Summary
The 100-200 seat aircraft market is currently shared by Airbus, Boeing and Embraer, with Boeing and Airbus taking 88% of the market. 10 new models from 5 new competitors are currently on the drawing board, all aiming to take share from Boeing and Airbus.
Chinese and Russian manufacturers will focus on both home and export markets for the first time, and can certainly take a significant share in their home markets.
Change in the industry capacity will negatively impact margins from 2015 onward.
Analysis
Boeing and Airbus will soon face increased competition in the 100-200 seat aircraft market from Embraer, Bombardier, Mitsubishi, Kawasaki, COMAC in China and United Aircraft Company in Russia.
These emerging program represent a threat to the two incumbents in the market, Airbus and Boeing, who in 2004 enjoyed all of this market and today share 88% of that market. If all of these aircraft meet their projected goals, the market share of the two incumbents could be cut in half.
Already, Boeing and Airbus are talking about larger aircraft when the 737 and A320 replacements are introduced. Boeing has publicly stated that its focus will likely be 150 seats and above, while Airbus has indicated that their focus is 130 seats and above. While the A318 and 737-600 have not been successful, the A319 and 737-700 are quite popular, but would be too small for the replacement models. As the 737-700 is Southwest's largest aircraft, will Boeing cede this market to someone else in the future, or will Southwest acquire larger aircraft?
At the 100-130 seat size of the market, a crowd is developing. The Sukhoi Superjet 100 from Russia, the MRJ-90 and forthcoming 100 from Japan, the existing E-jets from Embraer, the CSeries at 110 and 130 seats from Bombardier, and the ARJ21 from China. Moving up in size, the 737 and A320 families will be challenged by the C919 from China, MS-21 from Russia, and YPX from Japan.
At the same time, new engine technologies are under development that will provide a 15-22% improvement in fuel burn. The PurePower geared turbofan from Pratt & Whitney will power the CSeries and MRJ with a 16% improvement in fuel burn that PW believes can be improved to 22% as it is refined. GE is working on the LEAP-X with similar fuel savings, and both GE and Rolls Royce are working on unducted fans. Those engines, however, with exposed large fans, will require new aircraft designs as they cannot fit under the wings of today's aircraft.
For the first time in recent memory, new engine technologies will be adapted first by new competitors than the major incumbents. Airlines have been clamoring for new models even with a 10-15% improvement in fuel costs, while Airbus and Boeing are waiting for technology breakthroughs for a 40% improvement. The net result is that new competitors will have superior economics to the incumbents by 2016, and perhaps lower prices for aircraft manufactured in Russia and China.
That will place Airbus and Boeing with a difficult decision. Should they wait for new technology and allow new competitors to gain market leadership, or potentially re-engine their existing models in the interim to maintain their market position. We believe a re-engining is quite likely for the A320 family, which will have enough time until the 2024 replacement time frame to recover costs. This will likely force Boeing to similarly react.
Even if not all of the new programs are successful, and we believe some will not achieve commercial success, the supply demand balance of the industry is nonetheless changing. As additional competitors enter the market with viable products and industry capacity increases, it will naturally have an impact on market share and pricing. While the short-term, thru 2013 appears safe, Boeing and Airbus will begin to lose additional market share as these new programs emerge between 2014-2016, and likely some of their pricing power.
Technology transfer and outsourcing has a downside - potentially training future competitors. Boeing's work in Japan and Airbus work in China have resulted in technology transfer to new competitors, and while a short-term expedient, may turn into a long-term strategic error.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
