For the past several years, Boeing (NYSE:BA) has been studying the possibility of building an all-new jet, most likely called the 797, to cover the "middle of the market" segment. The goal would be to offer more range and more seating than today's biggest narrow-body jets, like the Airbus A321neo and its long-range variants, while keeping trip costs dramatically below those of wide-body jets, even highly efficient ones like the Boeing 787.
Unfortunately, the Boeing 737 MAX safety debacle has forced the company to put development of the 797 on the back burner. That has essentially ruled out its original plan of having the proposed jet ready for service by 2025.
As a result, Boeing is now considering a far more modest undertaking: revamping the 767 with new GEnx engines from General Electric (NYSE:GE) to fill the middle-of-the-market role. If it proceeds with this project, it would be great news for GE.
What Boeing is studying
The Boeing 767 was developed beginning in the late 1970s, with several variants introduced throughout the 1980s and 1990s. Given that the 767 relies on a 40-year-old basic design and 1980s engine technology, it isn't as fuel-efficient or capable as more modern jets. Nevertheless, it remains a popular choice for cargo airlines, and Boeing has a substantial backlog for its 767 family, split between cargo and military variants.
Boeing's 767-X study is looking at the possibility of upgrading the largest 767 model -- the slow-selling 767-400ER -- with new GEnx engines. The GEnx is about 15% more fuel efficient than the prior-generation engines found on existing 767s, according to General Electric. To accommodate this larger-diameter engine, the 767-X design would include an extended landing gear.
For now, Boeing is primarily looking at building the 767-X for the cargo market. In addition to consuming less fuel than the 767-300F that Boeing builds today, the 767-X would also have more room for cargo. However, a passenger variant is also on the table and could be well-suited to mid-range international routes.
Boeing executives insist that the company has not abandoned its 797 feasibility studies. But while the 797 would be a superior airplane relative to the 767-X concept, the latter could be introduced sooner, most likely around 2025, and at a much lower cost.
This would be a big win for GE Aviation
The 767-X project isn't a no-brainer for Boeing. While development costs would be lower than for the 797, the price tag would still run into the billions of dollars, and the resulting product wouldn't offer the game-changing economics of the 797 concept. As a result, Boeing might remain at a competitive disadvantage in terms of addressing the middle-of-the-market segment.
By contrast, the 767-X represents pure upside for General Electric. GE has already designed a great engine in the GEnx, and it is producing them at a high rate for the 787 Dreamliner -- and, to a lesser extent, the 747-8 -- bringing down manufacturing costs. Adding a third aircraft for this mature engine type would lead to additional sales, driving further long-term growth in GE Aviation's service revenue with fairly minimal incremental costs.
The proposed Boeing 797 would not be so clearly positive for GE. General Electric's CFM joint venture is one of the two engine makers being considered to power the 797 if Boeing goes ahead with that project. However, even if CFM were to win the contract, it would have to invest a substantial amount of money to develop a new engine. It would also likely lose money on the first few years of engine production.
In light of GE's need to fortify its balance sheet over the next few years, it would be better if CFM didn't take on a massive new development project in the immediate future. Furthermore, even if the 767-X doesn't sell as well as a 797 would, it's not necessarily a loss for GE: CFM is one of two engine suppliers for Airbus' competing A321LR and A321XLR models.
Why the 767-X project has a good chance of being approved
The 737 MAX safety crisis has increased the likelihood that Boeing will opt to develop the 767-X rather than the 797 for two main reasons. First, the 797's timeline has slipped. Management has been forced to focus most of its attention on getting the 737 MAX back in the air, and the regulatory certification process for new aircraft is likely to get much tougher. Thus, the 767-X now represents Boeing's best shot at getting a 767 replacement ready within the timeframe customers demand.
Second, the reputational damage to the 737 MAX means Boeing should prioritize development of an all-new replacement for the 737 family. The company isn't likely to take on two major development projects at once, and waiting until after the 797 would enter service in the late 2020s to ramp up work on a 737 MAX replacement would be unwise.
Even if Boeing decides to go ahead with the 797 program, it could still pursue the 767-X as a cargo-only upgrade of the 767. The addressable market would be smaller, but not insignificant.
If the 767-X concept becomes a reality, it will be a huge win for GE, driving further growth for its high-margin aviation business with minimal upfront costs and risk. As a GE shareholder, I will be following Boeing's decision process closely over the next year.