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OEM duopoly: No alternative? April 2019 Download PDF

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Boeing management in the Q1 results presentation were confident that there would be no long-term impact on the 737 MAX backlog nor future orders. Indeed, the impact of the 737 MAX grounding will probably not be perceptible in the long-term perspective.

The charts colourfully illustrate projected global deliveries and fleet structure for narrowbodies and widebodies out to 2029. The graphs have been compiled from Airline Monitor’s annual supply/demand forecast for jet aircraft (Feb 2019). The reason for using this particular forecast is that Ed Greenslet (ESG) has been using essentially the same logical successful methodology for decades, and has generally proved to be right. The forecasts are genuinely objective and provide the necessary level of detail.

Looking at narrowbody deliveries to begin with, there is a clear cut-off point around 2020 when the final deliveries of A320ceos and 737NGs are phased out and are replaced completely by MAX and neo deliveries. ESG has built in a business cycle to the forecast (which was made before the Ethiopian crash) but there is a clear upward trend in deliveries of both types, while the A220 (formerly the Bombardier C series) starts to play a minor role.

The total delivery chart shows Airbus outperforming Boeing, but the market is fairly evenly split between the two OEMs. The grey shading tentatively indicates a small incursion by other manufacturers.

The projected fleets show the NGs and ceos still having a major role in the Boeing and Airbus fleets up to 2029 while older types gradually disappear.

The widebody picture is more complex. Types like the A330-200 and the 777-200/300 are coming to the end of their production runs, with deliveries from the early ‘20s being dominated by A330neos, 787s and 777Xs. The 747 and 767 gradually disappear, except for freighter versions, and the A380 is reduced to a trickle of deliveries to, essentially, Emirates. Overall, Airbus and Boeing share the global operating fleet of widebodies, though Boeing has the edge. There is a minuscule number of widebodies from other manufacturers shown at the end of the ‘20s.

One simple and obvious observation from the delivery and fleet graphs is that there are only two options — buy Boeing or buy Airbus. Or maybe buy Chinese; there are two possibly viable models available from Comac.

The 150-170 seat C919 is officially due to start Its commercial deliveries in 2021, with China Eastern as the launch customer. The aircraft can be powered by LEAP engines as an alternative to ACAE (Aero Engine Corporation of China) units. Comac claims that it has 300-plus firm orders plus another 700 odd options, mostly from Chinese leasing companies or airlines, though GECAS has also made a commitment.

The C929, which is a 250-350 seater widebody, very tentatively predicted to come into commercial production in the late ‘20s. The C929 is being developed by a joint venture between Comac and UAC, the Russian manufacturer. No engine choices have yet been decided.

The Chinese types do not have much credibility in the West, dismissed as overweight and inefficient. But there is a reasonable prospect that the C919 at least will find a niche in the internal Chinese market, which might just worry the two OEMs, as China is the key driver of new aircraft demand.

In this respect the annual chase to outdo each other in announced orders seems little more than a PR exercise. Commercial aircraft manufacturing is a duopoly, and an apparently impenetrable one (especially after Airbus’ investment in Bombardier and Boeing’s joint venture with Embraer). Yet, as noted in the previous article, it is a duopoly which continues to discount heavily to win orders.

But there is logic behind this pricing strategy. In a duopoly probably the worst tactic is to collude to push up prices as this will attract the attention of regulators and antitrust enforcers. It may in effect lower the barriers to entry as the potential returns on investment to newcomers entering the manufacturing market are improved. Still the technological barriers will remain very challenging.

From an airline perspective, playing off the two OEMs against each other can normally result in good discounts, product support and guarantees that the aircraft will actually meet the operating criteria promised in the sales presentations. Operating lessors can inject a further element of competition.

Network carriers usually have mixed fleets so neither OEM can expect brand loyalty. Traditional flag carriers, which used to split orders between the US and Europe for political reason have largely faded out of the mainstream.

The positioning of LCCs may be changing. These short-haul carriers have made operation of a single-type or model a key feature of their low cost strategy as it enables maximum flexibility and reduces training and maintenance costs; most importantly, bulk ordering minimises unit capital costs. But there comes a point in the development of an LCC where it is large enough, with multiple bases, to ensure operating economies with two different aircraft types. Ryanair bought Lauda specifically to obtain a new A320 fleet and gain experience operating Airbuses in addition to its core fleet of 737s, and so further enhance its negotiating strength with Boeing. Gary Kelly, CEO of Southwest, has recently stated that although Southwest has always been a sole Boeing operator, that might not necessarily be the case in the future.

GLOBAL TRAFFIC AND BACKLOG OUTLOOK
Produced by GNUPLOT 5.3 patchlevel 0 +0% +2% +4% +6% +8% +10% +12% +14% +16% 2000 2005 2010 2015 2020 2025 0% 10% 20% 30% 40% 50% 60% Backlog as % of World Fleet Global Traffic Growth Backlog as % of World Fleet Global Traffic Growth

Source: Airline Monitor, Feb 2019

NARROWBODIES
Produced by GNUPLOT 5.3 patchlevel 0 0 100 200 300 400 500 600 700 800 900 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Boeing narrowbody deliveries 737NG 737MAX 737NG 737MAX 0 200 400 600 800 1,000 1,200 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Airbus narrowbody deliveries A320ceo A320neo A220 A320ceo A320neo A220 0 500 1,000 1,500 2,000 2,500 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total narrowbody deliveries Boeing Airbus China/Russia Boeing Airbus China/Russia 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Boeing narrowbody fleet 727 737 Classic 737 NG 737 MAX 727 737 Classic 737 NG 737 MAX 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Airbus narrowbody fleet A320ceo A320neo A220 A320ceo A320neo A220 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total narrowbody fleet Boeing Airbus China/Russia Boeing Airbus China/Russia
WIDEBODIES
Produced by GNUPLOT 5.3 patchlevel 0 0 50 100 150 200 250 300 350 400 450 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Boeing Widebody Deliveries 747/767 777 777X 787 747/767 777 777X 787 0 50 100 150 200 250 300 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Airbus Widebody Deliveries A340/A330 A330 NEO A350 A380 A340/A330 A330 NEO A350 A380 0 100 200 300 400 500 600 700 800 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total Widebody Deliveries Boeing Airbus Russia/China Boeing Airbus Russia/China 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Boeing Widebody Fleet 747/767 777 777X 787 747/767 777 777X 787 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Airbus Widebody Fleet A300/310 A340/A330 A330 NEO A350 A380 A300/310 A340/A330 A330 NEO A350 A380 0 2,000 4,000 6,000 8,000 10,000 12,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total Widebody Fleet Boeing Airbus Russia/China Boeing Airbus Russia/China
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