Civil aircraft manufacturing over the last two decades has been a remarkable example of duopoly: Since Boeing’s merger with McDonnell Douglas in 1997, Airbus and Boeing have dominated the supply of all airliners with more than 125 seats. In the period from 2002 (immediately post-9/11) to the end of 2018 (just before the Boeing 737 MAX crisis), the two companies split deliveries almost exactly equally.
John Leahy, Airbus’ hugely successful chief salesman for that entire time, could be remarkably candid in discussions with investors. His view was that a balanced duopoly was stable, but if either player tried to increase its share much above a 55-45 split over any period, the other would have to respond by cutting prices to regain that share. Otherwise, it would start to incur a significant (and potentially structural) economic disadvantage in terms of production volumes, costs and hence profitability. This would make any battle for additional market share not just pointless but actually self-destructive: Prices would fall for likely no long-term gain in share.
This makes the current situation all the more surprising. In 2020, with first the 737 MAX and then 787 production all but halted, Boeing’s share of deliveries fell to a low of 20%. The company’s share averaged only 26% in 2019-21. That should have been a transient state of affairs: The MAX return to service led deliveries to rebound to 245 aircraft in 2021. This year should see further gains in production (toward the targeted rate of 31 per month) and deliveries.
Orders, cancellations and other changes to backlogs over the last three years tell a different story. Boeing has recorded around 2,000 cancellations since 2019, and a proportion of the 737 MAX orders in 2021 were a reallocation of these (sometimes including already-built aircraft) rather than genuinely new orders.
This may go some way to explaining the company’s remarkably vague statement with its fourth-quarter results announced Jan. 26 about MAX production. Boeing stated that it is “evaluating the timing of further rate increases for the program.” Contrast that with Airbus’ surprising boldness on rates for the A320neo family, up from 40 to 45 per month in 2021 and now projected rising to 65 per month by mid-2023.
There were predictable headlines in early January about Boeing “winning the annual orders battle against Airbus” in 2021. Boeing’s 909 orders (before cancellations, 535 net of them) were clearly ahead of Airbus’ 771 orders (507 net).
But it is far too early to conclude that Boeing is back and the stable duopoly restored. We see the broader challenge as being that, even when both the MAX and 787 programs recover to production stability, Boeing’s current backlogs are simply too small for it to regain parity with Airbus through production increases alone.
Boeing’s backlog at the end of 2021 was 4,134 aircraft (83% of these were MAXs). This compares to 7,083 for Airbus (82% of which are A320neos and another 7% A220s). Even if we prudently adjust Airbus’ backlog to a similar standard to Boeing’s accounting standard adjustment (which excludes orders with financially or commercially dubious customers), Airbus still has a 50% greater backlog than Boeing.
It is this that should worry Boeing, its suppliers and investors: At the same production rates, Airbus can deliver aircraft for at least three years longer than Boeing. But the two companies’ rates for their flagship narrowbodies are not the same and, on the basis of current plans, it looks inconceivable that they might converge before 2025 at earliest.
Airbus likely will deliver at a 50% greater rate than Boeing for half a decade or longer. And this is where the brutal economics come in. Suppliers should expect Airbus to “request” significant price cuts for all A320neo parts and subsystems. With rates 50% or more above the 737 MAX, an additional 10% discount to the comparable 737 part would not be unreasonable. Investors should expect these supply savings (plus the learning-curve benefits that Airbus will derive from the higher rates) to be fed into a combination of price cuts, R&D and some retained margin.
Boeing has produced the 737 at equivalent rates to the A320 before, and the company probably will try to get back to that parity. But Airbus’ current volume advantages are underpinned by a near-insurmountable superiority in backlog. Boeing “won” the 2021 orders contest, but it needs to do the same for every single year to come. The only way Boeing can realistically expect to do that is by cutting prices. And investors need to recognize that, with its far greater backlog, Airbus can compete on those terms for far longer (and better) than its U.S. rival.
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