Issue 365: Unstuck in the Middle

The signs, portents and industry scuttlebutt are all pointing towards a Paris Airshow launch of at Le Bourget in June. But a key question is, after eight years since the announcement of the A320neo this coming December, how much of that “middle-market” is left for the taking.

Boeing declined to answer any questions from Australian Aviation about the NMA, noting that “there’s no real update to provide”.

So is the airframer keeping its cards close to its chest for a big bang six months from now in Paris?

Boeing’s MOM means many different things to many different people

Let’s start off by defining what can be a very amorphous concept. For over a decade and a half, Boeing has talked about the middle of the market as the section that bridges the capabilities of larger single-aisle narrowbodies and smaller twin-aisle widebodies.

In aircraft terms, the 1980s’ Boeing 757 is most commonly referred to as the prime example, but the contemporary Boeing 767-200, -300, -300ER and even -400ER have also been used in this section, as have Airbus’ A300, A310, A330-200 and, on the narrowbody side, A321 and newer A321neo.

From Airbus’s side, head of market analytics and messaging Joaquin Toro-Prieto tells Australian Aviation, the European airframer has not been approaching the middle-of-the-market as a specific category in and of itself.

“Giving in terms of range or in terms of capacity a denomination for what we consider middle-of-the-market, we do not have such a thing as the classification of the middle-of-the-market. That’s a denomination and an approach that Boeing has been using in the last few years, when they’re trying to categorise a space between what would be maybe a 767 and a 757, an aircraft that will be in this type of category.”

“Just before this year’s Farnborough Airshow,” Toro-Prieto explains, “we were releasing our latest Global Market Forecast, and in there what we were doing was a classification in term of aircraft sizes between S, M, L, and XL. In this M category, we were talking about some of the variants and some of the models of the A321.”

The middle of the market, Toro-Prieto suggests, “is something that could be served by A321s, or it could be served by A330s, it depends which type of market you’re trying to address. In some cases you can have A330s in low configuration that will sit in this type of seat count where defined.”

It might well be expected that Airbus, which is not currently planning to launch a new aircraft in this segment, to suggest that its existing aircraft can serve it from above and below.

But the key to the middle of the market, as Toro-Prieto alludes to, is the competing tension between range and size.

In range, it’s around 4,000-5,000nm, which from Sydney or Melbourne is roughly the difference between just about reaching Hong Kong and comfortably reaching Beijing. And with regard to passengers, it’s something around 175-275 passengers, depending on how much premium seating there is and what the economy class seat pitch is like – factors which also affect the range of the aircraft.

The level of interest in this category is intense, for a variety of reasons. One key is the transatlantic market, recently pegged as the most valuable in the world, which is oversaturated between hub airports and underserved between spokes. Routes like London-New York have enough demand for widebodies, but flights from secondary cities in Germany or France are more complex because of eastbound winter winds, which historically have resulted in the need for fuel stop diversions on the Boeing 757.

For Australia, New Zealand and the south-west Pacific, the question is a little more nuanced, not least because of the Sydney-centric focus of a lot of existing operations. Here, the middle of the market as it stands today is the sweet spot between the range of a Boeing 737-800 (just about 3,000nm) or Airbus A320 (up to 3,300nm) and the capacity of a 787 or A330 (usually 250-275 passengers for full-service airlines, depending on configuration).

What kind of new markets could be opened if hub airlines from China and south-east Asia could fly fewer passengers on smaller, longer-ranged aircraft to a greater variety of destinations? Which smaller or more northerly Australian airports could see new hub or base operations with aircraft better suited to their market size and demand? What new operators could establish themselves in less constrained airports in the ASEAN region, creating hub networks spanning the equator?

Right now, airlines are rather in the position of Goldilocks: a narrowbody may be too small and too short-ranged, a widebody may be too big and inefficient over shorter distances, but there’s nothing just right.

But with more efficient engines for narrowbodies (enter the 737 MAX and the A320neo), with the cost of acquisition and operation of existing widebodies becoming more efficient (cue the A330ceo, A330neo and 787), as well as the efficiencies of operating fewer fleet types, there’s certainly an argument that the middle of the market is being squeezed from either side.

So, why not just use a 767 or A330? Largely, that’s what airlines do. But these jets are sometimes too much aircraft for a route, both in terms of capacity and range, given that the smaller A330, the -200 version, has a range of some 7,300nm, and the 767-300ER reaches nearly 6,000nm – significantly more than required, which is not efficient. And in efficiency terms, the 767 and older A330s do not have the cost advantages of newer aircraft.

As passenger demand expands too, and especially in areas where it outpaces the possibility of airport construction, there is natural upward pressure on aircraft size. There is upward size pressure too, from slot restrictions.

An airline flying a smaller 757 or A321 across the Atlantic to London Heathrow is likely not making the best use of those seven-figure LHR slot prices. It’s a similar story at other congested airports around the world, like Hong Kong, Beijing, Tokyo Haneda, and so on.

This both pushes smaller narrowbody operators to fly larger versions, making an argument for a middle-of-market aircraft, and pushes the middle-of-market demand upwards as well, making an argument that the middle-of-the-market could use an A330 or 787.

SIDEBAR: THE CONTENDERS

In the narrowbody corner:

A321neo

Length: 44.51m

MTOW: 97t

Range: 4,000nm (in A321LR version including three auxiliary centre tanks)

Typical passenger capacity: 206, 2-class

Maximum passenger capacity: 244

Boeing 737 MAX 9

Length: 42.16m

MTOW: 88.3t (preliminary)

Range: 3550nm (with one auxiliary tank)

Typical passenger capacity: 178-193

Maximum passenger capacity: 220

Boeing 737 MAX 10

Length: 43.8m

MTOW: (not yet specified by Boeing)

Range: 3300nm (with one auxiliary tank)

Typical passenger capacity: 188-204

Maximum passenger capacity: 230

In the widebody corner:

A330-200ceo

Length: 58.82m

MTOW: 242t

Range: 7300nm

Typical passenger capacity: 247

Maximum passenger capacity: 406

A330-800neo

Length: 58.82m

MTOW: 251t

Range: 8,150nm

Typical passenger capacity: 257

Maximum passenger capacity: 406

Boeing 787-8

Length: 57m

MTOW: 228t

Range: 7355nm

Typical passenger capacity: 242

Maximum passenger capacity: (not specified by Boeing, but 381 according to specification documentations if four type A doors installed)

Boeing 787-9

Length: 63m

MTOW: 254t

Range: 7,635nm

Typical passenger capacity: 290

Maximum passenger capacity: (not specified by Boeing, but 381 according to specification documentations if four type A doors installed)

Spoiler alert: Airbus’s and Boeing’s starting point is based on their existing aircraft

As of the time of writing, the offering at the narrowbody end from Airbus is the A321neo and its extra-fuel-tanks variant, the A321LR. At the widebody end, it’s the Airbus A330, particularly the -200 version, although the airframer is keen to sell more (indeed, at this point it’s practically ‘any’) re-engined A330-800neo aircraft.

From Boeing, it’s the 737 MAX 10 and the 787 Dreamliner, and while the former has lower acquisition and operating costs than the A321neo, the latter is more expensive than an A330-200.

The problem for both airframers is that the narrowbody is not enough aircraft, and the widebody is too much aircraft. Looking objectively, however, the gap between them is greater for Boeing than it is for Airbus, which offers more capable narrowbodies and a less expensive widebody.

The market was not convinced by Boeing’s offering of the 737 MAX 9 to compete with the A321neo, which outsold the Boeing jet by around five to one before the launch of the stretched, but lower range, MAX 10.

A key aspect to note when considering the size of the market that the eventual numbers for the larger versions of both narrowbody aircraft are somewhat underestimated as the result of the way aeroplanes are paid for. Pre-delivery payments are calculated on the basis of the delivery price, which is naturally lower for an A320 or 737 MAX 8 than an A321LR or a 737 MAX 10. Airframers, however, love to deliver the larger aircraft, since they cost more yet take up the same amount of space on the assembly line. Airlines therefore almost always have an option to upgauge their orders, pretty much at any time before assembly begins, but the initial orders are for the smaller jets, with conversions coming afterwards – as seen this August with Virgin Australia’s MAX 10 announcement.

In terms of the percentage of A321neos being ordered and produced, says Airbus’s Joaquin Toro-Prieto, “we know that we are on the way up. In some ways it’s complicated to say. The reason for that is because a lot of the airlines, when they’re ordering aircraft from us – and that’s the case for a lot of lessors – they will decide to order the smaller variant A320 because in terms of pre-delivery payments and early payments, the aircraft tag price is lower than an A321.”

Since these pre-delivery payments are calculated on the price of the variant ordered, Toro-Prieto says, “they will be advancing less money at the beginning. Then later on, since we provide flexibility to change between A320 to A321neos, when we offer them those conversion windows they will come back to us and say: ‘we’re going to be up-converting and we’re going to, instead of getting delivered an A320, go for an A321.”

Looking to the line at present, “we are seeing today already in terms of the amount or the percentage of A321 going 20, 30per cent,” Toro-Prieto says. “I think that in the coming years we’re going to get towards this objective that was mentioned months ago, when John Leahy [Airbus’s former sales supremo] was still around, when he was saying ‘ideally at some moment in the future I would expect to see a 50% production rate.’ We are not there yet, and we will need to see from the industrial point of view what we will need to do to adapt that. But with the current demand and as the airlines look to bigger models, what we’re seeing is a higher interest towards the A321.”

On the Boeing side, in pure passenger size terms, the MAX 9 and MAX 10 are certainly valuable and useful aircraft, and will serve well on transcontinental US and Australian routes, as well as shorter-range flights. They are lighter than their A320 family equivalent, but do not have the same range or runway performance – the MAX 9 maxes out at 3,550nm and the 10 at 3,300nm, which hampers their attack of the middle of the market from the narrowbody end. To simplify to perhaps an extreme, the greatest issue for the MAX serving the MOM is the lack of ground clearance on the 737 for newer, larger, more efficient turbofan engines.

Airbus rather ate Boeing’s lunch with the A321neo as a result, which has an official 4,000nm range for 206 passengers in its A321LR version, nearly 100nm of official range more than the 757-200 it is intended to replace in the world’s fleet.

As a MOM contender, Boeing’s NMA is the unknown

Most observers suspect Boeing’s NMA will end up being the 797, and the expectation is that it is a twin-aisle aircraft roughly the size of a 767, with new engines, new wings and probably a new carbon-fibre fuselage.

The “probably” on the fuselage concerns the price of the aircraft, which Boeing needs to keep relatively low, especially since the 787 is a capable but expensive plane. Too high a price, and airlines may look more appreciatively on cheap, late-model (or second-hand) existing twinjets. It may well be that Boeing goes for a half-and-half approach or uses some form of technological wizardry to try to make the numbers add up.

One question still outstanding is around the actual shape of the fuselage. It seems that some markets (usually exemplified by the USA and Europe) desire a relatively decent cargo hold, while others (where China and east Asia are the examples) place a lower priority on cargo and a higher priority on cabin space.

It’s all a bit of a “watch this space” for airlines and observers. At this point in time, if Boeing doesn’t launch the NMA at the Paris Air Show in June 2019, there’ll be a lot of surprise and disappointment, which would, of course, be good news for Airbus and particularly the A321neo.

The A321neo has stolen a lot of MOM’s market already

Airbus started out selling the A321neo in 2010, and ran away with most of the lower end of the middle-of-market segment after launching the extra-fuel-tanks version, originally called the A321neoLR and later shortened to A321LR.

As part of its plan to make the A321neo all things to all airlines, Airbus is also offering a rejig of its doors, as the Airbus Cabin Flex, or ACF, program. Rather than the four doors seen on current versions, the second set of doors disappears and is replaced by either one or two overwing exits. For very high premium layouts, such as all-business-class airline La Compagnie’s A321neo, only one overwing is needed and the door immediately behind the wing (which would be doors 3 on the current A321) is deactivated, with consistent cabin interiors making the changes almost invisible to most passengers.

ACF reduces weight and makes the cabin layout more flexible, especially for operators at the longer end of the range game where a premium cabin means that there is less evacuation pressure on the forward and centre doors.

Airbus has, however, been keeping its next move close to its chest. Its options largely revolve around adding extra frames to make a larger aircraft, extra fuel tanks to create an aircraft with more range, or both to create a larger aircraft with the same range as the A321LR.

At the risk of sounding as confusing as Apple’s latest round of iPhones, let’s call these the A321XLR (same size, more range), A322 (larger, no more range) and A322LR (larger, more range).

It seems that all of these options are technically possible for the A321neo frame and the A321neo set of engines from Pratt & Whitney or CFM. The question is which one – or ones – Airbus will jump at.

All could take a different bite out of different parts of the middle of the market, and the jury is still out as to whether it makes more sense for Airbus to wait until the 797 is more firmly specified before revealing its deck or to try to corner the market earlier, as it has with the A321LR.

Yet some airlines have already made choices for the A320neo family, which will come with the ability to upgauge if needed.

“The Qantas Group has bought A320neo and A321neo and they’re going to be deploying them in different ways,” Airbus’s Toro-Prieto explains.

“They have Qantas mainline, and they have yet to start to be seeing exactly what is it that they want to be doing, but an A321neo flying coast to coast in Australia is an aircraft that will be doing very good service,” Toro-Prieto says. “Feeding into Sydney, Melbourne, Brisbane, some of the islands from the Pacific into these three cities, flying from Australia into areas of south-east Asia, that’s an aircraft that will have a lot of potential.”

Indeed, the A321neo’s (and the NMA’s) true role in our market may well be to expand operations at airports outside Sydney or Melbourne, with Brisbane, Perth, the Gold Coast, Cairns, Canberra and Darwin particularly well situated in the range sweet spot.

Yet Airbus is cagey on stating publicly the exact range vs passenger capacity of the A321neo and the A321LR, somewhat understandably in advance of Boeing’s NMA. At a 206-passenger capacity, Airbus lists a 4,000nm range, around the distance between Sydney and Hong Kong. It’s unclear what assumptions back up that figure, however.

On the network carrier side of the model, many of the airlines operating at this sort of range will likely operate substantially less dense aircraft: premium cabins take up more space, extra-legroom sections are proving popular, and economy seats are given more pitch. That all means fewer passengers, which provides a correspondingly lighter weight.

As an extreme example, the tiny French all-business class airline La Compagnie, which flies the 3,200nm between secondary airports of Paris and New York, is replacing its 74-seater Boeing 757-200 aircraft with 76-seater A321neos – and that’s the base neo, not the LR version with the extra fuel tanks. Clearly, the company’s range, headwind and airport holding congestion assumptions for this sort of lightweight operation are positive.

At the other end of the airline spectrum sit the numerous low-cost carriers that have ordered the neo, where planning assumptions usually include a lower rate of hold luggage takeup than on legacy airlines, and where the 28in or 29in seat pitch does not necessarily lend itself to flights at the eight-hour-plus extreme of the middle of the market.

At that point, a widebody aircraft almost seems inevitable for many carriers to approach the middle of the market when densification is a factor, and indeed the proliferation of long-haul, low-cost carriers (see Australian Aviation, October 2018) within the Asia-Pacific region suggests as much.

Airbus seems to be waiting to aim the A330 at the MOM from above

Airbus’s mid-1990s widebody twinjet was never expected to outsell its four-engined sister, the A340. Yet it has, handsomely, and now dominates mid-range operations on the widebody side of the middle of the market within Australia, on the triangle trunk routes, on transcontinental services, and to closer Asian destinations.

The current engine option (the A330ceo) versions come in the original A330-300, ordered by Qantas as an international aircraft, and the shorter yet longer range A330-200, used by Qantas, Virgin Australia and a wide range of other airlines.

For new engine options (the A330neo), Airbus offers what is essentially a flat replacement of the A330-200 with the A330-800neo, while the A330-300 is succeeded by the -900neo. The neo has more range – 8,150nm for the A330-800neo compared with the 7,300nm for the A330-200 – but both of these are substantially more capable than the middle of the market demands, as is the size.

Qantas has three slightly varying layouts for its refitted A330-200s, with either 27 or 28 business class seats and 243 or 224 economy seats, respectively. Virgin Australia seats 20 in business and 255 in economy. Neither airline offers premium economy on these aircraft.

Qantas, for its part, has made the choice to upgauge the middle of the market from the Boeing 767-300ER aircraft it previously used for short-range, high-density missions to the A330-200, including with a relatively short-lived high-density version with business class seats that were premium economy-style recliners rather than flat beds.

And that lack of premium economy is notable in the context of this middle class growing in importance and profitability for airlines. Premium economy is already the most profitable real estate on the plane, by square centimetre, and its popularity means that airlines are increasingly installing it even on smaller aircraft.

What the premium economy trend does is push the size of a middle-of-market aircraft slightly higher: if four rows of premium economy replace five rows of premium economy, a larger aircraft is needed to carry the same number of passengers.

(On the narrowbody side, too, fewer passengers in more spacious seating means lighter aircraft with greater range. See: American Airlines’ transcontinental A321, which seats just 102 passengers in a 3.5-class layout, where the airline focuses on premium load and frequency over economy capacity.)

Interestingly enough, few A330s operate with a full three-class layout, with Cathay Pacific’s long-haul version – seating 39 in business, 21 in premium economy and 191 in regular economy for a total of 251 – one of the few exceptions.

(On the 787-8 side, British Airways’ seats 35 in a very dense business class, 25 in premium economy and 154 down the back, totalling 214, while Air Canada’s seats 20 in business, 21 in premium and 210 in economy, adding up to 251.)

Once the options in the middle of the market firm up, it seems that there is space for a rethinking of the passenger experience that can be offered, whether on a widebody, narrowbody or middle-of-market aircraft.

Is there a role for a new A330 regional, whether neo or ceo?

Asia Pacific is something of the region of the A330, with both early customers and later purchasers of the airframe creating regional configurations for shorter range missions.

Airbus has for five years offered a downrated A330-300 for regional operations, which the airframer explains “is optimised for missions up to 2,700 nm (five-hour flight) covering short to medium haul routes and offers significant cost savings through a reduced operational weight of around 200 tonnes.” It delivered the first to Saudia in 2016.

It wouldn’t be beyond the realms of possibility that Toulouse might be looking at offering a similarly downrated A330-200, or even a downrated version of the more efficient A330-800neo, which is advertised as around 15 per cent more efficient than the ceo version. Airbus has previously emphasised the lower purchase costs of the A330 compared with the 787, and while that has not prevented the Dreamliner’s success in long-range markets it is not optimised for the middle of the market.

Could the poorly-selling A330-800neo be re-envisaged and reborn to attack the middle of the market from the top – or could a fleet of inexpensive late-model downrated A330-200s be a deal too good to pass up for a cost-conscious airline?

“The A330-800 is an A330 at the end of the day,” Airbus’s Toro-Prieto says. “The interesting thing, like all the A330s, when you’re looking into what the A330 is doing today, is that it’s doing pretty much everything that you want. You will find A330s in very short operations, on 30-minute flights, and A330s in operation today that are flying, for example, from Buenos Aires to Europe. So you will have all the depth and breadth of these operations in the same platforms. That’s proving that this is a very flexible platform and that it can adapt to do different things.”

But is it too much plane? “It’s for the airline to decide,” says Toro-Prieto, “taking into account the type of operation that they would like, and what is the design weight out of what we’re offering today that they will be interested in. [They can] then go for a low maximum takeoff weight, if they want to be operating only this type of short sectors.”

“A lot of airlines are trying to escape from high aircraft specialisation. You need to have significantly big fleets to specialise an aircraft. For most of the airlines, where they’re more eager is around flexibility: having an aircraft like a Swiss Army knife you can adapt and use in a lot of different environments and a lot of different operations,” Toro-Prieto concludes.

And Airbus is keen to be selling those re-engined models. “The objective regarding the A330 is as soon as possible just to be delivering neos,” Toro-Prieto says. “Today, there are still in the portfolio some A330ceos. Some of the customers, they’ve been ordering it just for a question of getting it as soon as possible, but our objective is to do a phase-down, a run-down of the production of ceos into neos as soon as possible.”

Production and suppliers for all the contenders is the wild card

Across airframers, from Airbus to Boeing, Bombardier to Embraer, the threat posed by strained suppliers of aircraft parts to on-time delivery has been substantial – and visible. The engine-less A320neo “gliders” that first started appearing at Airbus aprons at Hamburg Finkenwerder, Toulouse Blagnac and Tianjin Binhai caused wags to nickname the new generation of aircraft “no engine option”. There’s little reason to think that Boeing has a better grasp on the situation, and indeed dozens of engineless aircraft at Renton demonstrate the Seattle area has its own gliding club issues to resolve.

Meanwhile, engine delays hit the A330neo program, while in-service powerplant woes have continued to impact Boeing 787s across the world, creating a shortfall of narrowbody aircraft as lessors wet and dry have plugged gaps from Auckland to New York to London to Tokyo to Santiago. (One end result of the eventual resolution of these issues may indeed be a glut in the availability of smaller widebody capacity, which may itself affect the demand for a middle-of-the-market aeroplane.)

Interior delays around seats, lavatories, galleys and monuments have troubled the Airbus A350, and with increasing industry consolidation and fewer players in the market, problems are multiplied. Indeed, as mega-corporations consolidate the players — Safran with Zodiac, UTC with Rockwell Collins and with Pratt & Whitney, AVIC with FACC with AIM Altitude and with Thompson — the waxing or waning confidence in various parts of each business will prove complicated.

The conventional wisdom is that, while first movers in a field have a speed to market advantage, they also run the risk of being delayed with bleeding-edge teething issues. Yet the 737 MAX is hitting the same glider problems as the A320neo, just years later.

Boeing did not cover itself with glory in its design and production of the 787, from the management of its global supply chain to electrical issues, from battery fires to fuel leaks, from emergency landings to airworthiness reviews.

With Boeing’s NMA using new technology — and especially engines created for a new category of aircraft, due to be selected within the coming months — it will be for Seattle to deliver on the promises it will be making to serve this market of its own creation.