Boeing faces important strategic decisions on 737X
As Boeing moves closer to its mid-year target of deciding whether to opt for a clean-sheet narrowbody replacement or launch a re-engining programme for the 737 NG (Next-Generation) aircraft family, the Chicago-based airframer faces multiple important strategic decisions on the aircraft programme that will potentially change the game like the Boeing 787 Dreamliner does in the widebody segment.
Importantly, the possibility of launching a twin-aisle 737 replacement raised by Boeing executives promises a significant reduction in the operational cost of the aircraft over today’s existing A320 and 737 NG and threatens to make the A320 neo (new engine option) obsolete within a few years following the re-engined aircraft’s entry into service (EIS) in 2016.
At a press briefing held at the Asian Aerospace 2011 in Hong Kong on March 9, which Aspire Aviation attended and asked a question specifically on the twin-aisle 737 replacement studies, Boeing vice president (VP) marketing Randy Tinseth provided detailed information on the rationale behind a potential twin-aisle 737 replacement.
Critically, Tinseth noted that a clean-sheet 737 replacement would deliver a 15-20% reduction in fuel burning, while delivering a staggering 20-30% improvement in the airframe maintenance cost and a significant 10-11% reduction in cash operating cost (COC) “to overcome the investment hurdles of all new spares and engines and that’s what your customers would want and require to make an investment in the airplane”.
Tinseth also revealed that a re-engined 737 would only deliver a 11-12% fuel burn saving and a less-than-glamourous “a couple of percents’ improvement on operating cost”.
“We ask ourselves, ‘Can we do better than that?’ and we may think we may be able to with a new airplane,” Tinseth declared.
Meanwhile, Tinseth said a twin-aisle 737 replacement would actually reduce the turnaround time and enable airlines to operate 9 sectors per day instead of 8 per day on the existing 737 NG, thereby enabling operators to earn a significantly higher revenue by “making 1 more flight per day”.
While Tinseth acknowledged that “the OEW (operating empty weight), fuel burn will increase a little bit” primarily owing to the twin-aisle effect, there will nevertheless be “a significant operational cost improvement for a twin-aisle”.
Coupled with the larger revenue cargo volume that a twin-aisle 737 replacement would provide which can carry the LD-3 container, it is apparent that a twin-aisle 737 replacement would enable carriers to maximise their yields and carry more lucrative cargo which will be an ideal fit to the rapidly-growing Middle-Eastern, Chinese and Indian markets.
The NPV/DOC debate
In addition, a twin-aisle 737 replacement would fair favourably in the net present value (NPV) and direct operating cost (DOC) analyses when compared to a single-aisle next-generation narrowbody replacement and the Airbus A320 neo as well.
Direct operating cost (DOC) of an aircraft is calculated according to the following formula:
Direct Operating Cost (DOC) = Cash Operating Cost (COC) + cost of capital
As the cash operating cost (COC) of the twin-aisle 737X is 10-11% lower than the existing 737 NG, the direct operating cost (DOC) of the twin-aisle 737X will also be significantly lower, whereas the DOC advantage of the A320 neo versus the existing A320 family aircraft is only limited to 2%-5%, depending on the selection of the CFM International Leap-X or Pratt & Whitney (P&W)’s PurePower 1100G engines, according to Aspire Aviation‘s source.
Interestingly, Aspire Aviation‘s source confirms that Air France has separately done an evaluation over the A320 neo and found that the DOC saving of the A320 neo is only 2% on intra-European missions.
In the meantime, capital value (CV) is the present value of the anticipated net receipt (i.e. net income) generated in the future and the capital value, or called the present value (PV) generally, is calculated according to the following formula:
As the net income generated by every twin-aisle 737X aircraft is substantially higher than the A320 neo, owing to the extra revenue generated by flying significantly more cargoes and operating an extra sector per day, as well as the 737X’s fuel burn saving of 15-20% whereas the A320 neo’s fuel burn saving is reduced to around 7% due to the strengthening of the aircraft’s outer wingbox, according to Aspire Aviation‘s source who works at the European airframer; the present value (PV) of the twin-aisle 737X will be less heavily discounted when compared to the A320 neo.
Net Present Value (NPV) = Present Value (PV) – cost of capital
Furthermore, the net present value (NPV), whose calculation method is listed above, for a twin-aisle 737X would be significantly higher than that for an A320 neo.
A point which is noteworthy is, this higher return of the twin-aisle 737X comes at a higher risk, as airlines, like every other company and everyone else, has a positive time preference, though Aspire Aviation believes the higher NPV and significantly higher fuel burn and maintenance cost saving, and a marginal lead-time offered by the A320 neo, more than justifies the higher risk of a twin-aisle 737X with an EIS in 2019 or 2020.
“The [A320]neo is a way for them to address their value gap that is in the market today. Our question is how do we even go better? How do we take that next step?,” Boeing vice president (VP) marketing Randy Tinseth said at Asian Aerospace 2011’s press briefing.
While a twin-aisle 737X is a fascinating idea and has a robust business case, it nevertheless presents unique challenges to Boeing, particularly over the market positioning.
A 180-200 seat twin-aisle 737X would ideally replace the lower end segment of the 757 market, while the higher-end segment would be replaced by the 240-seat 787-8. This concept has received the endorsements from Air Lease Corporation (ALC) chief executive Steven Udvar Hazy, and, surprisingly, the outspoken Qatar Airways chief executive Akbar Al-Baker, who strongly criticised the A320 neo and claimed he would support the idea of a clean-sheet 737 replacement.
“All I can tell you is our recommendation to Boeing, and we’ve bought over 800 new Boeing airplanes, is to build an aircraft family rather than a single sized model and that family hopefully will encompass at the upper end an airplane that could replace the 757,” Air Lease Corporation (ALC) chief executive Steven Udvar Hazy commented.
“In all of the studies that we have done and in talking to airlines, you can turn a twin-aisle aircraft faster if you have good passenger access. So the whole idea of a short- to medium-haul aircraft is maximizing utilization and if you can get ten minutes a turn and you do six segments a day you can get an hour more flight utilization,” said Hazy, concurring Boeing’s VP Marketing Randy Tinseth’s comments that a twin-aisle replacement would feature faster turnaround times.
“Look at the upper end of that market, once you get above 200 seats. How many of you have flown on a 757 when you’re in row 39F and how long does it take to get off the airplane if they’re loading only through the front. Sometimes it [feels like it] takes longer to get off the airplane then the flight itself. My feeling is that to be a really an effective airplane above 200 seats and a great competitor and have the cargo capacity, which is also an important element in the revenue generation of airplanes, a small twin-aisle has a lot of advantages once you get north of 200 seats,” Hazy lamented.
However, a 180-220 seat twin-aisle 737X would represent an up-gauging of the 132-seat 737-600 and 149-seat 737-700 in a single class configuration and given the fact that Boeing is highly unlikely to abandon this lower-end segment of the narrowbody market whereas the chances of launching two aircraft families to replace the 737NG family are slim, if not non-existent, the world’s second-largest aircraft manufacturer will undoubtedly have to address this difficult question.
Separately, Boeing vice president (VP) marketing Randy Tinseth acknowledged at the press briefing at the Asian Aerospace 2011 that the second or third-generation composite technology “just doesn’t exist yet” and that “right now the technology is not there because of the [scalability] issue”, though he cautioned that the use of composites has consistently exceeded Boeing’s expectations.
Tinseth also noted the significant improvement being made by the aluminium industry on the aluminium-lithium (Al-Li) technology while emphasising that Boeing has not decided which material the 737 replacement, whether it is a clean-sheet single-aisle aircraft or a “twin-aisle” single-aisle replacement, will use.
Aspire Aviation predicts that Boeing will eventually opt for a clean-sheet 737 replacement this summer but leaving the material options undecided to allow more time to study the latest developments on the Al-Li technology and the composite advancements.
In conclusion, while the A320 neo is going to sell well with Lufthansa, Indigo Airlines and Virgin America already committed to the aircraft and more sales are definitely to come (“A320 neo orders won’t clear doubts in years“, 12th Jan 11), a twin-aisle 737X replacement aircraft would arguably be a promising aircraft and may even become yet another game-changer, although it is obvious that Boeing cannot afford the 787-style delays and glitches this time around.
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