COC and DOC

Scott Hamilton wondered about changing messages from Boeing regarding operating cost comparison between the 737-800NG and the A320/A320neo.
Indeed the numbers Boeing told to the public were a little bit confusing. But when you look carefully what they really talked about, the picture gets clearer:
Let's begin with the situation we have today: Boeing says the 737-800NG is 8% better than the A320. This is probably a fairly accurate statement when you talk about COC per seat. COC or "cash operating costs" are the costs the airline pays for flying the aircraft from point A to B: fuel costs, maintenance costs for aircraft and engine, crew costs, landing fees, navigation charges. But as the 737-800NG has, in a typical layout, 162 seats compared to 150 seats in the A320, and the difference is - coincidentally or not - exactly 8%, the COC per trip should be right on-par between the two aircraft. That can be explained by the fact that the A320 is a little bit heavier than the B737-800NG, but the engines of the A320 have a better SFC, so that fuel burn should end up in the same range. Maintenance costs for the CFM56-7B and -5B should be not very much different also, maintenance costs between the two aircraft should also not be a decisive factor.
So for now let's assume:

	B737-800NG	A320
seats	162	150
COC per trip	100%	100%
COC per seat	100%	108%

Now the "neo" comes into play. But before the "neo", Airbus will gain 3 seats in the A320 through a new galley design, as we saw at the media briefing day last week.
The "neo" engine are advertised to save 15% fuel, at least when combined with the sharklets, which will be introduced before.
Also, these engines are advertised to have 20% lower maintenance costs.
Now: how much is that worth? First, we have to establish a certain mission we want to look at, as for a long flight fuel costs represent a larger pie of the (cost) cake than for a short flight. For our study let's assume a 500nm mission.

Even now, the question how much 15% lower fuel burn and 20% lower engine maintenance costs are worth in COC largely depends on the cost of fuel:

• At $1.50 per gallon you can assume that the fuel costs are one third of the COC. Engine maintenance costs would be in the 10% range.
• At $3.00 per gallon fuel costs are about 50% of COC and engine maintenance costs are more in the 6-7% range.

Right now we are at $3.20 per gallon, so let's assume the $3.00 per gallon numbers. Then the new engines save 7.5% per the lower fuelburn (50%*15%) and 2% per the lower maintenance costs (10%*20%).

Now we have:

	B737-800NG	A320neo
seats	162	153
COC per trip	100%	90,5%
COC per seat	100%	95,8%

Boeing stated that the 737-800NG would have a 2-3% cost deficit compared to the A320neo. But that was before Airbus came out with the three extra seats. If you compare COC per seat on a 150 seat basis for the A320neo, the value is 97.7% - the Boeing statement can therefore be seen as accurate.

Scott Hamilton now thought that Boeing's message shifted when they said that the B737-800NG would still be better by 2% than the A320neo - but read carefully: now they are talking not about COC, but DOC, which include capital costs.
I have doubts that it makes sense here to compare DOC, as that implies that Boeing knows the pricing policy of Airbus or can foresee future leasing rates. In reality, it is very hard to estimate DOC's, as leasing rates vary, interest rates vary and so do depreciation rules in different countries.

If Boeing says that the DOC's for the 737-800NG are 2% better than for the A320neo and COC's are (say for simplicity) 2% worse, that implies that in their calculation COC's are 60% of DOC's and so capital costs are 40% of DOC's. That seems to be a little bit on the high side I think, at least in times of $3.00 per gallon, where COC's are higher than at $1.50 per gallon and historically low interest rates, which would lower capital costs. So the 2% cost advantage for the 737-800NG compared to the A320NEO might be, say "overoptimistic".

So, Boeing does not necessarily change messages - but:

• they change the topic of what they are talking about
• they are making assumptions which are at least not very transparent

In the end, the market will decide and show us the "truth".

No new Boeing airplane in sight...?

Scott Hamilton has it here: chances that we will seen and hear an announcement from Boeing for a new airplane, call it 737RS, call it 797, are getting slim. Buckingham Research now says that they do not expect an announcement from Boeing for a new airplane at the Paris Air Show. An approval to offer would not come before the end of 2012/ early 2013.
As I argued earlier, there is no real technical case for a new aircraft in the 2020 timeframe. And if there is no technical case, there is no business case. No business man will spend $10-15 billion without getting a decent return, if he can get the same return by spending $1-1.5 billion, as Airbus does it.
I don't want to say that Boeing now will do the 737RE - but in my eyes it would do much more sense. And this is one if the rare occasions I agree with Richard Aboulafia, who just today at the Aero Club in Wichita said that Boeing should quickly go forward with the reengining.
If they do not move quickly, there is a real danger that long-time Boeing customers are moving to Airbus.

A problem with reengining for Boeing could be the emerging signs that the CFM LEAP-X could be a little bit behind schedule. At least there is no customer for the LEAP-X on the A320NEO yet. As EIS for the NEO is 4.5 years away, some airlines (as well as ILFC) seem to be confident enough to order the GTF, but not the LEAP-X. They could also wait another year or even two and decide then about the engine - means ordering one engine now that they are sure that the other is not ready in time? Leahy last week said that the LEAP-X would be available by about 9 months, but no more than 12 months after the GTF. As EIS of the NEO was moved forward by 6 months at the same time, that means that the LEAP-X would have been 3-6 months later than the GTF per original schedule. Three to six months should not really be the deciding factor when ordering an aircraft that is used for twenty years and longer. So there could be something more behind all that...

The absent LEAP-X customers

It is very early to say anything about the long-term share of the Geared Turbo Fan and the LEAP-X on the A320neo. On the other hand it is notable that there are now three announced engine choices for the A320neo and none of them is in favour of the LEAP-X.

• ILFC opted for the GTF for at least 60 of their 100 aircraft (MoU with Airbus yet to be firmed up). They have an option for the GTF for the remaining 40 aircraft, but are in talks with CFM about the LEAP-X. Apparently ILFC is not yet convinced to order the LEAP-X.
• Indigo: this can be deemed as an easy win for P&W, although also CFM fought hard for this large deal. Indigo currently uses the V2500 on their "classic" A320.
• Lufthansa: as I wrote in another blog entry, the most important win for P&W so far. They initially ordered the V2500 for their A320, but when RR had problems with the High Pressure Compressor, they had to switch to the CFM56. By the time the A321 was launched, the V2500 then became Lufthansa's choice again - but for the A319 Lufthansa favoured the CFM56. I see two reasons for their split: one is to get a maintenance license for both engines, as Lufthansa Technik is a major player also in the engine maintenance business and saw business opportunities with third parties. Another reason is that the A321 typically flies on longer routes than the A320 and A319, where the better engine SFC of the V2500 plays a bigger role. On the other hand, the CFM56 could have an edge if you fly shorter routes and more sectors a day, as the CFM56 with it's single stage turbine has lower maintenance costs than the V2500. Now Lufthansa ordered the GTF for both the A320neo and the A321neo - a significant move in my eyes!

Now - who is the most probable LEAP-X customer, once ordering the A320neo? GECAS of course! There is no order for the A320neo from GECAS so far - this is no judgement so far, but if Airbus collects some more and potentially large orders by the time of the Paris Air Show in June and GECAS does not come on board, I have a sense that there could be a problem with the LEAP-X - as GECAS should be the customer who has the best insight into the engine.

Pratt did it again - with Lufthansa!

Pratt did it again! Third engine announcement, third win - a good run! And I would say, the third is the most important one, as I explained in earlier blog entry. The engine choice from Lufthansa for the PW1133G will probably be a signal for many other airlines, which do not have such a large and well-experienced technical department as Lufthansa. So we can expect that the Geared Turbo Fan will keep the lead position against the LEAP-X for the next months - and as we can expect a few more orders for the A320neo until the Paris Air Show in June, this could translate in many orders for the GTF as well.

Geared Turbo Fan scores big (again)

Flightglobal just has this story out. If it gets materialized (and I have no doubts), this is indeed a big coup for Pratt & Whitney and their PW1133G Geared Turbo Fan. After ILFC's selection for at least 60 of their 100 ordered A320NEO family aircraft (well, it is still an MoU as far as we know, but consider that it will be a firm order by June the latest), this is the second win over the LEAP-X engine. This is a bit surprising, as P&W can be considered a "new" engine OEM in the narrowbody market, as the V2500 offered now is sold by the IAE consortium and not by P&W themselves. So Pratt was believed to have a more difficult start to sell their engine, as they can not count on an own customer base like CFM can.
An advantage in this particular case was that IAE is providing the V2500 for the A320 ordered by Indigo before.
Meanwhile AirAsia CEO Fernandes said that an announcement for a A320NEO order would come soon and there would be some order conversions from the old order for classic A320's to the NEO version. Here CFM has a clear edge over P&W, as AirAsia currently uses the CFM56 and it would be difficult to convert an order from CFM56 powered A320's to GTF powered A320neo's.

There are orders and MoU's for 332 A320NEO family aircraft so far - 210 aircraft will be equipped with the GTF, so the GTF has a market share of (at least) 65% today. I am curious where this is after the Paris Air Show...

P.S.: Meanwhile the press release from P&W is out.