A Technological Innovation in the Air That Investors Won't Want to Miss

Airbus Group (NASDAQOTH: EADSY  ) and The Boeing Company (NYSE: BA  ) , the two companies that make up the global duopoly in airplane manufacturing, each have a new commercial jet model hitting the market in the next few years. Airbus's A320neo is supposed to hit the market in about 18 months from now, and Boeing's 737MAX will follow about 18 months after that. Both models provide significantly increased fuel efficiency -- a tangible and irrefutably positive innovation -- but are of the same kind, if not degree, as previous models.

The A320 New Engine Option

Airbus a320 New Option Engine (NEO), set to hit the market in late 2015. Photo: Airbus

Orders for these new models are piling up fast, with airliners like Southwest, American, and United Continental among the many customers demanding the efficient vehicles. Both Airbus and Boeing have each already received over 2,000 orders for their new models, a number that appears to be breaking sales records and increasing fast. While the new models offer significant improvements, however, investors find themselves continuing to wait on a larger leap in technological innovation. We are apparently still quite far from a commercial airliner that runs on alternative fuel sources.

Improvements in (fossil) fuel efficiency
The Airbus A320neo reportedly offers a 15% increase in fuel efficiency over the standing model. In addition, the new engine has lower levels of harmful emissions. The Boeing 737MAX is supposed to reduce fuel requirements by 14%, and may reduce operating costs to a level that is significantly below that of Airbus models.

Investors can be happy about these innovations. In an industry where 40% of operating costs may go to fuel alone, a 15% increase in efficiency can lead to hundreds of millions in savings per year.

Passengers should also welcome these new models, with more spacious aisles and the hope of a cheaper ticket -- that is, of course, if the airline is willing and able to pass any of their savings on to their customers.

Environmentalists can even take heart that less fuel is being used for the same amount of traveling, which has obvious benefits.

The next big step
While I acknowledge the marginal benefits that these new models provide, I want far more. As an investor, I am actively searching for the high-performance airline running on alternative energy.

Airbus reports that its "European Advanced sustainable aviation fuel Flightpath" initiative can lead to sustainable fuel production, usage, and storage. Within its exciting literature about the potential of algae to be developed into a fuel source for the aviation industry (seriously), Airbus alludes to a far-off target of 10-35 years down the road.

I found Boeing's literature a little more short-term focused, emphasizing the company's testing process rather than whatever long-term deadlines it may have in mind. Boeing essentially has the same idea as Airbus, however, which is to figure out how to make a big jet fly on fuel made from plants, using the same manufacturing infrastructure already in place.

Boeing 737MAX.  Southwest Airlines is set to receive the first one, in mid-late 2017. Photo: Boeing

Researching and developing
Of course, this is a huge undertaking. I did pretty well in my science classes, but I can't even begin to imagine the time, energy, and corporate resources that must go into making a jet fly on wood chips (again, a serious possibility.) Both Airbus and Boeing have spent between 3% and 7% of their revenue on R&D in the past few years, and as you can see by the chart below, that figure has dropped since 2011. 

EADSY R&D to Revenue (TTM) Chart

EADSY R&D to Revenue (TTM) data by YCharts

I would like to see Boeing spending more on R&D, if game-changing technological innovations are a part of their long-term strategic focus.  Airbus is outspending them in this department, despite the fact that Boeing has the higher gross margin and net margin.  If Airbus is able to develop a renewable-fuel jet first, this additional investment should pay off big time.

A potential gold mine
It is clear that, in addition to the harm caused to the environment by the burning of fossil fuels, fossil fuel costs are significant to airlines. As non-renewable fuels become more scarce (which, as their name suggests, they will), fossil fuel costs should increase to potentially crippling levels. The first airline manufacturer to successfully offer an economical alternative-fuel jet stands to make a killing. Airliner demand will be huge in the face of higher fossil fuel costs and potential business from environmentally conscious fliers.

It is unclear if Airbus or Boeing will be the first to market. In fact, considering how the similar scenario played out in the auto industry, it is not out of the question for a third party to enter the competition and make the alternative-fuel jet a reality, as Tesla Motors did on the ground. It may be wise to stay abreast of technological advancements in the jet manufacturing industry, and decide for yourself if any one firm has the potential to change the commercial jet game.

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