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Residuals of MAX & neo Need to Reflect New Narrowbody

August 5, 2019

United Technologies Hints At Possible 2025 Replacement Launch Date

While the focus of attention in naturally on the problems surrounding the MAX and the ramp up of production of the A320neo, the residual values of both types need to increasingly consider the implications of the next generation of narrowbodies.

Forecasting residual values of aircraft requires an appreciation that the market will change over time rather than merely extrapolating from todays market conditions. The changes that are likely to occur in the future are formed a generation before. Only a few years after the service entry of the B737NG the Boeing Yellowstone projects were created which followed Project 20XX seeking to utilize advanced technologies in terms of materials and propulsion. Yellowstone 2 or Y2 turned into the B787 and the Y3 into the B777X. Yellowstone 1 or Y1, starting soon after 2000 – three years after the service entry of the B737NG, considered a wholesale replacement for the B737. By 2006 the Y1 project became much more formal with key personnel being appointed to consider the replacement designated the B737RS with service entry to be effected in 2012-2015. The plans for the B737RS were accelerated after it became clear that Airbus were also considering an all new replacement for its narrowbody. As fuel prices rose to unprecedented levels Airbus was perhaps rushed into the re-engining the A320 rather than seeking to develop an all new aircraft. The ability to place the new larger engines under the existing A320 wing was also a contributing factor and Boeing made the decision to adapt the existing B737 rather than pursue the all new B737RS. An all new B737 would have arrived to market some four years after the A320neo and in view of the cost overruns involved with the B787, was not seen as desirable at the time. The basic design of the B737 goes back to the 1960s and in the developing the B737-200, then the B737-300, the B737-800 and now the B737-8, Boeing has relied heavily on adapting the original design. Such adaptation is finite and an all new design is required at some point, albeit inevitably predicated to a large extent on advances in propulsion.

The Chief Executive of United Technologies, the parent of Pratt & Whitney, has now indicated that while the company is offering a version of the GTF engine for the proposed B797, there will continue to be investment in the GTF engine such that it will be ready for the new generation single aisle. This new aircraft to replace the A320neo and B737MAX, is seen by Mr Hayes as being launched as of 2025. Consequently, despite the recent service the MAX and neo, there are clear indications that both Airbus and Boeing are considering replacements. New aircraft programs are always being considered by the aircraft manufacturers, but replacements for the MAX and neo are becoming ever more likely and as such a launch data of 2025 may perhaps even be considered pessimistic than optimistic for a number of reasons despite the extensive backlog for both the MAX and neo.

The technology that offers the necessary 15-20 percent improvement in fuel efficiency to warrant a new aircraft does exist, particularly if married to a new larger, more efficient airframe. Rolls-Royce has been actively working on a new engine for a number of years and would not have decided to opt out of the current MAX/neo programs if it had not considered that it would be well placed to feature on the all new narrowbody; the Pratt & Whitney GTF may have had its problems but the potential for improvement in the coming years is considerable; General Electric and Safran will have to work hard to further develop the LEAP or continue to develop an all new engine to meet the demands of the new narrowbody just as Pratt & Whitney. The new environmental issues that are coming to the fore are increasingly focusing on aviation’s contribution which will accelerate the need for a response. Most notable are the problems associated with the MAX. While the Boeing aircraft will return to service in the coming months, probably with a designation other than the MAX, the financial implications of continuing with the MAX could precipitate the development of an all new B737 much sooner than expected. The customers of the B737MAX may themselves seek to encourage Boeing to accelerate the introduction of a new B737. The ability to launch an all new B737 would encompass the work already undertaken on the B797 – indeed, the B797 was perhaps already being used as a springboard for the B737 replacement – and provide a much more appropriate response to the success of the A321. With no formal launch of the B797, this all new aircraft could yet be developed into a replacement for the B737MAX. An all new B737 with seating capacities greater than the existing B737MAX and entering service by 2030-2032, could dominate the market for a generation with Airbus struggling to catch up for possibly ten or more years thereafter, just as Boeing is now struggling to compete with the A321. However, Airbus has already started to recruit engineers to develop a replacement for the A320neo so perhaps Airbus will have a response waiting should Boeing seek to morph the B797 into something more expansive. Any earlier than expected development of the B737 replacement would almost certainly provide new opportunities for Boeing as well technical challenges and a new relationship with the regulatory authorities. Such an all new aircraft would perhaps cost $30 billion to develop but the current problems associated with the MAX will have significant financial repercussions for years to come as well as adverse passenger perception give the rise of social media.

This suggests that an all new narrowbody could be in service by 2030-2033. Residual values of the aircraft are regularly projecting forward for 10,15, 20 – and even 25 years. Within even a ten-year event horizon a new narrowbody will likely be well under development. This means that the residual values of both the MAX and neo should already be expecting the service entry of an all new aircraft within 15 years. If such a scenario seems far-fetched, the first B737NGs were delivered in 1997 and the first A320neo was introduced in 2014 – 17 years; the first B737-300 was delivered in 1984 being replaced by the B737NG in only 13 years. Just as the residual values of the B737-800 needed to take account of the B737MAX more than a decade ago, then so too do the values of the B737MAX need to consider the prospect that Boeing will make a bold decision to revamp its entire single aisle product line that much sooner.

 

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