Boeing Does Not Have An Answer To The Airbus A220 Yet

Summary

  • The acquisition of Bombardier C-Series (rebranded as A220) program positions Airbus very strongly against Boeing for long-term future in the narrow-body space.
  • A220 is an extremely efficient and flexible platform, easily stretched to compete directly with today's top-selling narrow-body airplanes, A320neo and B737 Max.
  • I believe A220 will substantially replace both B737 Max and A320neo as the top narrow-body workhorse within the next 2 decades. Boeing does not have a competing platform (yet).
  • Boeing has been left quite a bit behind in the narrow-body space and would need to push hard (and need a lot of cash) to be able to catch up.

In the extremely interesting commercial aircraft duopoly of Airbus (OTCPK:EADSY) (OTCPK:EADSF) vs. Boeing (NYSE:BA), there are two strategic chess-like moves recently executed by Airbus that have the potential to tilt the coming decade in Airbus' favor. In my last article "A321XLR is a game-changer," I talked about the first of these two moves in substantial detail. Introduction of A321XLR is a shrewd move from Airbus at a time when the market dynamics are favorable and the sole competitor (Boeing) is busy dealing with a plethora of issues of its own making. My investment thesis was that the XLR effectively kills the business case for Boeing NMA (New Mid-Market Airplane) and leaves it unable to truly compete in the short term.

The second chess-move from Airbus to acquire Bombardier's revolutionary new small jet called 'C-Series' is even more interesting. To be fair, this was not really as much of a cunning move from Airbus as it was circumstance (and possibly a boneheaded move from Boeing) that pushed Bombardier (OTCQX:BDRBF) into Airbus' arms. I absolutely love how this story has developed and its implications on the commercial aviation market for both Boeing and Airbus are huge. I hope you will enjoy the journey as we go through the background, current developments and what they might mean to the world of passenger aviation.

Airbus A220-300Source: Airbus

Background

Commercial passenger aircraft market can largely be segmented by just two variables: Aircraft Range (How far it can fly) and Carrying Capacity (# of passengers it can carry for that range).

In trying to simplify the concept, I would like to categorize the passenger aircraft market as following:

1. Regional Range (RR)

2. Short Range, Small Capacity (SS)

3. Medium Range, Medium Capacity (MM)

4. Long Range, Large Capacity (LL)

Category

Range (nautical miles)

Capacity

Best Selling Aircraft

Leading Manufacturers

RR

<2000 nm

<100 pax

ERJ, CRJ, F100

Embraer, Bombardier, Fokker

SS

2000-4000 nm

75-150

B737, A220, ERJ-E2

Boeing, Airbus, Embraer

MM

2500-5000 nm

150-250

B737, A320, A321

Boeing, Airbus

LL

>5000 nm

>250 pax

747, 767, 787, A330, A350

Boeing, Airbus

Source: Author created table with own classification, inspired from Airbus document: Global Market Forecast 2019-2038

Historical Context

Designing and building commercial aircraft is an extremely complex and capital-intensive business. There are only a handful of companies in the world that have been able to do it successfully. Almost all of these companies have also required extended state support in order to sustain and grow the business. Bombardier Aerospace is one such Canadian company and that is where the A220 (previously called C-Series) story starts. As shown in the table above, Bombardier is one of the top 2 regional jet manufacturer that primarily competes in the <100 seat aircraft category.

A220 Beginnings

Bombardier first announced the C-Series in 2004 to target airlines requiring aircraft in the 100 to 150 passenger market with a maximum range of 3200nm. Other major objectives of the program were to get at least 20% lower fuel burn and 15% lower cash operating costs compared to contemporary aircraft (B737-700, A318, A319, DC-9, MD-80 and Fokker F-100) of the time. The development was estimated to cost $2.1B with 1/3rd of the cost borne by Bombardier, Suppliers and Partner Governments (Canada, the UK and State of Quebec) each. Unfortunately, the program was shelved in 2005 on account of unfavorable market conditions. However, a small team continued to further refine the business case and to find more risk-sharing partners.

As market conditions improved, C-Series was relaunched during the 2008 Farnborough Airshow with entry into service planned for 2013. At this time, Bombardier estimated the potential market for the 100 to 150 seat segment to be 6300 aircraft over next 20 years representing more than $250 billion in revenue. By the end of 2009, the development cost estimate had gone up to $3.9 billion, nearly double that of the previous estimate in 2004, still shared equally with suppliers and governments. Two versions were planned: CS100 (~110 seats) and CS300 (~130 seats) with the possibility of a stretched version CS500 (~160 seat) if market demand dictates development. Based on the proposed specifications, CS500 would squarely compete with the high volume models of single-aisle narrow-body airplanes B737 and A320 from Boeing and Airbus, respectively. It has been mentioned in some circles that C-Series was the jet that forced Airbus to introduce A320neo and Boeing to immediately respond with 737 Max.

A screenshot of a cell phone Description automatically generated

Chart: Narrow-body and Regional Jets by Seating Capacity (Source)

Troubles Brewing

As the C-Series program progressed from design stages to prototype to flight testing and certification, various system integration issues continued to delay the proposed entry into service. By end of 2012, it was clear that the first revenue flight would not take place before 2015. Total C-Series program costs by end of 2015 had ballooned to $5.4 billion including a $3.2 billion write-off putting severe stresses on Bombardier's finances. The Canadian planemaker was struggling with lack of cash and in desperate need of a government bailout. Canadian government agreed to provide bridge funding to save the program.

Through all this, the plane itself had proved to have excellent handling characteristics and better-than-expected fuel burn as well as in-service reliability. As a result, take-up from the airline industry was pretty good with 250 firm or tentative orders and a total sales pipeline of 360 units. In April 2016, Bombardier announced a flagship order with Delta Air Lines (DAL) for 75 CS100 with additional 50 options making Delta the biggest C-Series customer. As Bombardier had envisioned, C-Series was winning deals against the smaller variants of B737 and A320 packaged offerings from Boeing and Airbus, respectively.

Death Blow from Boeing

In April 2017, Boeing filed an anti-dumping petition with US International Trade Commission (ITC) against Bombardier for selling the CS100 to Delta below production costs ($20M sales prices compared to $33M production cost as estimated by Boeing, Bombardier disputed this). As a result of this complaint, the US Department of Commerce initially found in Boeing's favor and imposed 300% anti-dumping duties on the C-Series aircraft sold in the US market. This was an existential hit for the already cash-starved Bombardier and to the extreme surprise of Boeing, Airbus swooped in as a savior to take full advantage of the tense situation.

On October 16, 2017, Airbus and Bombardier announced a partnership on the C-Series program, with Airbus acquiring a 50.6% majority stake and moving the final assembly line for US customers to Alabama in order to avoid the import duty. After multiple hearings, arguments and deliberations, ITC ultimately dropped all duties in early 2018, a big win for the C-Series and now the new owner of the program, Airbus.

So, at the end of it all, Airbus acquired a ready-to-go next-generation aircraft with huge development potential (more on this in the next section) for next to nothing. As you would expect, C-Series was rebranded as A220 in mid-2018 to reflect the Airbus ownership. With the might of Airbus Sales and Marketing behind it, A220 has seen robust sales in 2018/19 period. At the same time, Airbus supply chain and manufacturing expertise should help bring productivity up and production costs down in the ensuing years. As per analyst estimates for the next 20 years, Airbus branded A220 will capture 55-60% market share (more than 3000 aircraft) in the 100-149 seat segment compared to 40% that was expected for C-Series under Bombardier.

A220 - Future Narrow-Body King

So why do I call the Airbus A220 a game-changer? If I can take you back to the recent past, there is a great parallel with the introduction of Boeing 787 and Airbus A350 and how those two aircraft have affected the legacy wide-body fleet of B747, B767 and A380. Both Airbus A380 and Boeing 747 are now unceremoniously retired as the cost efficiencies enabled by the two 'revolutionary' composite wide-body aircraft are simply too good for the older wide-bodies to compete against. The ones left in service, are getting accelerated retirement as it does not make financial sense to continue to operate the big boys when more efficient aircraft with much lower cash operating costs are available to fulfill most use-cases.

In my opinion, this is a story that will repeat itself with the A220 and Boeing's FSA (Future Small Airplane program, yet to be launched) replacing the current fleet of narrow-bodies, B737 Max and A320neo. I believe the danger of obsolescence is way higher for Boeing as the B737 family has reached the absolute limit of its decades old design (as demonstrated by the B737 Max). Airbus A320neo may still have some more life left as the platform is relatively modern and still has sufficient flexibility to target particularly narrow use-cases (e.g. range of 3500-5000 nm). In saying that, smaller versions of both planes (A318/319 and 737 Max 7) are already toast as they struggle to compete with the more efficient A220. This is quite evident in the order backlog section later in the article.

A220 InfographicSource: Airbus

Further, A220 has some of the most advanced features available on the market that are generally only found in the wide-body aircraft:

1. Geared Turbofan Engine (GTF) - First aircraft of its size to use a GTF engine. This is a heavy yet very high bypass ratio (12:1) engine from P&W (UTX) that enables fuel efficiencies of up to 20% over previous generation aircraft.

2. Award-winning Composite Wings made from Resin-Transfer-Infusion (RTI) Manufacturing Process - Makes it possible to manufacture the whole wing as a single piece avoiding use of adhesives or mechanical fasteners, eliminating mass and improving mechanical qualities. It is indicated that this revolutionary wing can accommodate stretched versions of the airframe without significant modifications.

3. Largest overhead bins and windows for a narrow-body

Below is the dot plot for the current top-selling narrow-body airframes in terms of seating capacity and range. Green dots are Boeing (Embraer included) and Blue dots are Airbus.

As you can see, A220-300 and A321XLR are both in their own zip-codes where there is no other competition nearby. Airbus is already working to increase the range for A220-300 to 4000 miles to cover for most of the 'long-but-thin' use cases (and to match A319neo offering).

Being a smaller manufacturer, Bombardier designed the A220 as a multi-decade bet for future of the company and as a result, it is an extremely flexible platform. A220-300 is the base airframe design and A220-100 is the shortened version. There is also a stretched version called A220-500 that competes directly with the current narrow-body kings, 737 Max 8 and A320neo. As per some industry sources, A220-500 is a ready-to-go design that could be built and certified with minimal investment as most components (Wing, Cockpit, Tail, Landing Gears, Operating Systems) between the 300 and 500 versions are common. There are also rumors of the A220 platform being able to stretch further to A220-700 and A220-900 versions that may compete with the Max 9 and Max 10 (and A321Neo) in terms of capacity.

Boeing Response

In the short term, Boeing really only had one option available in order to have a competing portfolio in the low-end market against A220. Boeing approached Embraer (ERJ), the Brazilian aircraft manufacturer and a market leader in the regional jet segment, with an offer at the end of 2017. In Boeing's defense, that is the most sensible path available as the only other new aircraft family in this segment with decent sales potential is the Embraer E-jet E2 series. In early 2019, Boeing announced an agreement to purchase 80% stake in Embraer's commercial aircraft division. This deal is currently undergoing anti-trust and shareholder reviews and should be finalized by mid-2020.

A220 vs. E-jet E2 Comparison

So, that is where we are today in terms of competitive positioning for Airbus and Boeing in the low-end market. Now, let's look at the airplanes themselves and how they are faring against each other in the market.

Shown below are 2 comparison tables; First comparing the smaller versions of both planes and the second compares the more popular aircraft.

A220-100 vs E190-E2:

A220-300 vs E195-E2:

Two things are immediately apparent from this comparison:

1. A220 is significantly more efficient (15-20% lower fuel costs per passenger per mile) than E-jet E2 in spite of a larger size and bigger seat width (higher potential to cram more seats in).

2. A220 also has 20% longer range which is certain to increase by mid-2020

Order Backlog and Deliveries

Now, let's take a look at how both aircraft are faring in the market. In the end, marketing and brand cachet can only take you so far. Actual orders and deliveries are where the rubber meets the road.

Company

Model

Order Backlog

Deliveries

Updated

Airbus

A220-300

437

68

19Q4

Embraer

E195-E2

123

1

19Q3

Boeing

B737 Max 7

82

0

19Q4

Airbus

A220-100

58

37

19Q4

Embraer

E190-E2

37

7

19Q3

Airbus

A319

35

17

19Q4

Boeing

B737-700

3

1233

19Q4

Sources: Embraer, Airbus and Boeing

As you can infer from the table, A220-300 is by far the most popular choice in the SS segment. E195-E2 has got some traction as well. However, this data on the surface does not show what is happening underneath. When you go a level below to see which airline has ordered what and for what purpose, it seems that the E2 and the A220 are not really in the same product space. Airlines are using the A220 on long and thin routes, most often with a business class, while the E2 is remaining in the regional niche.

E.g. KLM (OTC:KLMR) has ordered 21 of the E2-195 for their regional airline Cityhopper, not the mainline fleet. There are other orders from Azul in Brazil and Air Peace in Nigeria, which are both regional airlines. Rest of the orders are from leasing companies that primarily cater to the regional demand.

Whereas for A220, some of big orders have come from mainline airlines like Delta, JetBlue (JBLU) and Air France (OTCPK:AFRAF). Delta changed their order from the original 50 A220-100s to 45 of the -100s and 50 of the -300s, a net order increase of 45. In June 2019, JetBlue firmed their order for 70 and then Air France firmed their order for 60. 175 of the A220-300s have been ordered for 2019, with a total order book of 505 for the type and 600 for the entire line.

Conclusion

In conclusion, Airbus has ownership of a next-generation narrow-body airframe that could be competitive for the next 20-30 years without any significant investment and Boeing has not even started designing one yet (as far as I know). That is the context you should look at when comparing Boeing and Airbus as an investment for the next decade or more. More and more capable narrow-bodies are the future. Widebody aircraft will be reserved for premium heavy and super high demand routes into congested airspaces/airports.

Even discounting the 737Max fiasco, Boeing has been left a bit behind by both the A321XLR and A220 introductions in the narrow-body space and would need to push hard (and need a lot of cash) to be able to catch up. Boeing's acquisition of Embraer commercial aircraft division does not really address the gap as the use-cases of the underlying aircraft are different as shown by the order backlog analysis.

This article was written by

My interest in the stock market is relatively recent. As it happens, I incurred heavy losses on my initial investments during an industry and market downturn. Investments were more or less chosen due to familiarity. After that loss, I realized that whims and intuition are not going to make me money and started reading. SA came a few years ago and I have enjoyed the association. Some of the articles on investing strategies have been especially illuminating. I have more than recovered my initial losses several times over in the last few years. However, the market has been on an upswing so the real test is going to be when the bear comes to take the candies away. I do have some strategies in place that I adhere to no matter the conditions so that should help.
Follow

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (38)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.