Pricing pressure on the B737NG

Boeing for the first time acknowledged pricing pressure for the B737NG yesterday, when Ray Conner, CEO of Boeing Commercial Airplanes spoke at the JP Morgan Aerospace Conference. A synopsis can be found here at Leeham News and Comment. Read also the comment to get an insight of what readers think about how Boeing handles the battery problem of the B787.

Conner also said that there was (and is, I suppose) pricing pressure on the B737MAX, but this is normal for new aircraft entering the market.

Where the pricing pressure comes from gets clear when we look at the number of open orders and the orders Boeing has to fill until the B737MAX enters service in late 2017 and until the B737MAX
will take over full production. This will take about two and a half years if we take the transition phase of the A320neo as an example.

We are now 56 months away from EIS of the B737MAX. Right now (March 2013)builds the B737NG at a rate of 38 a month. In the first half of  2014 the build rate will reach 42 a month.

At January 31,2013, Boeing had 1958 unfilled orders for the B737NG.

In the 11 remaining months of 2013, Boeing will build 418 B737NG.

Given that rate 42 is reached in June 2014, Boeing will build 480 B737NG in 2014.

In 2015 and 2016 Boeing will then build 504 B737NG each.

Until December 2017, when the first B737MAX should enter airline service with Southwest Airlines, 462 aircraft will be build.

Altogether:  2388 B737NG until December 2017. So Boeing has to sell another 430 B737NG to fill all slots until the first B737MAX arrives. Another 700 slots are to be filled until June 2020, when the B737MAX should take over full production.

Now compare this to the A320ceo/A320neo situation:

At January 31,2013, Airbus had 1846 unfilled orders for the A320ceo.

Airbus will build another 445 A320ceo in the remaining 11 months of 2013.

In 2014 Airbus will build about 485 A320ceo.

Until October 2015, when the first A320neo should be delivered to Qatar Airways, Airbus will have build another 365 A320ceo.

Altogether: 1295 A320ceo until October 2015. Another 700 A320ceo delivery positions remain until the A320neo takes over full production in the middle of 2018. This leaves Airbus with around 150 delivery positions to fill. EADS said in December of last year that there are about 300 positions left. I suspect that there are some cancellations build into these 300 positions. The most obvious candidate is Kingfisher. There are 67 open deliveries from Kingfisher and Kingfisher Red. Another suspect is Delta: they inherited 7 open deliveries from Northwest Airlines, which they can cancel without penalty. United Airlines also has 42 unfilled orders for the A320ceo family. If I add these, I am at 262 open slots, not too far from what EADS said.

Now to the pricing pressure on the B737NG: as long as there are open slots either for the A320ceo or A320neo, the pricing pressure from Airbus will persist. But the pressure could also come from another side: the lessors. Even if there are no open slots at Airbus, airlines might find lessors which have A320neo slots available. Especially ILFC as the first leasing company to buy the A320neo should have plenty of aircraft available. The only airlines so far openly committed to take A320neo from a lessor is Spirit Airlines.

But lessors could also compete with the B737MAX against the B737NG. Right now leasing companies have ordered 250 B737MAX. ALC for example gets their 80 B737MAX between 2018 and 2022. If an airline manager has a choice between buying an aircraft which is from the “last-of-the-line “ batch with probably not so good residual value and to  lease the new model which burns something like 13% less fuel, I would negotiate very hard with both!

Good deals could be ahead in the coming years for airlines…