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Of Course Airbus Is Building the A330neo!

This week Airbus Group (NASDAQOTH: EADSY  ) took the wraps off its newest model: a reengined version of the A330 mid-range wide-body. Airline industry analysis group CAPA stated that the decision to build the A330neo "ends more than 12 months of will they-won't they speculation."

But it was virtually inevitable that Airbus would build the A330neo. To be blunt, Airbus desperately needs the A330neo to keep up with Boeing (NYSE: BA  ) in the wide-body aircraft market. With the A330neo now confirmed, Airbus stands in much better position to challenge Boeing's long-term dominance of the wide-body aircraft market.

The void in the Airbus wide-body lineup
As of early 2014, Airbus had a significant problem on its hands. The A350 -- which is due to make its entry into service later this year -- has proved to be a worthy competitor to Boeing's 787 Dreamliner (and the new 777X) in the market for midsize-to-large twin engine planes. But Boeing has dominated the market for 200-300 seat wide bodies.

Sales of the A330-200 have slowed dramatically in the past few years. Photo: Airbus

Airbus has two main offerings in this segment: the A330-200 and the smallest version of the A350: the A350-800. The A330-200 is a good plane, but it's outdated and not competitive with its closest competitors: Boeing's 787-8 and 787-9. Its only advantages over the Dreamliner are big discounts offered by Airbus and plentiful availability within the next few years.

As a result, sales of the A330-200 passenger variant have fallen off a cliff in the last few years. In each of the past two years, Airbus has booked fewer than 15 orders for the A330-200.

The smallest variant of the A350 has fared equally poorly. At the end of 2009, Airbus had more than 180 orders for the A350-800 -- that total has been gradually whittled down to just 34. The main cause was a decision by Airbus to build the A350-800 as a simple shrink of the A350-900, which saved development costs at the expense of fuel efficiency.

To compete with Boeing in the sub-300 seat market, Airbus needed either an aircraft with better fuel efficiency than the A350-800, or one that could be significantly more fuel efficient than the A330 while maintaining a low price point.

Enter the A330neo
The newly launched A330neo fits the bill. While the exact figures are disputed -- naturally -- the A330neo seems likely to deliver a double-digit improvement in fuel economy compared to the current A330. This probably won't match the fuel-efficiency of Boeing's Dreamliner (despite the claims of Airbus' marketing department), but it will be close.

The A330neo won't match Boeing's Dreamliner in range or fuel-efficiency. Photo: Boeing

The A330neo also won't match the Dreamliner's range. The A330-800neo -- the smaller and less fuel-efficient model -- will have a range of 7,450 nautical miles, which is just shy of what the Dreamliner offers.

The larger A330-900neo will probably sell better, but its range of 6,200 nautical miles puts it in a different class from Boeing's Dreamliner (particularly the 787-9, which has the most range). Fortunately for Airbus, most wide-body routes are well within the projected range of the A330-900neo, so plenty of airlines won't care about its relative range deficiency.

On the other hand, Airbus expects to spend no more than €2 billion to develop the A330neo. Given the projected sales volume of up to 1,000 planes, Airbus will be able sell the A330neo at a similar price to what it's currently asking for the A330. That will make it much cheaper than the Dreamliner.

For many airlines, the A330neo is a "good enough" plane at a great price. Photo: Airbus

A330neo sales will also benefit from better availability compared to the Dreamliner. Boeing has very few available Dreamliner delivery slots before 2020. By contrast, Airbus plans to begin delivering the A330neo in late 2017.

Foolish final thoughts
While Airbus remained coy about the possibility of reengining the A330 for all of 2013 and into early 2014, the company really had no suitable alternative. The A330 sales pace has been falling and was poised to fall further as Dreamliner availability improved. Meanwhile, very few airlines seem interested in the smallest variant of the A350.

In other words, without the A330neo, Airbus was on pace to cede the vast majority of the small wide-body market to Boeing within the next five years. With the A330neo, Airbus is vastly more competitive. The A330neo will likely be inferior to the Dreamliner in terms of range and fuel efficiency, but offsetting that, it will be cheaper and have better late-decade availability.

So far, Airbus' decision appears to be paying off. At the Farnborough air show last week, Airbus locked up order commitments for more than 121 A330neos -- roughly one year of production. Plenty of other airlines are interested in the A330neo, suggesting that this plane will indeed help Airbus challenge Boeing's long-held dominance of the wide-body market.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2014, at 3:01 PM, nomadd22 wrote:

    Everybody, except this author, knows that the 350-800 will be cancelled now, so some of the 330 neo sales will come from buyers who would have bought the 358. Almost all of the 330 sales will be because of availability and price. In the long run, that won't be enough to swing most buyers from a 788 with greater capability, lower operating and maintenance costs and a longer lifespan. With the 788 you can switch your plane to shorter routes. You don't have that flexibility the other way around. Longer range also means greater payload for the shorter ranges, so it's not really true that a 330 neo can handle 90% of the 788 jobs. It can only handle 90% with a lower payload percentage.

  • Report this Comment On July 19, 2014, at 7:00 PM, TMFGemHunter wrote:

    @nomadd22: It's been pretty obvious for a while that the A350-800 was never getting built. But it had hardly any orders left anyway -- not enough to support a re-engining project.

    I agree that availability and price will be key considerations for buyers. But I think you underestimate how effective that will be in gaining sales. After all, there are plenty of airlines getting A330ceos today, and they wouldn't be doing that if they expected the planes to be obsolete in 10 years. I don't think the 788's unit costs will be much better than the A330-800, but it's a tad smaller. The 787-9 will stack up better against the -800 from a unit cost perspective; ditto for the 787-10 against the -900.

    It's a waste of money from an airline's perspective to have planes with unneeded capabilities. This became a big sticking point in the negotiations over the 777X -- the Middle Eastern carriers need very long range plus hot and high capabilities. For most other airlines, those characteristics are unnecessary and wasteful.

    Anyway, that's my opinion.


  • Report this Comment On July 20, 2014, at 10:32 AM, DNMay wrote:

    It'll be interesting how Airbus and the airlines handle the matter of guaranteed resale value. The A330neo may look like a dog after ten years in service, and Airbus may not be able to sell many unless they guarantee a high resale value. Those low development costs may not look so low if Airbus has to "add to them" the cost of failing to met resale price guarantees.

    Oh, then there's also the matter of whether development costs can be held at current projections.

  • Report this Comment On July 20, 2014, at 3:19 PM, NicholasKeen wrote:

    If the standard seating on the 787 turns out to be 3-3-3 at 16.9" width and Airbus continues with 2-4-2 at 18" on the A330neo, then from the passenger's point of view it really is a no-brainer. Who would choose to be sardined into a 787 when they could fly side-by-side with their companion on the A330? On US Airways, the four center seats have a wider divide down the middle, between the left two and the right two, so the seating is effectively 2-2-2-2.

    It's a no-brainer from the passenger's point of view. The A330 always was a very nice plane to fly in.

  • Report this Comment On July 21, 2014, at 4:33 AM, RIATdog wrote:

    @nomad22 It will probably surprise you to hear that the A330-200 carries more payload than the 788.

    120+ commitments at launch, plus many more orders to come means that Airbus has a competitive plane in this important market segment.

    No, it's not as good as a shiny new 787, but it doesn't have to be in order to sell, and selling planes is what it's all about.

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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