Why Airbus Desperately Needs an A330 NEO

Airbus needs to put next-generation engines on the A330 if it wants to stay competitive with Boeing's 787 beyond 2020.

Mar 23, 2014 at 11:00AM

In the competitive market for widebody airplanes -- typically used for longer routes -- Airbus and Boeing (NYSE:BA) have adopted quite different strategies. Boeing first poured tens of billions of dollars into developing the 787 Dreamliner from scratch. Now it is embarking on a major update to its larger 777, which will include new engines and a new wing design.

By contrast, Airbus has concentrated all of its widebody development resources on its new A350. The A350 family already covers a large swath of the widebody market, and Airbus may ultimately launch an even larger version that would put the A350 in yet another market segment. Meanwhile, Airbus has made only token changes to the smaller A330.

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A330 sales have remained surprisingly strong despite the arrival of Boeing's 787. (Photo: Airbus.)

Instead, Airbus has relied upon price concessions and the availability of the A330 (compared to Boeing's 787, which is all but sold out through 2020) to keep sales up. However, to keep its fair share of the widebody market long-term, Airbus needs to improve the A330's competitiveness vis-a-vis Boeing's 787. Creating an A330 NEO with updated engines is probably the best way to do so.

The re-engining trend
As persistently high fuel prices have driven strong demand for new fuel-efficient planes, aircraft manufacturers have found plenty of success in offering reengined airplanes. By putting new engines on an old plane, aircraft manufacturers can take advantage of improvements in engine technology to reduce fuel burn.

Typically, a re-engined airplane won't offer the same level of performance improvement as a brand-new design. However, the upfront investment cost is dramatically lower, making it possible to break even much faster. Furthermore, the troubled history of Boeing's 787 program has highlighted the risks involved in designing a new airplane from scratch.

Airbus was the first manufacturer to adopt the re-engining tactic in recent years. In 2010, Airbus launched a version of its popular A320 narrow-body series with new engines, called the A320 NEO. With the first delivery still more than a year away, Airbus has already sold thousands of A320 NEOs.

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Airbus, Boeing, and Embraer have all embarked on re-engining projects recently. (Photo: Embraer.)

Boeing eventually followed suit by offering its own re-engined narrowbody, the 737 MAX, which has also seen good sales. More recently, Embraer (NYSE:ERJ) announced a re-engined version of its E-Jets for the large regional jet/small narrowbody market and Boeing began selling the 777X, which includes a new wing as well as new engines.

The case for an A330 NEO
So far, Airbus has resisted the idea of extending the re-engining trend to the A330, even though several airlines and engine manufacturers have been pushing this concept. Airbus has said that the A330 is doing very well as is and doesn't necessarily need further upgrades. However, airline and aircraft leasing firm executives have become increasingly skeptical that the A330 has a long-term future.

The A330 skeptics have a point. The A330 backlog has been shrinking recently. In 2013, Airbus delivered 108 A330s but received only 77 orders. Airbus hasn't booked any new A330 orders in 2014, either, although it appears to be on the verge of getting a large order from China. As of the end of last month, Airbus has 252 A330s on firm order, representing a little more than two years of production.

Airbus should be able to keep the A330 production lines running at roughly the current pace for another five years between the orders it has already booked, the potential Chinese order that is in the works, and future orders. However, it is hard to imagine Airbus selling 100 or more A330s annually beyond 2020.

First, the A330 will be nearly 30 years old by then. Boeing has already made plans to phase out the original 777 (which is similar in age) in favor of the re-engined 777X around 2020. Second, the competing 787 Dreamliner will probably have a smaller backlog by 2020, reducing the incentive for airlines to choose the A330 to get new planes quickly. The Dreamliner is at least 10% more fuel-efficient than the A330.

A re-engined "A330 NEO" could extend the A330 program's life by at least a decade by narrowing the fuel-efficiency gap with the Dreamliner. Moreover, the development cost could be as little as 1 billion euros. This seems like a very reasonable price to pay in order to keep Airbus competitive at the smaller end of the widebody market.

Foolish conclusion
Boeing has made waves with the revolutionary 787 Dreamliner, but the older Airbus A330 has remained successful because of its shorter waiting list and Airbus' liberal use of discounts. However, as Boeing reduces the 787 backlog to a more manageable level, Airbus will have more trouble selling the less-efficient A330.

A "re-engined" A330 NEO could significantly narrow the performance gap between Airbus and Boeing in the small-midsize widebody segment. Furthermore, Airbus probably wouldn't have to resort to such steep discounts to sell a more fuel-efficient A330 NEO. This fully justifies the relatively modest investment Airbus would have to make to develop this updated model.

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Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Embraer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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