Countdown to 737RE or NSA: Odds now favor Re-engine
It’s been a slow but steady shift in Boeing’s thinking that became evident during the pre-Paris Air Show briefings: Boeing is warming to the idea of re-engining the 737. According to sources with direct knowledge of the situation, it is likely officials will choose to do so and push out development of the New Small Airplane (NSA), with an EIS for the latter in the early half of the 2020 decade instead of 2019 or 2020 that Boeing has been talking about.
Pressure on Boeing to act and do something is mounting. Aviation Week has this story about the thoughts of Herb Kelleher, co-founder and former CEO of Southwest Airlines (now retired, but still advising Southwest when asked). Kelleher urges Boeing to “be bold” and launch a new airplane with a 2018 EIS but if not, go ahead and re-engine.
The competition at American Airlines, where Boeing is hoping to head off an Airbus order for this customer that has bought only Boeing aircraft since 1996, is a factor in Boeing’s move toward a re-engine, but not a deciding one. (Reuters has this analysis.)
According to our information, officials are planning to make a recommendation to the Boeing Board of Directors at its August meeting. Clarity, to use Boeing’s oft-chosen word, should come to the market place shortly after that, but no Authority to Offer (ATO) is immediately expected.
We previously reported that re-engining the 737 was very much alive, despite a long history of Boeing saying that while it was technically feasible, officials didn’t see the value proposition. Even earlier, we reported that not only was the trend shifting in favor of the 737RE, there was some thought that Boeing might do both a 737RE and the NSA.
According to our information, Boeing recognizes that it has to replace the 737. But shifting priorities toward favoring twin aisle derivatives of the 787, including the 787-10X, and protecting the 777-300ER franchise now that Airbus has refined the A350-1000, would stretch resources if the NSA were launched sooner rather than later.
Also, Boeing has yet to deliver a single 787 or 747-8 and it appears that deliveries this year will be far fewer for each than the 25-40 (equally split) Boeing has forecast on the year-end and first quarter earnings calls. New guidance is expected next week on the 2Q earnings call July 27.
Furthermore, as we previously reported, Boeing and CFM have found a way to shrink the fan size of CFM’s new LEAP engine a few inches, just enough to avoid raising the nose gear, reducing the work statement on changes required to the 737 to accommodate the new engine, and reducing R&D costs by 10% to 20%.
Boeing recognizes that it has to do something. While airlines, including Southwest, apparently prefer a new airplane, a re-engined aircraft will keep Boeing competitive with the Airbus NEO and in their view be 8% more economical on cash operating costs than NEO, an assessment Airbus dismisses out of hand.
A 737RE certainly would not be the game-changing, bold move Boeing needs to regain market leadership lost with the 787 delays. The balance of power would continue to remain roughly equal with Airbus. But the 737RE could help stem erosion from COMAC and Irkut, which are developing airplanes in the heart of the market, the 150-200 seat class. While neither COMAC’s C919 nor Irkut’s MS-21 are expected to be a major threat to Boeing or Airbus, sales in their respective home markets of China and Russia means billions of dollars of sales lost to Airbus and Boeing, affecting cash flow and profits.
Which brings us to production. Boeing’s Jim Albaugh, CEO of Boeing Commercial Airplanes, last week acknowledged what we reported way back in January: that Boeing is considering boosting production of the 737 even higher than the announced 42/mo planned by 2014. We reported in January Boeing was looking at 50 per month; Albaugh upped this to 60/mo last week, saying studies are underway.
Airbus is also looking at increasing production of the A320 beyond the 42-44/mo its previously announced.
For Washington State, choosing a 737RE will be good news, for production will remain in Renton where the 737 is assembled and competing for the NSA will be put off. Increasing production to 60 per month would also be good news—and bad. Renton has the room to go to 60 per month by utilizing the third 737 line now dedicated to the 737-based P-8A Poseidon, which when full production is up will only be assembling two per month on a line capable of 21. Line 1 is already at 21 a month and Line 2 is stepping up from its current 10.5/mo to a full 21 by 2014.
But this also means that when Boeing inevitably proceeds with the NSA, Washington will have to compete (which was going to be the case anyway) and room at Renton will be tighter than if Line 3 weren’t full. It’s certainly possible that as demand for the 737 drops, Line 1 then becomes available to transition to an NSA—but for Washington, it is not guaranteed to new airplane by any stretch.
We filed a story with Commercial Aviation Online that was published today. It has a bit more detail and a comment from a Boeing spokesman. We can post that story here tomorrow.