derivative development from today's Next Generation 737, just as the Next Generation family was a derivative of the 737 Classic. With 75% non-commonality, the 737-600, -700, -800 and -900 unlocked the Classic's customers to consider the A320.
The consequence of Boeing's changes to the 737; a new tail cone, widespread structural re-gauging, engine development and a raised nose gear make the Max a manageable, yet expensive (which Boeing disputes), undertaking, concluded Bernstein Research in a report earlier this week. But the result, as illustrated by Norwegian's A320neo order, may also be an unlocked 737 market for Airbus and Boeing to fight over.
Photo Credit Boeing & Airbus
In June, Bjorn Kjos, Norwegian's CEO, cast his ballot at the Paris Air Show in favor of Boeing to develop an all-new narrowbody.
As the ink dried on a purchase agreement for 15 more 737-800s...Kjos told a room of journalists he was "lining up in the queue to tell Boeing to build a new aircraft." and was urging Boeing it was time to take "the next giant leap."
At that point for the Northern European low-cost carrier, Kjos saw the cost of switching to an all-new Boeing aircraft with 20% better fuel efficiency as outweighing any cost of breaking its 737 fleet commonality.
A New Small Airplane from Boeing would have unlocked its narrowbody market, allowing Airbus to chip away at its Next Generation 737 customers with the promise of aircraft with a lower price tag and marginally higher fuel burn. While it may have been a hot seller, it was this consideration, along with the NSA's time to market that gave the world the re-engined 737 in July.
In a podcast recorded just after the Max was launched in August, I discussed Boeing's re-engining strategy this way:
All the stalwart 737 customers are going to sign up for this airplane. Primarily because Boeing has entered into a strategy that doesn't allow their customers to switch without significant cost and significant pain, essentially in terms of breaking the commonality between their narrowbody types. And that's ultimately a huge mark in favor of both Boeing and Airbus's strategy here, which is to hold on to customers long enough to get to the next generation narrowbody, the new small airplane, when it shows up sometime in the 2020s.
While Norwegian has demonstrated its comfort to expand outside of it short to medium-haul missions in Europe and on to long range routes with the 787 in 2013, to diversify its narrowbody fleet, Norwegian weighed the relative cost of spares and training for the A320neo and 737 Max.
Tom Enders, in an interview with Norwegian daily Dagens Næringsliv, said Norwegian Air Shuttle was offered a significant discount for its 100 A320neos that still allows Airbus to make money on the deal. Did that price tag, in conjunction with the complexity of the 737 Max, allow Airbus to unlock Norwegian as a Boeing stalwart?
London School of Economics academic, Dr. Theodore Piepenbrock and his work Toward a theory of the Evolution of Business Ecosystems, also known as Red-Blue, points to continuous incremental improvement as a key to long-term market success and keeping the cost doing business sustainably low.
How airframers develop and evolve an aircraft program in a mature market is a question explored extensively on this page over the past year. In June, this page discussed the importance of cost and the value of efficiency in that consideration:
Though, Boeing Commercial Airplanes CEO Jim Albaugh is unapologetic about the price tag of its narrowbody: "Our view is the 737 should command a higher price and we charge a higher price because of the capability it provides," adding that a re-engined 737 or an all-new airplane would be no different.
Piepenbrock's Red-Blue suggests mature markets are battlefields for cost competition. Whether Boeing likes it or not Airbus is playing a cost game while Boeing is playing a value game, prompting price sensitive airlines and lessors to invariably weigh the value of efficiency and fuel burn if its delivered up front as as price cut.
Though the price of a competing aircraft isn't always enough to flip a customer, a fact that has worked to Boeing's advantage in the past.
While upfront price was thought to be an important offset to a fuel burn disadvantage of the A340-500 and -600 over the 777-200LR and -300ER, the overall economic gap and lower maintenance costs of two fewer engines was not enough to break Boeing's widebody customers toward Airbus.
Of the A340-600 operators, only two, Cathay Pacific and Thai Airways International, operated 777s before ordering the -600 and were both existing A340 customers. Qatar Airways and Etihad later added 777s after its A340-600s were delivered. It was the widespread change in the A340-500 and -600's design that unlocked A340-200 and -300 customers to look at the next generation 777s for larger aircraft in its fleet.
It was Boeing's successful design of the 777-300ER and -200LR - the incremental evolution of the 777-200, -200ER and -300 - that prevented an exodus from operators that would have allowed the lower price of the A340-500 and -600 to flip Boeing's customers. No up front price advantage offered by Airbus allowed a switch to the A340 as the cost to acquire a new 777 variant was essentially the same as buying more of what was already in airlines' existing fleets.
Boeing's goal of achieving narrowbody market parity with Airbus may be made more difficult if this order splitting trend continues if its customers perceive the development of the 737 Max is taking too big of a leap away from its current offering. Perhaps the climb to 2017 needs a step or two in between?
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