The market for commercial aircraft beyond regional jets is dominated by Boeing (NYSE:BA) and the Airbus Group (OTCPK:EADSY). Despite this duopoly, both compete heavily in all market segments and hold similar market shares. Commercial Aircraft are also most important for both companies as they generate more revenue and deliver higher margins than the Defense and Space business. Boeing's and Airbus' order books are full, with a backlog of 5,199 planes for Boeing and 5,514 for Airbus (at the end of May 2014), utilizing their production capacity for several years.
With the Boeing 737 and the Airbus A320 series, both companies have very similar offerings in the narrow-body single-aisle segment. The transition to the 737 MAX and the A320neo family will start soon and begin a new chapter of more fuel efficient planes for short-distance routes. This market segment is the largest by the number of planes, but not in terms of revenue, and it is also the most competitive one. Large single orders and the relative lack of competitive advantages for one or the other manufacturer give the airlines a high bargaining power.
Beyond the single-aisle aircraft, there is the twin-aisle wide-body segment. It started with the four-engine jets which revolutionized intercontinental air travel half a century ago, when the famous Boeing 707 entered into service. Since Airbus has stopped the production of its A340, a program which has not been able to meet its expectations, there are only two remaining four-engine airliners available which represent the segment of very large wide-bodies: The new Boeing 747-8i and the Airbus A380.
For the smaller wide-body aircraft with only two engines, more choices exist, particularly as newly-developed planes will enter into commercial service during the next five to six years. In this segment, Boeing's and Airbus' offerings are less similar compared to the single-aisle narrow-bodies. On the one side, this offers more choices and better matching solutions to the airlines' needs, but on the other side, there is also the chance to differentiate from competition and to gain a certain competitive advantage for the aircraft manufacturers.
Four-engine Wide-bodies: Slowly fading away?
One of the reasons for flying four-engine passenger aircraft has been the additional safety in case of an engine failure. Regulations did not allow to serve long-haul routes over oceans operated by twin-engine jets until 1985. However, with more and extended ETOPS certifications, almost any route (including transpacific flights) can today be operated by twin-engine jets. The Boeing 777 was the first plane to obtain ETOPS330 certification in 2007, which allows it up to 330 minutes of flying time away to the next suitable airfield in case of an engine failure.
Twin-engine wide-bodies offer certain advantages: They can serve long-distance routes more flexibly and at lower operation costs, particularly with new models and fuel-efficient engines. This has led to an unfavorable situation for the Boeing 747-8i and the Airbus A380.
The 747 entered into service in 1970, and has remained the largest commercial airliner for 37 years until this position was taken over by the A380. However, the newest 747 variant, the 747-8i, which was first delivered in 2012, could not build on the previous successes. So far, Boeing has received only 51 orders for the passenger version, making the cargo version 747-8F with 69 orders more successful until today. As a consequence, Boeing has reduced the production rate of the 747-8 to only 1.5 per month in response to the disappointingly low demand.
Also the "Superjumbo" A380 cannot hold onto its expectations: Until today, Airbus has collected 324 orders, of which 140 will be delivered to Emirates - the by far largest operator of the A380. However, from 2010 until the end of 2013, Airbus has only been able to gain 24 net orders and the number of skeptics questioning the program grew. Then, in November 2013 during the Dubai Air Show, a rather surprising order for 50 more aircraft by Emirates has been announced. This and a new order for 20 aircraft from a leasing company at the beginning of 2014 have helped Airbus to grow its order backlog to a more comfortable level of 192. As it took Airbus so long to generate these two follow-up orders, one can only speculate about the concessions that had to be made and if these orders will in the end contribute to the company's bottom line.
All in all, the A380 program is prestigious, but not commercially successful after significant delays, a slow production, the lower than expected demand, and finally the issues with wing cracks causing expensive repairs. According to its 2013 annual report, Airbus expects to reach breakeven EBIT by 2015 at a production rate of 30 aircraft annually.
In summary, the four-engine aircraft have lost attractiveness, a scenario that has not been obvious when the A380 and the 747-8i programs were started, making the market projections of those days obsolete. In the current environment, and unless completely new aircraft concepts are developed, the chances are high that the Boeing 747-8i will remain the last commercial four-engine airliner that has entered into service.
I do also not expect Airbus to take the bet and upgrade to an A380neo, as it has been suggested by Emirates previously. This would mean to occupy resources which are urgently required elsewhere and to take a new financial risk with a very uncertain outcome. My take is that Boeing and Airbus will be able to gain some more orders for their flagships, but not in significant numbers and that both programs will end sooner than expected.
Boeing and Airbus offer more options in the twin-engine wide-body segment. The following table gives an overview on the aircraft which are already in service or currently under development.
Wide-body Aircraft Overview
The Airbus A330 is the smallest and oldest aircraft as well as the one with the shortest range and therefore not suitable for very long routes. Airbus currently considers the revamping with new engines (the A330neo). Based on the expected demand, particularly from Asia for a larger (compared to a single-aisle) and fuel efficient medium-range aircraft, the chances are high that Airbus will decide to put resources on the program.
The 787, which entered into service in 2011, is well-known and marks the first representative of a new generation of aircraft, based on lightweight composite materials. Similarly to the A380, this innovation did not progress smoothly, but went through various difficult phases and delays, including the major battery issues in the year 2013. The smallest model, the 787-8, has been developed first, the larger 787-9 is supposed to have its first commercial flight in October 2014, and only in 2013, Boeing started the 787-10 program.
The A350 is Airbus' answer to the 787, a completely newly developed airliner, utilizing composite materials extensively to save weight. The aircraft completed its maiden flight in June 2013, and the first delivery to its launch customer Qatar Airways is expected at the end of 2014. The first version to be introduced is the A350-900, followed by the -800 and ultimately the -1000. Both, the 787 and the A350, have been very successful in accumulating a large number of orders, although the A350's success has been clouded lately with the cancellation of an order for 70 planes by Emirates. The A350 is larger than the 787, also aiming at the market share of the original 777 types, particularly with the A350-1000.
The first version of the 777, the 777-200 was placed into commercial service in 1995. The whole program has been a large success, as it has received more orders than any other wide-body airliner. In November 2013, on the occasion of the Dubai Air Show, Boeing announced the official launch of the development of the upgraded 777-8X and -9X models. The 777-8X will be able to compete with Airbus' largest A350 model, whereas the -9X will be the largest twin-engine wide-body of all, occupying a position which is yet empty, bridging the gap to the larger 747-8i (and making her at least partly obsolete). In the press release announcing the program start, Boeing stated that it already had collected 259 orders and commitments for the 777X.
Several Advantages for the 777
The by far most crucial aspect for airlines is the seat-mile cost, and the largest single cost driver is jet-fuel. Despite carrying a higher number of passengers, the 747-8i and the A380 cannot fully live up to their expectations, compared to newer and more fuel-efficient aircraft with only two engines.
The closest alternative to the four-engine airliners today is the 777-300ER, and the new 777-9X will get even closer. In a typical 3-cabin layout, it will seat 407 passengers, almost the capacity of a 747-400 (with 416 seats) and 16% more than the largest A350. It has the broadest fuselage, and it is the only twin-engine aircraft that can accommodate up to 10 seats abreast in the economy cabin. This makes the 777-9X an almost 1:1 replacement for the 747-400, having the additional advantage of 900 nautical miles more range. The 747-400 entered into commercial service in 1989, 287 aircraft out of the 442 which were delivered are still operated and will have to be replaced within the next years. Airlines retiring the 747-400 have the choice of adding more seat capacity with the 747-8i and the A380 or to count on the 777-9X instead.
Given the long developmental cycles in the aircraft industry, the 777 will remain the largest twin-engine aircraft for a long period of time, and it will possibly live to see the day when the production of four-engine commercial aircraft comes to an end. With open orders for 51 planes and considering the current production rate, Boeing would have fulfilled all open orders for the 747-8 (including the 747-8F) in 2017 already. Airbus' production lines for the A380 would idle as soon as 2020 - the year the 777X is expected to enter into service. Although some more orders will come and ultimately slowing the production rate will prevent this from happening so early, it seems only of a question of time when the 777-9X takes over the position of the world's largest commercial airliner. At least it is sure that the 777-9X will resume a unique position in the aircraft market. Boeing itself states that it will have "no competitor in its market segment," a fact that should help to strengthen Boeing's position in the competitive market for commercial aircraft.
The 777 is of significant commercial importance for Boeing, among the 648 commercial aircraft which the company delivered in 2013, 98 were 777s. The following table shows the combined unit values for each aircraft type delivered in 2013, based on the current list prices. Of course, the list prices do not reflect reality, as the combined order volume totals $96,7B compared to revenues of only $52,98B for Boeing's Commercial Aircraft segment in 2013. Nevertheless, it serves its purpose to compare the volumes on a relative basis and to demonstrate the importance of the 777 for Boeing.
Boeing 2013 Commercial Aircraft Deliveries
Source: Company website, own calculations.
The scenario that is outlined in this article will only materialize as early as 2020 (or even later, given the likeness of delays), but in industries with such long developmental cycles, decisions that are made today in fact determine the fate of companies like Boeing and Airbus in 10 or more years.
Boeing's 777-9X will be uniquely-positioned in the market as the largest twin-engine airliner. As Boeing and Airbus struggle to gain new orders for the 747-8i and the A380, it can be assumed that both programs will end earlier than expected. When this happens, the 777-9X will most likely be the largest commercial passenger aircraft that is manufactured. Major customers of four-engine wide-bodies, like Emirates and Lufthansa (the only airline which operates all four-engine passenger aircraft still in service today: the A340, A380, 747-400, and 747-8i) have already ordered or shown interest in the 777-9X.
Maybe Airbus already evaluates the options for the development of a completely new twin-engine wide-body, based on a new and possibly even bigger fuselage than the 777-9X and with more powerful engines. I cannot comment on the technical feasibility of such an approach, however with the A320neo, the A350, and in the near future most likely also the A330neo program running, it is highly questionable that Airbus has the engineering and financial resources to shoulder a project of this dimension.
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