Ending months of speculation, Airbus (NASDAQOTH:EADSY) finally announced the major update to its original A330 long-haul aircraft at the biennial Farnborough event. It will form a part of Airbus' wide-body stable that has the A350, A330 and the superjumbo A380. In the crucial wide-body aircraft segment, Boeing (NYSE:BA) has the lead over the European aero major -- will the A330neo change that?
The A330neo arrives
The A330neo will feature fuel-efficient engines, better interiors, and pronounced aerodynamic improvements, according to the company's press release. It will come with the latest fuel-efficient Rolls-Royce engine, the Trent 7000, that would enhance the plane's range by nearly 740 kilometers and will be much quieter than its predecessor. In fact, this engine derivative is based on the TRENT-TEN (Thrust Efficiency and New Technology) that is powering the Boeing 787-10, and Airbus claims that it will lead to 14% fuel savings per seat over the aging A330.
The midsize wide-bodied aircraft of Airbus would be available in two variants -- the A330-800neo seating 252 passengers, and the A330-900neo seating 310 passengers. It would compete with three variants of Boeing's Dreamliner -- 787-8, 787-9 and 787-10 -- seating 242, 280 and 323 passengers, respectively.
Airbus would be hoping the A330neo to have the same effect on its order book as the single-aisle aircraft A320neo. In 2010, the plane maker had revamped A320 and launched A320neo. Presently, with still more than a year to go for its first delivery, the A320neo family has captured almost 60% of the market in the narrow-bodied category, clearly demonstrating Airbus' leadership in this segment.
In comparison, if we dissect the wide-bodied aircraft backlog of Airbus, we will see that the A330 backlog has been shrinking rapidly. Last year, while Airbus delivered 108 A330s, it added a lean count of just 77 orders to the pipeline. Also, as on June 30, the A330 backlog stands at 243 pending orders, which is not exactly the kind of number Airbus would like to post. With the current production rate of 10 jets per month, these pending orders could get cleared within the coming two years.
A thin battle with the Dreamliner
Airbus' wide-body backlog is 86 less than Boeing's till the first quarter. Airlines are shifting their preference to the Boeing 787 Dreamliner for its fuel efficiency. With almost no fresh orders for A330 in 2014, the unraveling of A330neo seems to have happened at the right juncture.
Airbus has estimated that development of the A330neo would impact the group's margins by 7%-8% in 2015, which the company would try to offset through cost cuts. Airbus has pegged the developmental cost to be 2 billion euro ($3.3 billion at current exchange rate), and would reap stable profits from the A330neo soon after its deliveries start in 2017.
On the contrary, the Dreamliner 787, which has been built from scratch by Boeing, has still not registered profit in spite of being in service since 2011. Analysts expect the Dreamliner to garner profits only after 2021. Of course, Airbus, too, faces a similar cash drain with its all-new aircraft A350.
In terms of pricing, the A330neo is cheaper than its competitors even without discounts. The listed price of the A330-900neo could be around $275 million, competing with mid-sized Boeing 787-9, which has a retail price of $249.5 million. Though the price of 787-9 looks more competitive at first glance, it can carry fewer passengers compared to A330-900neo. In the past, Airbus has often undercut Boeing on prices, which boosted market share but pressured margins.
Airbus CEO Tom Enders tried to alleviate concerns soon after its gala inauguration. Sharing his views with the Financial Times, he said, "It is legitimate that . . . investors are always concerned about price wars . . . on the other hand you can see that over the years we have behaved quite rationally [in the market]." He added that with this key launch, Airbus now has a "very strong portfolio" of wide-body aircraft and that A330neo would be a "high margin aircraft" for the company.
Interestingly, within five days of its primary launch, A330neo has been able to garner around 121 orders worth $33.2 billion at listed price. This includes the deal with leading Asian carrier Air Asia for 50 A330-900neo worth $13.8 billion, orders from Air Leasing Corporation, Avalon, and CIT. Airbus expects the flow of orders to continue, hitting at least 1000 by the end of the year, deliveries of which would begin from the fourth quarter of 2017.
Airbus is relying on reengineering to ramp up orders in the midsize wide-bodied segment, as it looks to keep operating costs low while maximizing revenue. The company seems to have a trump card up its sleeve with the competitive pricing and better engine of the A330neo, reflected in the thick order flow. How far the aircraft helps the aero major to catch up with Boeing, time will tell.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.