Dear Fellow Once And Future World Travelers,
What were you thinking about before the pandemic? The BeforeTimes seem far away now, but just six months ago, before the masks went on and the flying stopped, I was thinking about middle market jetliners, and what Boeing needs to do. Now that I again have a moment to think about non-pandemic stuff, I’m thinking that this topic is far more urgent than before.
The middle market was on my mind because in February I took a very well-timed holiday in Morocco with my family, and I thought about the future of air travel. Long distance travelers to Morocco fly into Casablanca, but aside from an enormous and opulent mosque, there isn’t much reason for tourists to go there. Marrakesh and Fez are the really interesting places, and they’re only connected to a few European cities. One day, after the pandemic, an innovative airline or two will start direct transatlantic service to these cities, continuing the multi-decade process of route fragmentation. Unless Boeing does something, soon, these routes will be flown by A321neos. And the world will see a lot of these new routes.
Consider the history of route fragmentation. In the late 1990s and early 2000s, Airbus and Boeing debated the future of airline strategies. Boeing argued that people wanted to fly point-to-point in a smaller, long-range jet; Airbus decided, for reasons known only to people who don’t want to talk about it, that the world needed a 520-seat monster that forced people to change planes in Frankfurt or Narita.
Two decades later, the results are far more lopsided than even I predicted: almost all international carriers ordered the 787, enabling lots of exciting new routes. A 787 took me straight to Casablanca from IAD. 787s and other jets can now take me straight to many more destinations from my home in DC (Portugal! Finally!), and many more routes will be possible after the pandemic, as growth resumes. Meanwhile, the final A380s are now being born to die. The last will be retired this decade, consigned to museums, beer cans, and episodes of VH1’s “I Love The 2000s!”
But Boeing has been surprised by just how right they were. So have I. Fragmentation has rolled on and on, pressuring jet sizes downward. It’s causing a massive airline fleet shift away from twin aisles and towards single aisles, as the new generation of single aisles is bringing more range and better economics. Point-to-point routes generally get better pricing, cost less, and pollute less, so perhaps it shouldn’t be surprising that the process keeps going, but it was once hard to imagine anyone except Icelandair or Continental flying narrowbodies across the Atlantic (707s and DC-8s excepted). For a brilliant exploration of how fragmentation might play out, see https://app.flow.gl/hw-airport/.
The 737MAX is part of this fragmentation story. I flew an Air Canada MAX from Heathrow to Halifax, and when the MAX returns they’re starting a Montreal-Dublin service too (as examples). But the 737-9 and -10 are losing very badly to the A321neo, and the A321XLR – right now, the Airbus jet has a 6-1 or even 7-1 advantage in orders (3,440 A321neos sold so far, as opposed to 500-600 -9/10s – Boeing doesn’t break down its MAX backlog by variant). So, this route fragmentation process is no longer to Boeing’s advantage. The A321neo is doing to Boeing what the 787 did to Airbus: disrupting their product line strategy.
This was all underway in the BeforeTimes. But the pandemic is accelerating this airline route and fleet shift, in the same way that the pandemic is accelerating numerous other pre-existing trends (e-retail eclipsing physical stores, the rise of telemedicine, growing societal inequality, etc.). Route fragmentation is accelerating for two reasons: (1) nobody wants to change planes in crowded airports if they can fly nonstop, and this preference will continue for years; and (2) the massive air travel downturn is highlighting the virtues of smaller jets. So, in addition to using A321s for new routes, they also make great replacements for existing A330s, 767s, and other jets. In fact, the A330neo might be destroyed by the A321neo.
Now, a glass-half-full perspective for Boeing. Launching a new jet is a great opportunity for the company. The A321neo isn’t perfect, and it would not be hard for Boeing to design a better jet for this role. Yes, Boeing is hemorrhaging cash, but spending $2 billion a year for five years on new jet development is just a tiny part of the company’s financial challenges. As Scott Hamilton points out, the end of the 747 (and possibly the end of one 787 line) will save on construction costs: “With empty production bays, Boeing has the unique opportunity to establish ‘clean sheet’ production without having to build a costly new production plant.”
There would be huge knock-on benefits from a new jet, too. As Kevin Michaels wrote in Aviation Week (tinyurl.com/y3zrv8oy), the new jet “will boost the morale of Boeing stakeholders – employees, customers, and suppliers – and signal that it wants to move past the 737 MAX disaster, regain industry leadership and invest in promising new digital design and production technologies.” I agree completely. Many politicians and regulators have a negative view of Boeing right now, seeing them as a cash-extracting rent-seeking monster. Launching a new jet would restore a far better corporate image: a company eager to create new technologies and jobs.
Yet right now, Boeing does not seem to be heading in this direction. I understood why they shelved the original NMA last year – a twin aisle stood little change of competing with a single aisle like the A321. But since then, Boeing has gone out of its way to imply that there would be no response to the Airbus challenge at all. Boeing’s R&D spend in the first half of the year fell 21% relative to the first half of 2019; Airbus R&D spending fell just 1%.
Indeed, management has rationalized a decision to surrender this market to Airbus. Dave Calhoun recently told Aviation Week, “And the center of the market is not the A321 – it’s still the 737-8 in our world.” There are 4,129 MAX orders and 7,449 Neo orders, and that differential is entirely due to the enormous A321 order book (the 737-8 is doing just fine against the A320neo). Calhoun’s comment, therefore, only rings true if the A321 is conveniently ignored.
Unless Boeing does something, this mid market advantage will propel Airbus to market leadership. It could mean a ten-point market share shift. And as the history of McDonnell Douglas shows, losing ten points of market share can become the start of a slow, painful sunset.
Yours, ‘Til A 797-200 Takes Me To Venice,
Richard Aboulafia