A few days back, Boeing (NYSE:BA) announced that it plans to replace the 737 Max by 2030. In May, CEO Jim McNerney had said that Boeing won't "pursue moonshots," referring to the 787 Dreamliner. Without mincing words, he had called built-from-scratch programs "apocryphal risk." In a complete u-turn, the company's now showing keen interest in building an all-new narrow body, even when 737's updated version 737 Max has bagged quite a few orders and is slated to enter service in 2017. Is there anything wrong with company's best-seller? If not, then why does Boeing want to substitute its key revenue driver with a completely new plane? Let's find out.
Boeing's decision could be triggered by the rising threat from age-old rival Airbus (NASDAQOTH:EADSY) as well as emerging players. Despite 737's incredible success -- through the third quarter ended September 2014, it had an order backlog of 4,033 units, which is more than 72% of the aggregate backlog -- McNerney believes building a new plane is essential as its competitors would offer something very similar to the 737 Max. Boeing wants to come out with a product way more advanced but at a similar price. There's no doubt that Boeing would save on cost by making another derivative plane on its existing platform, but "innovation" is the best way to stand out and effectively fight competition.
McNerney said that the new plane would be a bit bigger than the 737, but the fuselage wouldn't be a dramatic makeover from the current jet. Chances are that it would be made of composite material, which would make it more fuel efficient. Boeing has already invested billions in such technology for the 787 Dreamliner project, so using the platform makes quite a bit of sense. Not only would this save money, but time as well.
Stacking up against Airbus A320 family
The thought of building an all-new plane to succeed the 737 had occurred to Boeing at the start of this decade. But it ditched the idea after Airbus' A320neo, the derivative version of A320, received warm reception from airlines. About eight months after Airbus announced its plans to make the A320neo, Boeing took the wraps off the 737 Max. But the time gap has played a crucial role and given Airbus an edge. Both the models are fiercely competing for orders. Presently, Airbus has more than 3,000 in firm orders from 60 customers for the A320neo compared with Boeing's 2,325 737 Max orders from 48 customers.
Airbus has been strengthening its aircraft portfolio to capitalize on the future demand of narrow-body planes. The European player has been a strong contender in this segment -- continuously working to widen market share. And the company's currently posing a threat to Boeing with its latest addition, the A321neoLR, in the A320neo family. According to an analysis by Leeham, A321neo is gaining traction in the short-haul market over the 737 Max 9.
The A320neo, scheduled for service entry in 2015, will get a two-year lead over the 737 Max. So, a new plane from Boeing with greater advancements over Airbus' offering would give the company a leg up amid existing and potential competition. The Chicago-headquartered aero major realizes that it needs something more than a 737 Max to preserve its position, and the new plane could give it the first mover advantage.
New players entering the arena
Narrow bodies are forecast to make for 70% of the deliveries over the next two decades, and apart from Boeing and Airbus, there are new players that see an opportunity here.
Take for instance China's plane maker Commercial Aircraft Corp. of China (COMAC). The company was created in 2008 to retain a portion of the billions of dollars worth of commercial aircraft business moving to the American and European economies. Boeing forecasts that Chinese airlines would need more than 6,000 planes in the next 20 years. COMAC wants a share of the pie and is building the 158-168-seater narrow body C919 plane with engines from CFM International. The jet will have a maximum range of 3,444 miles and is slated to enter service in 2018. With about 400 orders, the C919 could create trouble for both Boeing and Airbus, whose 737 and A320 have been the most popular narrow-body aircraft flying across the globe.
Other competitors include Russia's Irkut MS-21, and Canada's Bombardier CSeries. Through the 180-seater MS-21, the Russian government's venturing into the local and overseas civil aviation markets, and is looking to take on the narrow-body offerings of Boeing and Airbus with a wider cabin. The prototype of the plane is scheduled to be rolled out next year. Irkut claims that the jet has lower empty weight, higher fuel efficiency and better aerodynamics than competitors. The CSeries is also pitted against the A320 and 737, with Bombardier asserting that the aircraft line is 20% more fuel efficient over similar options. Its carbon emission is 20% lower and results in 15% lesser operating cost.
Boeing's proposed replacement plan for the vulnerable 737 family looks like a well thought out move. The company has to make some strong decisions such as going for an all-new plane instead of a mere upgrade even though it would involve more investments. It's crucial for Boeing to do this in order to maintain its position and contest increasing competitive pressures over the long term, but investors would be hoping for better execution and less delays than what we saw with the Dreamliner program.
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.