Interesting Dynamics

Yesterday I posted a blog entry about the possible new” 737-7 definition (click here).

This post is not a real entry, but only a question.

What do you think about this potential “new” 737-7, if built, in relation with the A319neo, E195-E2, CS300 and perhaps other aircraft models?

What kind of competitive landscape do you expect from this possible new version?

Simple Shrink

This morning I wish to discuss about an article concerning the 737 MAX (click here). The article mentions possible two versions of the 737 MAX, which would be a bigger capacity 737-7 and a bigger 737-9.

From an observer’s perspective, I do not see clearly in the possible changes. It seems the current 737-7 offering might be replaced by a version that is slightly bigger and there could be a new 737 MAX version bigger than the 737-9. So far, my interpretation is that the 737-7 will morph into something else and the 737 MAX could become a family with four members, namely the -7, -8, -9 and another one bigger than -9.

Let us discuss only about the 737-7 in this blog entry.

Simple Shrink

According to the above mentioned article, the “new” and bigger 737-7 could be a simple shrink of the 737-8 and it would have a capacity of around 150 seats. Basically it would be bigger by one to two seat rows compared to the current definition of the 737-7.

The last time I heard the term “simple shrink” it was about the A350-800, that would have been a simple shrink of the A350-900.

I might be looking too much into it, but the term “simple shrink” seems to be the translation of, “Let’s do it as simple as possible in order to improve the development cost and also to reduce production cost.” If the new 737-7 version is based on the 737-8 with a shorter fuselage, then the development and also the flight tests would be much shorter. Indeed, if the 737-7 is a simple shrink of the 737-8, most system compliance demonstration for certification can be done by similarity to the 737-8 that will have been certified.

The only issue with simple shrink is that it would carry some parts that are not optimized, that could potentially result in higher empty weight. But, since the capacity would have grown a little bit, the operating costs on per seat basis would be better than that of the “previous” 737-7 while offering a better revenue generation potential. So, all in all, the balance is positive.

Cost Reduction

Many people in the blogosphere think the possible bigger “new” 737-7 is to make it more competitive. Well, in some sort it is the case. However, In my opinion it is more about Boeing reducing the overall cost of the 737-7’s development and production than about the aircraft itself.

If the -7 becomes a simple shrink of the -8, the commonality between the two would be significant and thus standardization of parts becomes possible. Imagine how things would be much simpler with lower part numbers for both -7 and -8.

The bigger “new” 737-7 would also improve the pricing compared to the “previous” 737-7. After all the production cost of the 737-8 and 737-7 would not be so different. Thus improving the 737-7’s value proposition is also getting more money from the product.

In addition, why would you invest too much for a version that is not selling so well?

As a conclusion, I would like to summarize the possible bigger 737-7 situation as follows:

  • it is an effort to reduce development cost and production cost
  • it is an effort to increase the value of the 737-7 and thus to generate more profit of a product that is not very popular

So I interpret that this is an overall industrial approach, beyond the conventional “product strategy” thinking.

Initially I didn’t see a real advantage of a bigger 737-7. After an interesting discussion with readers in the past post titled “Extra Rows” (click here), I finally changed my mind and admit that a bigger 737-7 is credible.

Only fools don’t change their mind.

Is There A Narrowbody Bubble?

The question whether there is a bubble in the narrowbody market has been asked several times, because the backlog is so huge. Some people start to say that the total order is way bigger than the actual need.

Short Term versus Long Term

Everybody knows the backlog for the 737 MAX now exceeds 3,000 units and that of the A320neo exceeds 4,500 units. Does the backlog indicate there is a huge bubble that could potentially burst any time?

Well, nothing is sure. However, something has to happen to that huge backlog because it represents more than five years of production at current rate. Many things can happen during five years.

Let’s see the long term demand for narrowbody. The easiest way to check this is to see what some manufacturers say about the future aircraft deliveries. For the sake of simplicity, we are going to check Boeing’s 2015 Current Market Outlook (CMO).

The expected total narrowbody delivery between 2015 and 2034 is about 26,700 units. Basically the number is way bigger than the combined A320 and 737 backlogs.

Current Generation Narrowbody

It is almost obvious that the current generation narrowbody won’t be competitive enough compared to the A320neo, 737 MAX or C Series. It is therefore reasonable to say that the A320ceo and 737NG production will have ceased by the end of 2020. In general terms, the previous generation aircraft, whether it is narrowbody, regional jets or even widebody will all cease production around 2020 – 2021 because new generation aircraft are coming.

Currently there are about 930 A320ceo in the backlog and there are about 1,250 737NG to deliver. As you can notice, both models will transition smoothly to the new generation replacement. Therefore most probably the roll over will be completed in the second half of 2019 or early 2020.

There Is Not Any New Generation Narrowbody Bubble

When you know that the efficiency of the new generation narrowbody is double digit percentage better than the current one, you can imagine that airlines will try to introduce new generation narrowbody whenever possible. It means there is not a bubble for the next generation aircraft.

Nevertheless, the current backlog spans too widely over the time. Although air transport is a growing industry, an airline’s life depends much on the way it is managed. Airlines are created and others go bust. How many airlines with A320neo or 737 MAX orders will survive in six years? Basically, while the amount of orders is way below the expected total deliveries for the next 20 years, many of the ordered aircraft won’t be delivered to the “customers” that initially ordered them. There will be a lot of order swapping in the next five years. Well, it will keep some people busy.

So, bubble or not bubble? It depends on how you consider it.

Delta Airlines Orders CS100

The CS100 obtains 75 firm orders and additional 50 options from Delta Airlines (click here). That’s a very good news for Delta, Bombardier and the aerospace industry in Canada.

Target

With Delta order announcement and Air Canada announced intention to order C Series aircraft, the target of 300 orders prior to the entry into service will be reached or exceeded.

In my opinion, the market for the C Series is more than big enough to guarantee a very profitable C Series program. My very rough estimates puts the total C Series deliveries at 3,500 units in 20 years. It may or may not include some enhanced versions. That number is only about 13% of the forecast narrowbody deliveries in the next 20 years (click here).

In a French blog, I wrote an article about the aviation market that is growing (click here). Air travel will continue to grow and thus the air transport industry needs more aircraft for replacement and growth.

Replacement And Growth

The topic about replacement and growth was discussed in this blog back in September 2010 after I attended a meeting on North American market forecast (click here). I invite you to revisit that very specific blog entry. Basically in 2010, Boeing forecast US$ 700 billion of new aircraft deliveries in the North American market. I am pretty sure the number has grown bigger today considering the constant growth of air travel.

Boeing 2010 CMO North America – image courtesy of Boeing

About two third of North America deliveries will be for replacement. That’s a huge number! One day, I took the time to count the number of small narrowbody aircraft and also big regional jets. In less than two hours and using only available information on the Internet, I found more than 4,000 aircraft. Those aircraft will have to be replaced in the next 20 years.

North America And Europe

So, in 2016 the C Series has two major orders from North American airlines. One from Delta and the other from Air Canada. Most probably other airlines will follow.

Coincidentally, I wrote a blog entry about the North America and Europe several months ago (click here). You need to read that blog entry too, in which I wrote the following.

I was asked several months ago where the CSeries will sell best. Well, the answer is not too difficult because the biggest aviation market is in the North America and Europe. So, I answered simply North America and Europe. That’s too easy, isn’t it?

Now, someone else asked me the question, “Which airlines are potentially CSeries’ customers because they have all bought Airbus A320 and Boeing 737?” Well, I answered the question with a simple response, “All of them are potentially CSeries customers.”

Anyways, the reality is that some airlines’ fleet are so huge that they can easily have several sub-fleet. More interestingly, those airline will have to accept mixed fleet from now on, whatever their choice is.

Today’s narrowbody aircraft are two digit percentage more efficient than the previous ones. In simple words, the new aircraft coming soon have all a step change in term of efficiency. So, it would be a heresy not to take delivery of those aircraft. However, those aircraft will have new engines, new documentation, new systems and so on. Even the “re-engined” version aircraft are basically new aircraft.

Whatever an airline’s choice is, it will have to undergo a transition to the new version of narrowbody, including the associated “transition cost”. In this context, I sincerely think the C Series can break into the market easily. And it does.

Delta Order Is Interesting

The CS100 order from Delta shows how important the CS100 is in the C Series program. If you look carefully into Delta’s choice, you can deduce that the airline is not ready to give up frequency on certain routes. In addition, Delta might be thinking about long-term network structural changes.

I am today wondering if Delta is not thinking about more point-to-point flights bypassing their hubs. I am not at all saying that domestic hubs like Denver or Atlanta will disappear, not at all. Nevertheless, very efficient, very capable and small enough aircraft like the CS100 opens new possibilities.

What if the CS100 order is part of a larger strategic plot? It is a coincidence that I posted something about Delta’s intention to develop a hub in Seattle (click here).

What’s Up With 737 MAX Flight Tests?

Several days ago there has been some kind of buzz about the 737-7 (MAX). Indeed, some say that the 737-7 might morph to a slightly bigger aircraft.

The source of the speculation is a press article that mentions the possibility of higher capacity 737-7. It is still unclear what exactly this possible “new” version would be. It is however surprising Boeing would put more effort for the 737-7 than they did for the 737-8. The question someone should ask himself is whether a higher capacity 737-7 would change significantly the market size.

So, the situation is not very clear yet. A machiavellian plot would be that the 737-7 “planned” EIS is pushed by two years and then the 737-7 is ultimately cancelled when the A319neo will have got its type certificate for both engines.

How Is 737 MAX Flight Test Going?

The first 737 MAX took off January this year and the third flight test article took off on 14 April. Things seem to be progressing well (click here). We don’t hear much about the tests. Perhaps it is now part of Boeing’s policy, not to provide information that is not necessarily an information. I guess the people who need to know are informed with the right inputs.

The above being said, I am quite curious to know some indications, like how many hours have been flown and the approximated remaining flight hours. I insist on the word “approximated”, because flight tests are what they are. If there are good surprise, flight tests can be shorter and if there are not-so-good surprise, the flight test can become longer.

According to a fellow blogger, one of the flight test articles was going to La Paz, Bolivia for high altitude testing (click here). He also mentioned in his post that the fourth flight test article would be ready soon, if it is not already the case, with the complete cabin interior. I am pretty sure many people want to see the cabin interior’s pictures.

Can Boeing  Deliver The First 737 MAX In March 2017?

The first 737 MAX took off on 29 January 2016. Let’s say the flight test started on 1 February 2016. Usually a flight test lasts about one year, especially for a derivative aircraft. Let’s take the example of the A320neo. The first flight happened in Sept 2014 and the type certificate was issued in November 2015.

In other words, if there is not any big issue, by March 2017 the 737 MAX will have got its type certificate. There is a possibility the first delivery could happen in March 2017 (click here). If CFM does its homework properly and there is no hiccups on the engine side then first delivery in March 2017 sounds credible and is possible.

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