Why Airbus Desperately Needs an A330 NEO

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.

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.

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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Read/Post Comments (17) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On March 23, 2014, at 11:56 AM, ellaerdos wrote:

    Adam;

    It is a gamble.

    At the end of the day the A330 NEO is a 30 year old design. If they want to remain competitive Airbus will still have to bite the bullet and develop a new plane.

    They would be hindered by the Euro's getting more expensive. Even with a discount, they can only go so deep. Unknowns run through a minefield of labor relations and energy costs to the political problems generated by Russia.

    .7/

  • Report this Comment On March 23, 2014, at 12:03 PM, Magila wrote:

    The 787 is 20% more efficient than the A-330 on a seat mile cost basis, and 25% more efficient on a per trip cost basis (That 10% number comes from artificially limiting the range and under estimating the 787 seat count in the comparison to skew the numbers in favoer of the old A-330). Even with new engines the only reason the A-330 still exists is because Boeing cannot build 787's fast enough to meet demand. Even with new engines the A-330 still has shorter range, and is 10-15% less efficient than the 787, and if you project those fuel costs over the 25 year life of an airliner Airbus would have to pay customers to take A-330's to make up the difference. Worse yet the secondary market for the A-330 is drying up, and lessors are nervous that thier fleets will have to be written off. In 2 years the 787-1000 will debut with more seats, longer range, and still 15 % more efficiency than the A-330. Airbus built the A-350 for a reason, They spent 5 years trying unsuccessfully to sell a re-engined A-330 and found it could not compete with the 787. Also the 777X is not just a re-engine of the 777. In addition to new more efficient engines, Boeing will build it from lighter alloys, it will have 30% more seats, and it will have a new supercritical folding wing. (The longest in commercial Aviation history) In summation Airbus is right not to pour $3 Billion into a spruce goose or a dead duck. (That hopeful 1 Billion cost was Euros and they always run over budget)

  • Report this Comment On March 23, 2014, at 12:41 PM, Tyeward wrote:

    I don´t think there is a need for an A330 NEO. It would have merit if the A350 program would have never happened. It´s almost comparable to GM having Oldsmobile and Buick competing in the same class when Oldsmobile was around. Airbus taking the time to re-tweak the A330 is a waste of time and money. In order for the A350 to live up to it´s sales potential, the A330 will have to give up the ghost. Currently the A330 excels and lives up to advertisement, however it is creeping up on being inefficient and just behind the power curve (just like the 767). It was wise for Boeing to move in the direction away from the 767 in favor of the 787. You would think that Airbus would see the logic in having a shutdown time frame for the A330 to be in favor of the A350. Of course this is a company geared towards profit, however reason must eventually prevail when it comes to one program getting in the way of another up and coming program when the claim is that the newer program is better and more efficient.

  • Report this Comment On March 23, 2014, at 2:53 PM, rh33 wrote:

    While it is arguably true that the 787 has had a "troubled history," that does not mean Boeing chose the wrong path. All new developments of complex systems have problems. The question is whether the results will be worth costs. Because of the 787's capabilities and efficiencies, Boeing is likely to see tremendous benefits from the 787. It is far from certain that re-engineering the A330 would produce a plane that would be competitive and it would be late to the market competition to boot.

  • Report this Comment On March 23, 2014, at 3:33 PM, seaguy wrote:

    As someone who lives in WA I'm fine with Airbus screwing up their loss is Boeing's gain and that benefits WA state.

  • Report this Comment On March 23, 2014, at 8:20 PM, DNMay wrote:

    Adam, you said: "Airbus was the first manufacturer to adopt the re-engining tactic in recent years."

    I respectfully point out that "recent years" is too recent to make your point.

    Even if you disregard the 707 and DC-8 (at least three generations of engine in each case), you should consider the DC-10/MD-11 with three, the 747 with at least two, the DC-9/MD-80/MD-90/717 with five+, the Fokker F.28/100 with two, the BAC-111 with two, the BAe146/RJ with two, the 737 with three and now four . . .

    In fact the A320 is probably a type which has had fewer re-engines than most in its successful lifetime.

  • Report this Comment On March 23, 2014, at 8:49 PM, Duzzy wrote:

    Putting brand new turbines on an old design doesn't make any sense. I'm guessing the 330 will be phased out once the supply of the new composite planes will be able to reach the demand. Lets face it, 787 does have a lot of problems but it's setting a new standard for commercial aviation. the a350 will be the 787's competition...not the 330.

  • Report this Comment On March 23, 2014, at 8:52 PM, Duzzy wrote:

    Putting brand new engines on an old design doesn't make sense in some cases*

  • Report this Comment On March 23, 2014, at 10:28 PM, hunter3203 wrote:

    Airbus's problem is they spent a fortune developing the A380 which appears to be a niche product. The volume and the money is in the large widebody twin market. Boeing has the 787 and the much larger 777. Airbus is trying to compete against two Boeing aircraft with only one, the A350. In order to compete against the large 777 they have made an aircraft that can't be efficiently made small enough to compete against the 787. That's the whole in Airbus's strategy. I think Airbus will have to try an A330 Neo in order to even say they're competing with the 787.

  • Report this Comment On March 24, 2014, at 8:26 AM, TMFGemHunter wrote:

    Thanks for the comments, everybody.

    The A350 isn't really a 787 competitor. The A350-900 is a good match for the 787-10 and the A350-1000 will be a good 777 replacement option, but the A350-800 isn't an adequate substitute for either the 787-8 or the 787-9. The 787-8 is unique because of its small size/long range, and the 787-9 has a significant cost advantage over the A350-800. That's just the natural consequence of the fact that the -800 is a simple shrink of the -900. It saves development costs but at the cost of efficiency.

    The big difference between the 330/330 NEO and the A350-800 is Airbus' ability to give discounts. There aren't a lot of open delivery slots for the A350 before 2020 so discounting the A350-800 would crowd out much more profitable -900s and -1000s. An A330 NEO would have fairly low development costs and would not be competing for production space with the bigger A350s. I think the A330 NEO would be close enough in performance to the 787 for enough operators that Airbus could sell it at a price that justifies the development cost.

    @DNMay: By "recent years", I really meant last 5-10 years. I certainly didn't mean to imply that it had never been done before. I think I confused the issue by adding the 777X and E-Jets, which aren't simply re-engines like the A320 to my discussion and 737.

    Adam

  • Report this Comment On March 24, 2014, at 8:45 AM, TMFGemHunter wrote:

    To put a finer point on my previous comment, not only is the A350 basically sold out through 2020 (and hardly any of those orders are -800s), I think Airbus will not have trouble filling all of its delivery slots through 2030 with just -900s and -1000s.

    @Magila: I agree that the Boeing 787/A330 comparison depends a lot on the seat configurations. The 787 cabin is about 8 inches wider, which is almost half a seat. So while the A330 is clearly an 8-across layout, the 787 can be 8 comfortable seats or 9 uncomfortable seats in each economy row. I deliberately said "at least 10%" more fuel-efficient because of the comparison difficulty.

    I think the gap is probably about 15% or maybe a tad more, but that's really just me splitting the difference between Airbus and Boeing estimates. Neither side can be trusted to provide a fair comparison. If the 787 CASM advantage is 15%-17% today, then new engines could probably get down to a 5%-7% differential. In my opinion, that would be close enough for Airbus to be competitive, even with the inherent range limitations of the A330 vs. the 787.

    Adam

  • Report this Comment On March 24, 2014, at 9:08 AM, patches12 wrote:

    Here is a dumb question, Why did Airbus build the A-350? It has 3 different versions. It is going to replace the A-330 for criss saks!!!!

  • Report this Comment On March 24, 2014, at 12:12 PM, TMFGemHunter wrote:

    The A350 is really replacing the out of production A340 more than the A330. It slots in between the A330 and the A380 in terms of size.

    Hawaiian Airlines is one of the few airlines that still has orders for the A350-800. Based on the info I've seen, HA is planning to put 322 seats on the A350-800, compared to 294 on its A330-200s. That's already a significant difference in size.

    However, Airbus has sold hardly any A350-800s (barely more than 5% of the current order book). The A350-900, which is the highest-volume model, is much bigger than the -800, and also significantly bigger than the A330-300. The A350 could coexist with an A330 NEO, because they are addressing different market segments for the most part.

    Adam

  • Report this Comment On March 25, 2014, at 3:40 PM, bctxjoe wrote:

    Currently, the 787 is no match for the A330.....maybe 20 years from now it might. Take away its lighter composite frame and new engines, it has nothing over the A330. The batteries and electrical design are flawed and potentially even dangerous. The A330 has been way ahead of its time with regard to technology i.e fly by wire, avionics etc for years. Boeing is just catching up.

    Airbus should definitely build the A330 neo. It should be as successful or even more successful than the 777-x.

  • Report this Comment On March 25, 2014, at 3:43 PM, bctxjoe wrote:

    The A350-800 could be replaced simply by A330-200 Neo with an extended range.

  • Report this Comment On April 11, 2014, at 7:29 AM, keesje wrote:

    Airbus sold 800 A330, 800 a350, and 3000 A380's in recent years. the A380 passed 300 without any serious competition & will be there for the next 20 yrs. Lots of derivative / upgrade options.

    No desperation at all. Regardless of how much the readers love to hear that. Sorry.

  • Report this Comment On April 11, 2014, at 7:29 AM, keesje wrote:

    3000 A320 that would be ;)

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