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.
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 The A330-200 is a good plane, but it's outdated and not competitive with its closest competitors: Boeing's 787-8 and 787-9.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 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.
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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