Airbus Takes Lead in Orders Race | A321neo Outselling 737 MAX 9 ‘Five to One’

On August 30, 2016, Airbus booked an order for 100 A321neo jets for Malaysian low-cost carrier AirAsia (order was announced at Farnborough International Air Show in July). Photo Courtesy: Airbus SAS

On August 30, 2016, Airbus booked an order for 100 A321neo jets for Malaysian low-cost carrier AirAsia (order was announced at Farnborough International Air Show in July).
Photo Courtesy: Airbus SAS

Boeing and Airbus delivered 59 and 61 commercial jets in August 2016, compared to 64 and 44 in the same month last year, respectively. In 2016, as of August 31, Boeing is trailing last year’s delivery figures with 491 (503 in 2015) commercial jets delivered, which is in line with company expectations. Airbus, on the other hand, has delivered 400 jets to date and is three deliveries ahead of last year.

In 2015, Boeing delivered 762 aircraft, ahead of Airbus’ 635, and both companies beat their 2015 delivery targets of 750-755 and ~630 aircraft, respectively. In 2014 and 2013, Boeing delivered a total of 723 and 648 jets, respectively, compared with Airbus’ 629 and 626. In late July, Airbus reaffirmed its target of delivering at least 650 commercial jets in 2016, an increase of 15, or 2.4 percent, from 635 last year. Boeing, in contrast, has announced that deliveries could drop by 22, or 2.9 percent, to 740 from last year’s record of 762 deliveries. Boeing has been able to increase deliveries significantly in recent years, mainly due to the ramp-up in production of the 787 Dreamliner (135 delivered in 2015).

In August 2016, Boeing delivered 38 737s, two 747-8s, two 767s, seven 777s, and 10 787s. Boeing currently plans to raise its 737 production rate from 42 per month today to 47 and 52 in 2017 and 2018, respectively. In early 2016, Boeing’s CEO, Dennis Muilenburg, announced that demand supports a further increase to 57 737s per month in 2019. Airbus is slowly ramping up deliveries of its A350 XWB and this, combined with a higher A320 production rate of 46 per month (commenced Q2 2016), means that the company is narrowing the gap in the deliveries race. In August 2016, Airbus delivered 47 A320s, seven A330s, six A350s, and one A380.

With six A350-900 deliveries in August alone, Airbus has now delivered 36 aircraft of this type to date (first delivery in December 2014). The company expects to deliver more than 100 A350s in 2018, when the production rate hits 10 per month. In 2016, however, Airbus still has to deliver 29 of the new long-haul jets to reach the target of 50 for the year. After a slow start blamed partly on shortages of seats and lavatories, Airbus had only delivered 15 A350s as of July 31. According to Airbus’ president and CEO, Fabrice Bregier, “The target remains a challenge because some of our industrial partners are experiencing difficulties.” After a strong August with six A350 deliveries, Airbus is likely to reach its target if the company can slightly ramp up the pace and deliver seven aircraft per month from September to November and eight in December.

In the orders race, Boeing had a poor month in August with just 22 gross orders and one cancellation (net of 21). Of the 22 aircraft ordered during the month, 19 were 767-2Cs for the USAF’s KC-46 tanker program. In other words, the company only landed two orders for a total of three 737-800s during the month of August. Airbus had a strong August and landed 115 net new orders (144 gross orders minus 29 cancellations). All 144 orders were for the company’s successful A320 family of narrowbody jets, and included among them is an order for 100 A321neo jets for Malaysian low-cost carrier AirAsia. The order was originally announced at the Farnborough International Air Show on July 12, but Airbus did not book it until August 30. Other orders booked include a combination of 11 A320ceo and nine A320neo jets from an unidentified customer and a BOC Aviation order for five A321ceos. Also, Tunisair converted a previous order for four A320ceo jets to five A321ceos – see full list of orders in data table below.

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In 2015, Airbus booked a total of 1,036 net orders, while Boeing finished the year with 768 net new orders, or 268 fewer than booked by Airbus. In both 2014 and 2013, Airbus won the orders race with 1,456 and 1,503 net new orders, respectively, ahead of Boeing with 1,432 and 1,355. In 2015, net new orders for both Boeing and Airbus were significantly down from 2014 levels, due, among other factors, to the sharp decline in the price of oil. Cheaper oil makes it financially more attractive for airlines to keep operating older, less fuel-efficient aircraft. On January 20, the U.S. WTI oil price closed at $26.68/barrel, the lowest level since May 2003. On Friday, September 9, the price of WTI crude (NYMEX November future) was trading at $46.31. Crude oil and jet fuel prices are almost perfectly correlated over time.

Airbus’ order backlog as of August 31, 2016, stands at 6,869 jets (of which 5,627, or 82 percent, are A320 family narrowbodies), ahead of Boeing’s 5,659 (of which 4,369, or 77 percent, are 737 narrowbody jets). The number of Airbus aircraft to be built and delivered represents a >10-year backlog (10.8 years of production). In comparison, Boeing’s backlog would “only” last 7.4 years at the 2015 production level.

An important question for the industry is whether the massive backlogs peaked in 2015 or will continue to grow throughout 2016. Despite a decent haul at Farnborough, Airbus is 270 net orders down so far this year compared to January-August 2015, while Boeing is down 92. Both companies could be facing their lowest order haul since 2009. Recently, Boeing was reported to have targeted only 535 orders for 2016 in an internal company forecast – well below its official forecast of 740-745 jets. Furthermore, Boeing has opted to leave list prices unchanged this year. The last time this happened was in 2009 (while also occurring in 2001). The prices set in July 2015 therefore continue to serve as the basis for talks with customers.

The end result is still too early to call, but it is the author’s belief that backlogs at both companies will decline in 2016 due to slower GDP growth and low oil prices, although Airbus still has a fair chance of bridging the gap. According to both Airbus and Boeing, the demand for passenger aircraft is tied to growth in worldwide revenue passenger miles (RPMs), which again are highly correlated with global GDP growth. The decline in orders should not be a major source of concern for jet makers, however. Backlogs remain at near all-time highs (with a new high for Airbus in August) and provide stability and growth for years to come. The main concern for both companies continues to be cost and the management of extensive global supply chains.

A320neo vs. 737 MAX

The A320 and 737 narrowbody families are Airbus’ and Boeing’s bread and butter and account for the vast majority of deliveries. Airbus had 4,780 A320neo jets in backlog as of August 31, 2016, well ahead of Boeing’s order book of 3,278 737 MAX aircraft. Closing this gap is a top priority for Boeing in the coming years. Currently, the 737 MAX 9 is being outsold by a five-to-one margin by the A321neo, which is a major concern for Boeing because airlines will be replacing their Boeing 757s mainly with A321neos. At the end of May it was reported that Boeing is considering a plan to put a larger engine on the 737 MAX 9. In so doing, Boeing would add range to the aircraft while stretching it to fit approximately 12 extra passengers (from 178 to 190 seats in a two-class configuration) and thereby gain a capacity advantage over the 185-seat A321neo (two-class configuration). In early September it was reported that Boeing is considering one of two options: 1) upgraded engines and a simple stretch of the 737 MAX 9 that would offer much of the range and payload of the A321neo; or 2) a more elaborate set of changes that would feature both a stretch and larger engines (same as those on the A321neo). The first option relies on upgrading the engines already developed for the 737 MAX family. It would enter the market by early 2020, while the more complex option 2 would not commence service until 2022.

Both Airbus and Boeing have been unsuccessful in securing solid order books for their smallest aircraft, the A319neo and the 737 MAX 7. Boeing is currently considering a larger version of the 737 MAX 7.

In the Middle of the Market (MoM) segment, the A320neo competes with the 737 MAX 8 and the slightly larger 737 MAX 200. Boeing is trailing Airbus’ order book of 3,428 A320neo jets by about 400-450 aircraft.

Boeing 777 Rate Cut

Boeing and Airbus are both facing challenges going forward. Boeing is struggling to bridge the gap in production between its current-generation 777 (777F and 777-300ER) and the future 777X to maintain the current production rate of 8.3 per month (100 per year). The 777 is a very profitable aircraft for Boeing and an important “cash cow.” In 2015, Boeing only booked 38 orders for the 777 (16 777Fs and 22 777-300ERs). We made the case in 2015 that “Boeing will likely cut the rate to first seven per month (84 per year) and later six per month (72 per year).” On January 27, in connection with the presentation of the company’s 2015 financial results and forecast for 2016, Boeing’s CEO Dennis Muilenburg announced that the company will reduce the 777 production rate by 16 percent in 2017 to 84 aircraft per year. Boeing also indicated that in 2018, as it begins to build the first of four 777X test aircraft, production of the current-generation 777 will likely sink below seven per month. We would like to emphasize that without a large increase in orders, Boeing could very likely be forced to cut the rate to six per month as early as 2017. Boeing has remained upbeat on the 777 order intake for quite some time, but orders are simply not coming in fast enough and in sufficient quantities. As of August 31, 2016, Boeing had landed just eight net new orders for the 777 while delivering 63. Boeing now has only 163 current-generation 777s in backlog (129 777-300ERs and 34 777Fs).

A380 Uncertainty and Recent Production Cut

A major challenge for Airbus centers on the future of the A380 as the company considers launching NEO and stretch variants of the aircraft. The company has to make a tough choice: either 1) invest billions in developing the NEO and stretch to reduce the aircraft’s cost per seat mile; or 2) phase out the platform and terminate production when orders run out in four or five years. More recently it appears that Airbus has found a third way: do what Boeing has done with the 747-8 and keep the production line running at a minimum rate for as long as possible (knowing that cheap oil extends the economic life of the platform). At the Farnborough International Air Show in July, the company announced its decision to cut the A380 production rate from 2.5 per month today to just one – or 12 per year. As of July 31, 2016, the A380 backlog stands at 126 aircraft.

Adding further insult to injury, Boeing is reportedly contemplating a stretch to its future 777X. Boeing has approached several carriers, including Dubai-based Emirates, the world’s largest operator of both the 777 and Airbus A380. The proposed 777-10X would carry about 450 travelers, bringing it well into A380 territory.

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References:

http://www.boeing.com/commercial/#/orders-deliveries

http://www.airbus.com/company/market/orders-deliveries/

https://www.flightglobal.com/news/articles/boeing-confirms-review-of-two-737-max-variants-424861/

http://www.reuters.com/article/boeing-commercial-strategy-idUSL8N18Q0JQ

http://www.bloomberg.com/news/articles/2016-09-08/boeing-said-to-mull-stretching-737-to-counter-airbus-a321neo-jet

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http://www.reuters.com/article/us-airbus-bregier-idUSKCN0Z1289

http://atwonline.com/airbus-a380/airbus-cut-a380-production-rate-2018

http://www.bloomberg.com/news/articles/2016-06-30/boeing-said-to-mull-stretching-777-to-knock-out-airbus-a380-jet

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