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Airbus A320neo vs. Boeing 737-8 MAX: a battle that’s just beginning

When Southwest Airlines announced the first firm order for the re-engined Boeing 737 MAX on Wedenesday, it represented the latest in a series of back and forths between Boeing and Airbus regarding their re-engine programs of the 737NG and Airbus A320 family respectively.

Earlier this year, speaking at the Credit Suisse Aerospace Conference, Airbus’ Chief Operating Officer – Customers, John Leahy dismissed the Boeing 737 MAX, stating that the Airbus A320neo family of aircraft will beat the Boeing 737 MAX’s fuel burn by up to 11% (on a per-seat basis), with each member of the family out-performing its direct Boeing competitor. Leahy further questioned the validity of Boeing’s claims regarding the current generation 737-800, claiming that Boeing’s metric of using total cash ownership costs (including ownership costs) is heavily subject to manipulation.

Meanwhile, in announcing the order from Southwest Airlines, Boeing continued to assert the 737 MAX’s superiority, claiming that fuel burn per seat would be reduced by 10-12% with the 737-8 MAX achieving a 7% advantage in total cash ownership costs (per seat).

De-mystifying the statements from Boeing and Airbus

Claims
  • Airbus chooses to use fuel burn as a comparison metric; claims that A320neo is 7% more fuel efficient per seat than the 737-8; predicts that 737 MAX will only get 8% reduction in fuel burn vs. 10-12% that Boeing claims (source: Airbus Global Market Forecast presented Dec 2011)
  • Boeing uses cash operating costs as a comparison metric; claims 737-8MAX 7% better per seat by this metric, predicts 10-12% reduction in fuel burn for MAX vs.
Reality
Both Airbus and Boeing are being a bit disingenuous in making these claims; in that they make them off different baselines.

Taking fuel burn first, Airbus’ claim of the A320neo being 7% more fuel efficient per seat used a 737-8 MAX of 157 seats vs. 150 seats for the A320neo. However, for typical two class seating, it’s generally accepted that the 737-800 (and therefore the MAX) can seat around 162 seats. Altering this input immediately brings the fuel burn differential between the two aircraft to around 4%. Additionally, Airbus has assumed that the MAX will only achieve 8% fuel burn reduction; but taking the MAX to the lower end of Boeing’s range: 10%, yields a 2.07% fuel burn differential.

Once you consider that Airbus assumes that the fuel burn of the current wingletted 737-800 is equal to that of the non-sharklet Airbus A320, whereas independent estimates typically give the 737-800 a 2-3% per seat, the fuel burn disadvantage of the MAX has essentially evaporated.

Of course all of this assumes that both Boeing and Airbus meet their targets for the re-engine programs, but regardless the drastic fuel burn advantage claimed by Airbus most likely does not exist.

Boeing’s math is no less creative. Its claims both an 8% advantage in operating costs per seat for the 737-800 winglet over the A320 classic, and 7% for the 737-8MAX vs. the A320neo. The largest figure we have ever seen as an advantage for the 737-800 was around 2% all in (including ownership costs), with current Airbus operators naturally seeing the A320 as better due to commonality and vice versa for current Boeing operators.

Cost of ownership is typically on the order of 10-15% of an aircraft’s cash operating costs, and Boeing’s MAX have list prices that are on average, around US $6 million lower than those of the neos; which cannot account for the remaining 6% disparity claimed by Boeing. Of course for customers like Southwest, (whom Air Insight has reported as receiving a 48% discount on their MAX order), the significant discount they receive off list price can lower costs; but discounts are usually even between Boeing and Airbus, and the neos were probably offered for 45%+ off list price as well.

Regarding maintenance, the 737-800 is typically shown as having a maximum 1-2% advantage in maintenance costs per seat from data reported to the US Department of Transportation. While CFM has pledged that maintenance costs (for engines) on the 737-8 MAX will remain the same as those of the current CFM 56-7B27s that power the 737-800, Airbus claims that Pratt & Whitney’s new PW1000G will reduce engine maintenance costs by more than 10% on the A320neo, a view that has been backed by numerous industry analysts.

All told, there is little factual basis for the wide disparities claimed by Boeing and Airbus for their re-engined product. We are still formulating our opinion on their relative positions because there remains much to be determined on the MAX; Boeing has said that it will not firm up the MAX’s configuration until 2013. Especially important will be the weights they eventually choose; aircraft with larger Operating Empty Weights (OEWs) tend to burn more fuel than lighter aircraft, and Boeing claims the lower weight per seat of its aircraft as an advantage over the A320.

If we had to predict, the base aircraft (A320neo and 737-8 MAX) will likely end up with no more than a 2% advantage in operating costs per seat for each aircraft. The Airbus A321neo will likely beat the seat-mile economics of the 737-9 MAX, and the 737-7 MAX and A319neo will likely approach parity with both aircraft being superseded by Bombardier’s C-Series. The one caveat is that if CFM misses its fuel burn reduction target on the LEAP-1B by 2-3 percentage points as many analysts have predicted, each member of the A320neo family will likely beat the seat-mile economics of its direct Boeing competitor.

Carriers likely to base decisions on non-cost factors

In announcing their order, Southwest cited commonality, and operational performance, rather than operating costs as the chief differentiators in its purchase decision.

“We did do comparisons between the 737 Max and the Airbus Neo and both airplanes deliver substantial improvements on their existing aircraft,” said Southwest Chief Operating Officer Mike Van de Ven, “But given the choice of a re-engine with derivatives from the existing airplane we concluded that the 737 Max with its improved economics, its fleet commonality and our network fit was clearly the choice for Southwest Airlines.”

In the press conference given for the Southwest order, company officials specifically mentioned the runway performance of the MAX at its hub in Chicago Midway as a major factor in the order decision. There was very little air time given to the operating economics of the aircraft; simply put, Southwest Airlines didn’t see a huge difference between the neo and the MAX, it just went with the aircraft that added the least incremental cost.

This is a pattern that we expect a majority of other global carriers will follow: current A320 operators will likely choose the neo for commonality and likewise for 737NG operators. The other major factor could be availability; carriers will sometimes order a plane that is somewhat less efficient than its competitors if it has an urgent need for any upgrade (see Delta and its order for 100 737-900ERs to replace 757s). This is why we see at least one major Airbus A320 operator (especially one with a mixed fleet) opting for the MAX over the neo; simply put, the neo is sold out for a longer period than the MAX, and during the interim period where an airline have to wait for neos, competitors could use a re-engined plane to undercut the profitability of the carrier; so they could use the MAX to close such a gap. However, the MAX’s order book is expected to catch up to that of the neo by the end of 2012; so only one or two carriers would likely be able to take advantage of this kind of deal.

Globally, there are still several major players who have yet to make a decision to purchase either re-engined jet. Off the top of my head, there’s the Chinese (who’ll buy a bunch of both), the Japanese “Big Two” (ANA/JAL- Likely to buy Boeing); SE Asia’s legacies (Singapore Airlines, Thai Airways International), IAG and Air France-KLM in Europe, Avianca/TACA in South America, and United, US Airways, and Delta in the United States.

Conclusion: Maintaining the duopoly

Ultimately, both Boeing and Airbus can live with a situation in which their products are competitive with each other; they both profit from the current duopoly. A recent string of competitors around the globe (COMAC C919, Bombardier C-Series, etc.) challenged their market position, but we feel that the MAX and neo sufficiently restore the joint market leadership of Boeing and Airbus in the large narrowbody segment.

Boeing announced along with the Southwest order that it has secured 948 orders and purchase commitments from 13 different customers for the MAX, and expects that figure to climb to at least 1,500 by the end of 2012. Airbus currently has around 1,500 orders and purchase commitments for the neo, and that figure will likely rise as well.

One thing is for sure, the relative merits of the MAX and the neo will be debated up until their EISs in 2017-2019, and perhaps beyond into the next decade.

About Vinay Bhaskara

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