737 sales inflation

Recent weeks saw an inflationary order boom of Boeing's 737. 30, 40, 50 at a time, Unidentified Customers mostly. Boeing has sold 446 of the 737 so far this year, with only 14 cancellations. Book-to-bill ratio is well above 1. If you take the already announced production rates into account, production now would run until mid 2016 without any further orders.
Airbus does not have this sales fortune with their A320 family so far this year - 221 sales is not bad, of course, but book-to-bill is clearly below 1. Still, without any further orders and with announced production rates, the last A320 family aircraft would leave the factory in mid 2016.
But what could be behind the recent sales success of the Boeing 737? Here is my (2 cents worth) theory:
Boeing tries to drive Airbus into the -NEO by selling the 737 at huge discounts and then outperforming the A320NEO with a new aircraft.
If you followed the conference call on Boeing's 3rd quarter results, you can guess that Boeing decided not to reengine and to develop a 737 successor for the 2020 time frame. Whether Airbus believes that this successor will be significantly better than the A320NEO will probably trigger the decision pro or contra the -NEO.
If Airbus believes that in the early 20's there is not much more technology out there than today, then Airbus will go forward with reengining (or is it reengineing?). But if Airbus fears an overwhelming superior competitor coming out of that development, then Airbus will forego the -NEO idea.
So what technology could be there ready for EIS in the early 2020's - meaning that it is available (TechnologyReadyLevel6 for techies) in 2016 at the latest? Enginewise: not much more than today I would say. Rereading an article from AviationWeek it is even questionable if all the engine technology for the -NEO would be there in 2016, as the article suggests that the LEAP-X1C for the C919 does not feature all the technology CFM officially claims it has on hands - if that is true, then this would also be true for the potential CFM offering for the A320NEO and the 737RE - and maybe that is the reason why Boeing kind of backs aways from the -RE story. Combined with the well-known problems for installing the larger engine under the wing of the 737, the LEAP-X would not get to the same SFC level than the larger fan-GTF (81", as Airbus revealed at the ISTAT conference) for the A320.
So, if the differentiation between a A320NEO can't come from the engine, it has to come from the aircraft itself. What is possible? A carbon-fibre fuselage, of course. Although, a recent posting from AirInsight suggests that maybe Aluminium-Lithium could be the material of choice for future high-cycle aircraft - just look at the Bombardier CSeries.
Anyway, significant weight savings could come from a new material. But then I guess everybody expects the fuselage to be wider than today's 737, at least matching the A320 in cabin comfort - meaning, that a portion of the weight savings is eaten up by the larger fuselage diameter.
A few years ago Boeing scrapped their 737RS studies. I talked to a Boeing Technical Fellow not long after that announcement and he told me that one of the reasons was that they did not found enough weight savings back then. As today's 737NG is still build upon the certification of the very first 737, Boeing did not have to take care for some (weight costly) security measures that you have to build into an airplane if you want to certify it today. The Boeing Fellow expected the extra weight you have to put into the aircraft at 10,000lbs, if I remember correctly. So Boeing would have to find 10,000lbs weight savings to be where they are today...
The wing is another area to improve the efficiency of an aircraft. Here chances to see carbon-fibre is better than for the fuselage. Lower weight and better aerodynamics could lead to a few percentage points in improvement.
Another way to improve efficiency is to enlarge the aircraft, as this article suggests (of course this works out for the airline only when they can fill the aircraft).
Undoubtly, the trend goes to larger aircraft and there is no replacement for the ca. 1000 757's on the horizon so far. So both next generation narrowbody families from Airbus and Boeing will cover the 757 - at least in passenger capacity, not necessarily in range.
So, what is my verdict on the -NEO question? Don't know, but we all should know by December 31.
Until then we can all have fun with speculating, just as I did here.

ISTAT takeaways

The NEO question

The 17th european ISTAT conference is over – more than 550 people joined the event. For me it was my first ISTAT conference and a very special experience, as I am en engineer and at this conference I learned to see the aviation industry from a bankers, lessors and an appraisers perspective. And this perspective is very different – money (sometimes sadly) rules the world, as we all know.

And when I as an engineer and environmentally conscious guy of course would like to see a new engine on the current narrowbody families, the folks who live from buying, selling and financing aircraft are not really enthusiastic about it.

They fear that their current assets loose their value once the –NEO versions (or how ever they would be called) come to market.

But is that really the case, I wonder? There are 4,349 A320 family aircraft in operation as of September 30, according to the Airbus O&D spreadsheet, 3,411 B737NG were delivered by September 2010 (and just a few of them are out of service). There will be approximately 4,000 more A320/B737’s delivered by late 2015, when a reengined model could enter service.

These reengined aircraft will not hit the second-hand market for, say, another 10 years, at least not in greater numbers. So why on earth should there be a big hit on residual values for the not-NEO narrowbody aircraft? I don’t get it – but a I am just an engineer…;-)

One of the biggest opponent at the conference was the self-described “godfather of aircraft leasing” S. Udvar-Hazy, who described his role in the aviation industry as to ensure that the aircraft manufacturers don’t become like car manufacturers and bring a new model to market every four years or so. He also played down the benefits of the reengining: 15% fuel burn improvement would relate to 5% DOC improvements, given that fuel costs relate to about one third of direct operating costs. In my mind fuel costs will account for more than one third in the foreseeable future with oil prices just again climbing north of $80/barrel and the IEA raising the oil demand forecast.

But SUH further downplays the benefits when referring to John Leahy, who would like to raise list prices for the NEO’s by $7-8m, what it half of the benefit over 20 years operating a NEO aircraft. So, SUH says, the benefit is just 2-3%, which could be further eroded by higher costs for training maintenance personnel and lost commonality.

The environmental benefit he calls as PR benefit for the outside world. Tell that your neighbors living next to an airport: I am sure that an aircraft that is roughly 5dB (per measuring point) less noisy is more than just PR for them – it would be a benefit in quality of life! And as I explained earlier it can also be worth a few percentage points in COC, at least in Europe.

But then I find another inconsistency in SUH’s argumentation: if the new engine would be worth only 2% in DOC, why should the older aircraft loose their value. I can understand that they would loose value, if the newer aircraft is way better, but not when the difference is so small.

Lufthansa’s fleet chief Nico Buchholz on Monday called the improvements for the –NEO sufficient. On Tuesday he kind of backed away a little bit, saying that he would like to see a new aircraft, but would consider taking the second best option if the best one is not available.

CSeries

SUH was asked what he thinks about the CSeries, as at the Farnborough Airshow he ordered almost every aircraft but the CSeries. His message was clear (at least to me): the money he got from investors has to work, i.e. to make money. So he cannot place an order for an aircraft he gets four or five years later and only then can earn money through leasing rates. So we can expect an order for the CSeries once the aircraft is in production and available delivery slots are not too far away.

Heading for the ISTAT conference

I am heading for the 17th European ISTAT conference in Munich, Germany, on Monday and Tuesday (11-12 October). This event will be very interesting I guess, as the main topic will be the potential impact of potential -NEO variants of the A320 and the B737 of residual values for today's not-NEO aircraft and engines. Steve Udvar-Hazy will hold the opening adress, all aircraft OEM's, engine OEM's, lessors, appraisers and many more  will be there to discuss the state of the industry.
Look back at the end of the week for my take on the event...

CSeries expansion

AirInsight today has this piece about the possibility that Bombardier may expand the CSeries family beyond the CS100 and CS300 with CS500 and CS900 called 150- and 190-seaters. While at least the 150 seater would look like a good top end of the product line, the question is how to position it in the marketplace. If the 150 seater should have the same range as the CS100/300 (close to 3000nm), the aircraft would need a larger engine with higher thrust. Therefore Bombardier would have to raise the landing gear - the problem with that is...well, ask Boeing!
But there is another possibility: keep the MTOW at the CS300ER level - how many airlines are out there flying more than 2000nm with today's narrowbody. According to RR just about 3%.
So the CS500 might be a possibility. But I doubt there will be a 5 abreast 190 seater. This would be a too tube - just my two cents.
A driver for the 150 seater could be that Embraer thinks about a new aircraft. If they choose to place their aircraft sizewise above the CS100/300, Bombardier might be forced to react.
Interesting times ahead - Embraer should be ready to announce their plans in the next six months.
But how could Embraer pay for all this? To come up with a good CSeries competitor, they would have to be able to produce a carbon wing, for example. - Maybe they let Brasil, Argentina, Chile, South Africa and some other countries pay for it - via the KC-390 tanker development.

UPDATE: There was a suspension letter filed on October 4th, 2010 for the CS900. A 5 abreast 190-seater would have been a little bit of a too-far stretch, anyway. Or was is meant to be the name for a CRJ900 replacement? Very speculative of course...

Southwest, airtran and the 737-800

Addison Schonland from airinsight has this interesting piece about Southwest and airtran and what an order for the 737-800 could mean. He is absolutely right I think: to understand the rationality behind it you have to take a deeper look into the economics of the 737-800 and it’s competitor, the A320.

Say (just for simpliciy), the operating costs of the 737-800 and the A320 are equal (inreality it depends from airline to airline, route to route etc., see also Fuel burn and operating costs) . Then, because the 737-800 is a little bit larger than the A320 (a fair comparison has 162 seats for the 737 and 150 for the A320), the operating costs per seat are lower for the 737-800 by 8%.

The reengining of the A320 will drive costs down by roughly 15% (per the better SFC, the skarklets, the lower maintenance costs of the engine and whatever Airbus might do besides that).

Now the A320 has an advantage: 15% per flight, but considerably less on a per seat basis. This kind of explains why Boeing (at least officially) thinks they can forego the reengining and work with incremental improvements instead to match the A320 costs on a per seat basis.

But as fuel costs will rise in the future (who is so optimistic to think they will stay where they are or even go down?), the advantage of the A320NEO will be harder to match. And as I explained in  A320NEO vs. B737NG+, lower noise fees in Europe and elsewhere will add to the –NEO’s advantage. So it is not yet clear, that Boeing will not do a reengining of the. Lately, Boeing hinted that a decision will only be taken in 2011, so they might wait for the acceptance of the NEO and what Airbus will build into that upgrade besides the new engines.

Ad the Economist wrote last week, the decision at Airbus to go-ahead with the reengining is due tomorrow – then the last call is with the EADS as the owner of Airbus. They have to give the green light. If it is given, we can expect Airbus to market the NEO in the middle of October. Expect orders – or conversions from existing orders – to roll in soon!