Discussion About The 737-7 MAX

About two weeks ago, I posted a blog entry about the redefined 737-7 (click here). It attracted a lot of discussion. The firm configuration of the 737-7 was publicly announced during Farnborough airshow this year although the aircraft was launched in 2011.

Few Orders

The 737-7, both the initial version and the redefined one have not attracted many orders so far.  Southwest, Westjet and Kunming are the three known customers of the seventy 737-7 orders and commitments to date.

It is highly likely the total orders for the smallest version of the 737 MAX family would reach several hundreds units during the life of the program. It is even possible it would ultimately reach about 15% of the 737 MAX family’s total orders. It depends much on how airlines would change their approach to address the market.

It might also depend on the definition of the MOM (Middle of the market) aircraft. I am sure people are puzzled by my statement. This is my rationale, the way airlines will address air travel might change, the definition of the hypothetical MOM aircraft will be the result of the way airlines will address the market. Basically, if there is a significant change in that MOM segment then perhaps there will also be some changes in the smaller narrowbody market.

Getting A Little Bit Bigger

The redefined 737-7 is about 12 seats bigger compared to the 737-700 or the “old” 737-7 MAX. Let us take a rounded number and say that the redefined 737-7 has 8% extra seats compared to the “old” 737-7.

Usually, when an aircraft gets bigger, it increases the fuel efficiency if expressed on per-seat mile basis. Basically, one would expect the redefined 737-7 would be about 3% to 4% more fuel efficient than the “old” 737-7 on per seat-mile basis.

Now, the way the redefined 737-7 is done would not allow to obtain the full benefit of the “stretch”. Indeed, the 737-7 will have many more common parts with the 737-8 than the “old” 737-7, thus the redefined 737-7 is heavier than it could have been if it were “optimized”.

Basically not only the seat count is increased, the design weights (MTOW, MLW, MZFW) are also increased. Therefore the redefined 737-7 needs a stronger (and thus heavier) landing gear and wing structure.

The obvious benefit of the increased design weight is the increased maximum range, so the redefined 737-7 becomes a good platform for a long-range business jet when equipped with auxiliary tanks.

All in all, I think the redefined 737-7 is about 14% to 15% more fuel efficient than the 737-700NG on per seat-mile basis or similar to the difference between the 737-8 and the 737-800NG.

Family Concept

One obvious reason that could potentially drive 737-7 order up is the “Family Concept”. Indeed, the commonality between the 737-8 and the 737-7 is very high. If my flair is not too mistaken, almost 100% of the LRU is common between the 737-8 and the redefined 737-7.

I can mention other things like the engine maintenance optimization. It is already the case with the 737-800NG and the 737-700NG. Usually, the thrust requirements on the 737-700NG is lower than on the 737-800NG or 737-900NG and thus an engine with a reduced EGT margin for a 737-800NG can be transferred to a 737-700NG. Of course, this is not always valid, but it might add some kind of flexibility in term of shop visit scheduling.

An operator that has many 737-8 and needs some smaller aircraft might well order some 737-7. It is also possible an airline would like to start with a fleet of 737-7 and then order some 737-8 or convert some order to the bigger version if the traffic grows.

This being said, the family concept this is also applicable to Airbus A320neo family. There is little doubt about it.

I must have omitted other possible benefits of the family concept, I hope readers can provide us with these possible other benefits.

Production Simplification

Since there is significantly higher commonality between the redefined 737-7 and the 737-8, there must be a significant reduction of part numbers. Obviously this could end up with reduced complexity in term of part manufacturing and logistics.

The drawback is that the real production cost of a redefined 737-7 and a 737-8 maybe quite similar whereas the pricing difference between the two could be around US$ nine millions. In reality there is no incentive for Boeing to push the sales of the 737-7.

The redefined 737-7 is an interesting case where the manufacturer is certainly not very interested to produce it, but the market might ask for it.

 

Non Event

Today Boeing reported its earning for the second quarter 2016 (click here). I read the press release and also the presentation. I concluded quickly that it is a non event despite the announced charge of US$ 2.1 billion after tax. After all, it is only declared charge for the second quarter 2016.

Follow The Money

As usual, I am more interested by the free cash flow, the cash and marketable securities and also the debts. Before doing so, we might want to note that Boeing bought back US$ 2 billion of shares and paid US$ 0.7 billion in dividends during the second quarter of 2016.

I looked a little bit more into the details (click here) and found out that the free cash flow increased slightly to US$ 2.6 billion compared to Q2 2015. If everything goes right, I expect the free cash flow for the full year 2016 would be around US$ 7.5 billion, an increase compared to 2015 free cash flow.

As far as the cash and marketable securities are concerned, the total increased a little bit by about US$ 0.9 billion. However the total debts also increase by about US$ 1 billion.

All in all, Boeing’s financial looks healthy so far.

Sincerely, I do not like to look into the “operating margin” especially during one quarter. Boeing’s accountants are quite seasoned and they play a lot to avoid excessive tax burden. I still remember the day I heard the term “tax efficiency” pronounced by Jim McNerney. I didn’t understand what it meant until somebody explained it to me.

Boeing Might Consider Ending 747 Production

Well, the 747 production will ultimately end, like any other product. Perhaps we need to say it differently. FOr example we can say, “Boeing considers ending 747 production after the 130th delivery.” Or maybe we should add a timing, “Boeing considers ending 747 production in 2021.”

Initially I expected to see the 747 freighter would continue the production during years to come, albeit at low delivery rate, because the 747F has a unique feature that other freighters do not have.

A380 Will Have The Monopoly In A Very Small Market

We all know that VLA market is small and is not growing fast, if it is growing at all.

Now, if the 747-8 Intercontinental production is stopped, the A380 will remain as the only aircraft with 450+ seats. However, it does not mean that the A380 will survive. Having the monopoly in a market that barely exists is a little bit absurd, especially when the production cost is still higher than the value you can get from it.

Anyways, the situation is now clear. Boeing considers ending the 747’s production if there is no big order coming in the coming year. I guess the charge on the 747 in Q2 2016 is part of the preparation for 747 production ending. The have to be more charges in the future for the 747 if indeed Boeing wishes to close the line.

777-8 Freighter

If Boeing stops the 747 production then I am wondering whether Boeing would offer a cargo version of the 777-8. It might be difficult to offer similar loading door as the 747F because the 747’s cockpit is on the second deck. Hey, perhaps a lowered cockpit like the one on the Beluga can do the trick.

What Will Happen To The A380?

It will be interesting to see what Airbus has to say with its A380 production. At one point Airbus stated that the A380 is cash positive if the production rate is 30 per year or above. So, the projected production rate in 2018 does not allow to produce the A380 profitably.

The question is of course whether Airbus is prepared to produce A380 at loss during years to come.

Eight Hundred

You might have noticed that time to time I put numbers as the title of my postings. This time the number is quite interesting because it is the serial number of the A380-800, A350-800 and also the A330-800. For some absolutely unknown reason, the number eight hundred has not been a very lucky number for those aircraft.

This being said, the purpose of this blog entry is not at all to  discuss about those aircraft.

Eight Hundred Orders

Coincidentally, today I checked the total  order tally of the 777-300ER. So far the 777-300ER has a total of 800 (eight hundred) orders, of which 660 (six hundred and sixty) have been delivered. I must say that the number is impressive for such a big aircraft.

I still remember several years ago people treated me as a crazy man when I said the 777-300ER would get orders exceeding 400 units. I was told that the A350-1000 will “dry” 777-300ER orders. Only very few people in 2007 could imagine that the 777-300ER would cross the 400 order threshold.

Anomaly

The 777-300ER’s situation is so incredible that I qualified the aircraft as an “anomaly” in recent aviation history. How can an aircraft be so dominant in its market segment today? It is almost inconceivable and yet it happens.

The 777-300ER entered into service in 2004 with Air France and has dominated its market segment since then. The very first credible contender in the A350-1000 that will enter into service in 2017 if everything goes right. It would have taken more than 13 (thirteen) years that a credible contender come into play.

The Target Has Moved Away

The A350-1000 was formally launched in 2006 or elven years before its targeted entry into service. Such a long time between the launch and the targeted into service allowed Boeing to think about the next move.

The A350-1000 was supposed to counter the 777-300ER. As this blog has always said, it is unproductive, if not totally absurd to put an aircraft that will enter into service in 2017 in head-to-head competition against an aircraft that entered into service in 2004.

Finally, in 2013 Boeing formally launched the 777-9 and 777-8, the two aircraft this blog has been waiting for since its inception. The targeted entry into service of the 777-9 is in 2020, with a kind of vacuum period between the current 777-300ER, 777F and the 777-9. As you know, it is way better to prepare a transition period between two of your products than being forced to have it without preparation.

Basically, the A350-1000’s target has moved away and now people start to talk about the A350-2000, a further stretch of the A350-1000. It is still unclear whether the A350-2000 would ever see the day.

Victim

Obviously, the victim of the competition in the 400+ seater segment is the Very Large Aircraft. As you know, there are fewer and fewer orders for the A380 and the 747-8 Intercontinental.

Several years ago I estimated that the Cash Operating  Cost (COC), on per seat basis on a 6,000 nmi benchmark route, of the A350-1000 is double digit percentage lower than that of the A380-800.

Not only there are only a few routes on which the A380-800 can be useful, new efficient twin engined aircraft are much more cost effective that the quad behemoth.

The hypothetical A350-2000, if launched, will make the A380’s case even more difficult.

With 800 orders, clearly the 777-300ER is a big success. It may be a bigger success than Boeing had imagined when they launched the aircraft back then.

Misleading Title

It was in May 2015 when I posted a blog entry with a misleading title “Possible Slow Down In Widebody Demand” (click here). Why was it misleading?

Well, the title says “the demand” slows down when in reality it is the “orders” that could see a slow down. It is obvious from the content of the post because it starts with a demonstration on how big the widebody backlog was at that time. Today, I am pretty sure the backlog is still huge today. I would really like you to read the blog entry again.

A330neo Still Needs More Orders

As of end of June 2016, the total orders for the A330neo was at 186 units. As you all remember, the aircraft was launched in July 2014 or four two years ago.

Initially the aircraft was targeted to enter into service in Q4 2017, but I already detected about five months of delay for reasons I do not understand. Any delay on this program would be very disappointing because the aircraft is just a derivative of the A330 and the engine is a derivative of the Trent1000. As of today, we still need to stick with the official EIS date of Q4 2017, although I have some doubts about it considering the herculean task Airbus is facing to recover the A320neo and A350 production ramp-up.

There is another interesting point, it is about the A330-800 order tally. It is still at 10 units, which is in my opinion, a very small number. Obviously the A330neo needs more orders, especially for the A330-800.

American Airlines Deferred The Delivery Of Twenty Two A350

Several days ago American Airlines deferred the delivery of almost two dozens A350 (click here). Is it a disaster? No, it is not. After all, the production slots can be reallocated to some other customers. In addition, several deferrals would alleviate the burden on A350 ramp-up effort.

The above being said, one can actually ask the question whether there is a kind of slow down in the long-haul passenger demand. Or perhaps it is only a slowdown of the growth rate.

The situation is still not very clear and there could be unexpected events that would deter people from traveling.

Do Not Get Distracted By The Narrowbody Segment

In June 2013, I wrote something about the fact people should not be distracted by the announcements in the narrowbody sector and keep the focus on the widebody sector because thongs would be happening there.

Well, I think the battle in unfolding now with the 787-10, 777-9, A350-1000 and the hypothetical A350-2000. You can also add the potential widebody MOM too.

Anyways, things are happening in this market segment.

Boring

On the narrowbody side, things become boring. The A320neo now has more than 4,500 orders and the 737 MAX has more than 3,200 orders. Any new order beyond this insanely huge backlog does not change the situation much because it just does not make much sense to have a backlog that exceed four years of production at current delivery rate.

Both Airbus and Boeing can continue to announce new narrowbody orders, but it won’t impress me anymore. For me, it would be just posturing without much meaning.

That’s all for today, folks!

Disturbing Conclusion

[UPDATE:  July 19, 2016: penalty due to weight was too optimistic. Thank to Mark’s comment]

The other day I posted an entry about the 737-7 with the new definition (click here). One reader posted several comments insisting that the newly defined 737-7 burns 5% less fuel on per seat-mile basis than the 737-700NG. It started at comment #43 (click here).

It Is Not Necessarily Very Right

Well, I didn’t understand his point until he finally posted a link to a Boeing press release (click here). There is indeed one misleading sentence in the press release, “The airplane offers 12 more seats in a 2-class interior configuration and more than 20 in a maximum seating configuration, compared to the Next-Generation 737-700. It will also use 5 percent less fuel per seat and have 500 nautical miles (926 km) more range capability.

I read the press release then I suddenly realized that the fuel burn was compared when both the 737-700 NG and the redefined 737-7 are flying on its respective maximum range and maximum passenger load.

So, I tried to understand how the fuel efficiency of both aircraft compares when expressed on a per seat-mile basis.

Could Be More Than Twenty Fifteen Percent

Since I do not have any detailed data, I can only use rough information from different sources. For example, Boeing stated at one point that the fuel efficiency of the 737-8 MAX is about 14% better than the 737-800NG. I am pretty sure it based on the double digit SFC improvement between the CFM56 and the CFM LEAP. In addition, the aerodynamic refinement adds about 1.5% efficiency.

In simple words, when expressed on a per seat-mile basis, the 737-8MAX is about 14% more efficient than the 737-800NG, with the same seating.

Now, how does the redefined 737-7 compare against the 737-700NG? Let’s do it in two steps using simple rules of thumb.

  • Based on the comparison between the 737-8 MAX and 737-800 NG, the old 737-7 should be about 14% more efficient than the 737-700 NG.
  • The redefined 737-7 MAX has 12 extra seats compared to the “old” 737-7 MAX or 8% more seat
  • Let us take 1.5% 6% fuel burn penalty due to the increased weight (of the OEW plus 12 passengers)

If you combined all the three elements above, you get around 20% to 21% 15%-16% of fuel efficiency improvement between the 737-700NG and the redefined 737-7 MAX when expressed on a per seat-mile basis.

That’s an interesting conclusion.

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