The single-aisle 737 has been Boeing Co.'s (NYSE:BA) best-selling model for years and makes up for three-fourth of its total backlog. The successful run has only gotten better with the newly launched 737 Max as Boeing has promised the aircraft's operating cost would be lower than its competitors.
The past year saw amazing demand for the aircraft -- 1,196 gross orders, which is 77% of Boeing's total gross order units. At list prices, gross order value for the 737 was nearly $123 billion -- more than 50% of Boeing's total gross order value.
The 737 is so popular because of three key reasons -- increasing use of narrow-body planes, rising demand in Asia-Pacific, and the 737's fuel efficiency and high reliability. Let's explore these in detail.
Narrow-body preference across the globe
Studies show that in the past five years, the proportion of narrow-body jets in the global fleet is rising. Narrow-body aircraft have found favor with airlines as they provide better turnarounds and utilization on short-to-medium routes.
North America has been shifting toward single-aisle planes for domestic routes -- according to Boeing's 2014 market outlook, in 1993 widebodies made up for 20% of the capacity, while that has reduced to 5% now. Similarly, China's wide-body capacity has fallen to 9% from 30% in 1993. North America and China are the world's biggest aviation markets, accounting for 32% and 11% of the 2013 global fleet.
The emergence of low-cost carriers, or LCCs, across the globe has also fueled narrow-body demand. Most low-cost carriers build their fleets around single-aisle planes as widebody jets carry a higher list price.Airbus studies show that the market share of LCCs in terms of seat capacity has expanded from a meager 2% in 2003 to 25% in 2013. In Europe, LCCs made up for 40% of the domestic capacity in 2013, and 20% in North America. The share is as high as 58% in Southeast Asia.
Rising demand in Asia Pacific
Demand in Asia is on the rise. In the last few years, the market has surpassed Europe in size, and is second only to North America. In 2013, Asia had a fleet size of 5,470 airplanes of which 70% were narrow-bodies. With growing liberalization, cross-border subsidiaries and foreign direct investments in airlines are increasing.
Over the years, route regulations in Southeast Asia have been eased, opening new short-haul routes that require bigger fleets. The Association of Southeast Asian Nations' open-skies agreement, to be partially implemented this year-end, looks to further liberalize rules governing international routes. This will open new short-haul routes in China, India, and Southeast Asia. According to Boeing, "More than half of the region's forecast 2,460 single-aisle airplane deliveries over the next 20 years are already on order." These planes will serve 600 million people as air travel in the region grows. In 2014, nearly 27% of all 737 orders to identified customers were from Asia-Pacific.
China and India, major narrow-body customers, have been building new airports and expanding existing ones to cater to the rising demand. The Indian government is planning to build 200 airports across 50 cities, and the number of airports in China was expected to go up to 230 in 2014 from 175 in 2010.
The 737 presents an attractive proposition to carriers
Apart from adding to the fleet size, airlines are also replacing their existing fleet with upgraded planes. The 737 Max 8 emits less CO2 and saves fuel by as much as 14% compared with current single-aisle planes. Boeing claims that the aircraft would offer the best operating cost in the segment, and be 8% more efficient per seat than Airbus' A320neo.
Boeing claims the 737 Max will have a better reliability rate than the 99.7% provided by the current generation 737, already one of the best in the industry.
Replacement demand originates mainly in the matured markets of North America and Europe. While analysts believe lower fuel cost might encourage airlines to retain their existing fleet longer, Boeing's 2014 order tally shows airlines are buying the upgraded planes unabated. Replacing current generation aircraft with new fuel-efficient ones even when oil prices are low makes sense as prices will not remain low forever.
Airlines' increasing profits also support such huge investments. IATA expects airline net income to come in at $19.9 billion in 2014, up a staggering 80% from $11 billion in 2013. Lower oil prices have saved airlines billions in fuel cost, boosting profits. Airlines are using these profits to expand networks and buy new fuel-efficient planes. For 2015, the association forecasts airlines profits to increase by more than 25% and hit a record $25 billion.
The 737's reliability and cost efficiency have made it loved among carriers around the world. The shift in fleet preference toward narrow-bodies, new demand from emerging markets, and replacement of aging fleets in more matured ones should continue to fuel 737 demand in the years to come.
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.