This article was written by mba and first published here

When Airbus launched the A320 to compete against the 737 family of aircraft in 1984, it was competing against a mature company with a distinct first-mover advantage. It took Airbus a good number of years to catch up to Boeing’s order books, cementing both the A320 and the 737 as two of the most successful aircraft of all time, in terms of orders.  With the advent of a new generation of aircraft, we have seen a slight advantage of one manufacturer moving ahead, though it is still early days for both aircraft families. As of November 2017, Airbus commanded a healthy lead with 5,254 neos on order compared to 4,065 MAXs on order and a first-mover advantage in the 200-240 seat segment with the A321neo edging out over the MAX9 and MAX10.

Since the launch of the 737 Next Generation (NG) and the A320ceo family, the preference in the narrowbody market has shifted and resulted in the changes culminating in the MAX and neo family of aircraft. The most distinctive shifts we have observed are the general upgauging of the aircraft and a greater sensitivity to fuel prices. The upgauging of aircraft has resulted in every version of the MAX being built larger than its predecessor. Additionally, we see an upward shift in market share of the 200-240 seat aircraft in the narrowbody market. The A321neo has increased its market share to 28% from the 22% the A321ceo held in the ceo family and the MAX 9 and MAX 10 aircraft command 14% of total MAX orders compared to 8% the 737-900 and 900ER held with the NG family.

Order Book Review

mba Insight Chart: Order Book Review

Source: mba REDBOOK STAR Fleet November 2017, Boeing.com, Airbus.com

The Impact of Rapid Economic Growth

A large part of this upgauging can be attributed to the rapid economic growth in Asia. IATA estimates that the region will grow 4.7% annually, with China set to become the world’s largest aviation market by 2024 and India displacing the UK as the third largest market in 2025. While the Asian carriers have been riding on the wave of economic growth in the region, the infrastructure has been struggling to cope with the surge in demand and is lagging behind the growth of the carriers it’s trying support. To overcome these infrastructure limitations, Asian carriers are relying on larger aircraft to fly higher-density routes. A great example of this is Vietnam Airlines which has seen strong growth over the last few years but has been limited by infrastructure growth in the region. The airline operates a modern mix fleet with the smallest aircraft outside of its turboprop fleet being the A321-200 with the intention to lease 18 A321neos from Air Lease Corp and Aviation Capital Group. With the MAX and neo, we see that Airbus has had greater success in Asia, with orders in Asia accounting for 46% of the neo backlog. Boeing has taken a more balanced approach with the bulk of its MAX orders concentrated in North America at 33% and Asia coming in a close second at 30%.

Regional Overview of the MAX/neo Order Books

mba Insight Chart: Regional Overview of MAX/Neo Order Books

Source: mba REDBOOK STAR Fleet November 2017, Boeing.com, Airbus.com

Comparing Cost Advantages

The general upgauging of the narrowbody segment has worked in Airbus’ favor allowing the A321neo to pull ahead of the 737 MAX 10 due to its first-mover advantage and seat cost advantage. However, as we move down the product line we see a reversal with the MAX having a seat cost advantage over its Airbus counterpart, with the MAX 8 and MAX 7 having a $20k seat cost advantage over the A320neo and A319neo respectively. While this may intensify the competition between the MAX 8 and A320neo, the lower seat cost of the MAX 7 may come at a cost to Boeing. The lower cost per seat on the MAX 7 is a result of increasing the capacity of the aircraft which may take away some of the advantages the 737-700 gave to its customers.  The segment in which the A319 and 737-700 operate is somewhat niche compared to the larger variants, where operators care more about “right-sizing” and operating an aircraft within a narrower band of operating economics in which the aircraft is viable.  Although the bulk of the sales are still expected to come from the A320neo and MAX 8, the lower end of the narrowbody segment where the A319 and 737-700 currently operate should not be neglected.  With over 1,440 A319s and 1,125 737-700s in operation; and the average age of the fleet being 11.76 years and 11.8 years respectively, the 100-150 seat market may prove to be a pivotal market to capture even if the orders are solely for replacement rather than growth. With the new family of E2 jets by Embraer and the marketing efforts of Airbus behind the Bombardier CSeries, we could see a dilution of market share and an end to the long standing duopoly in the segment.