Trying to understand Boeing's 737 thinking
by Addison Schonland | Jul 28, 2016 | Airbus, Boeing | 7 comments
The decision to "right size" the 737 MAX7 has caught the attention of industry observers. Some think it's a mistake, while others think it is the ideal reaction to Airbus, with an unintended consequence of also giving Bombardier another hurdle. Either way, the process of how Boeing got to the position of re-thinking the MAX7 demonstrates that Boeing can and will change direction quickly as needed.
The following chart might help explain how Boeing got to thinking about the sizes of the MAX variants.
The original 737 typically seated 85 (100) or 97 (200) in a two class configuration. The Classic (500/300/400) seated typically 108 to 146 in two class configuration. The NG (600/700/800/900) typically seated 108 to 177 in two class configuration. The MAX (7/8/9) typically seats 138 to 180 in two class configuration. Each generation of 737 has grown in size and has seen capacity grow even faster with thin-line seats.
From the first iteration of the 737, the larger model outsold the smaller model. On the original, the ratio was 37 to one. On the Classic we see the smallest model, the -500, was outsold by the combined -300 and -400 models by 4.1 to one. On the NG, the larger -800 and -900 models outsold the combined -600 and -700 by over 4.3 to one. That is even after Southwest became a huge customer for the -700. More recently, even Southwest started to switch to the 800. Finally, when we look at the MAX, the 7 is outsold by the 8 and 9 by a ratio of 47 to one. Boeing led (or followed) the market and continuously up-sized each generation. The mantra has been (as oil prices rose) that airlines could make more money flying the larger capacity. This larger capacity saw costs rise more slowly than potential revenue, which was great during expensive oil and 80% load factors. Circumstances supported Boeing's thinking about up-sizing.
It would seem self-evident therefore that Boeing was going to focus on the MAX8 and 9 when the MAX line came about. The history shows the bigger aircraft is the way to go. Up-sizing sold better than right-sizing for Boeing. literally decades of experience reinforced this thinking.
But Boeing faced a competitor with 150 seats called the A320. The A320 and the A321 recently started to sell better than the Boeing equivalents. In head to head competition, Boeing has to essentially give customers 12 seats for free when the -800 competes against the A320. The MAX8 maintained that problem against the A320neo. Customers were squeezing Boeing to match prices with the smaller A320 and in doing so, obtain more up-size revenue potential. This is great for customers, but not so great for Boeing.
The MAX8 is selling very well. But that free seat issue hasn't gone away. In fact, looking at the minuscule sales for the MAX7, one wonders why Boeing even bothered with it.
But Boeing will not concede and it is playing a tough hand well. It will make as standard a model as it can – the MAX7 will closely resemble the MAX8 except be a tad shorter, using the MAX8 wing and landing gear. This is a lesson from Toyota – keep things as close to standardized as possible. Manage production costs and still offer customers a choice. You want 150 seats? You can have that. You want more seats? You can have that too – but it costs more. No more free seats.
Boeing therefore manages to better compete with Airbus and conveniently adds to pricing pressure on Bombardier. So far so good. Will customers flock to the re-sized MAX7? That may be a tough call because Boeing has trained its sales team (and customers) to talk the market up. It will be interesting to see what happens. It appears the current MAX7 customers are excited about the prospect of going from 126 to 138 seats. Yes, the MAX7 is an up-sized 700. That up-sizing pattern apparently cannot be broken.
Now what happens with the MAX9 vs the A321?
BernardP	on July 28, 2016 at 9:01 am
Following Boeing's reboot of the 737MAX7, what will happen with the A319neo? Both have now essentially the same capacity. Both are now sized at about the CS300's capacity. Both still face a limited market potential. Both will use family commonality and deep discounts to fight the CS300. How will Bombardier be able to right-price its right-sized all-new design?
@PierreBus380	on July 28, 2016 at 10:16 am
Boeing is just trying to avoid SouthWest go to a 2-plane fleet: 737 + CSeries. That would be too big of a blow/message to the market whatnot. Even if they sell only 200 of the 737Max7.5, that seems to be their goal. Obviously, the Max7.5 will never be a market success. It's wasted money. Boeing is playing defensive trying to plug hole in the dam. They are squeezed by Bombardier on the smaller size (Max7) and Squeezed on the larger end A321Neo. And instead of out-innovating competitors, they are playing whack-a-mole… As I've kept saying for years now, get the number crunchers out of management and put engineers back at the helm. They sat too comfortably on the duopoly bandwagon for too long and forgot to innovate/execute/innovate/execute. They now are in a cycle of execute/execute/execute/execute. And forgot to get back to insert some "innovate" cycles in there. Boeing could've blown everyone out of the water with a blended wing (sure, pax at the center to avoid swinging too much) but Boeing has so much smart people and technologies just ready to a leap above the tube w wings. To me, who has worked at Boeing, it is extremely sad what's going on. My only hope is that innovation will come from SiliconValley and that Boeing will NOT be allowed to gobble up anyone sticking its head out. Because based on how things are going right now, Boeing would try to destroy that company instead of digesting it. The Douglas merge was a mistake for US innovation and competitivity. Innovation is dead. The only innovation that came out of Boeing are mostly coming out of the IT world (glass cockpits) and materials engineering (Aluminium alloys, composites, etc). The whole 737 evolution is based on 3% here and there. There's just no LEAP there, except the engines (which, again, is not Boeing). 🙁
To anyone who watches the comedy/drama "SiliconValley", Boeing is managed by the same types of people as the one that is pushed upon PiedPier. Totally unable to innovate and will push for the safe product that will only maintain cash flow (status quo) while the core of the org is filled with gems. And even the small competitors are slowly catching up (because most of the lego blocks are available to everyone else). They are at a point where making the product uber cheap and in volumes are not even keeping the competitors out.
iamlucky13	on July 28, 2016 at 5:58 pm
"Obviously, the Max7.5 will never be a market success. It's wasted money."
The same thinking applies to the Max7, but it doesn't matter. They're already contractually obligated to deliver them to three customers. Unless the customers all want to switch to the Max8 or cancel the orders without penalties, Boeing's hand is tied. It's too late to decide not to build the smallest model.
Fortunately for Boeing, all three customers apparently like the Max7.5 – Boeing even claims the customers requested the changes. Furthermore, they apparently accepted designing the Max7.5 to have more commonality with the Max8 than the Max7 was going to. This means the designing the changes required for the Max series will be less expensive for the Max7.5 than it would have been for the Max7 – perhaps even enough to offset the cost of designing the new fuselage plugs.
So the worst case is a very small increase in cost of the Max7.5 development. The best case is that the Max7.5 has enough appeal that more customers order it.
"instead of out-innovating competitors, they are playing whack-a-mole."
There is not a realistic option for "out-innovating" here. Had they gone with a clean sheet design, in the 5 years between when the NEO entered service and when the Boeing New Single Aisle entered service, the 737 demand would have plummeted to almost nothing, leaving Boeing with marginal finances to finish the high development costs, just like Bombardier ended up with marginal finances to develop the CSeries with the limited cash flow the CRJ is bringing in.
"Boeing could've blown everyone out of the water with a blended wing"
The challenges of a BWB aircraft go well beyond the forces experience by passengers sitting far from the centerline. The structure is radically different than any other aircraft than has been tried – the B-2 included, which does not have a large, non-cylindrical pressurized volume. The closest comparison is the X-33, which was cancelled because even NASA couldn't make a large non-cylindrical pressure volume of a reasonable weight and cost. And the challenge of assembly line production of such a structure would have been significantly more difficult than what Boeing faced with the 787. Let Boeing take a good look at flattened oval fuselages first (Hopefully for the New Medium Aircraft/MoM). Then maybe they'll have the appetite to consider more exotic designs.
Few people seem to appreciate that, in an industry like aviation, whenever you have a few hundred thousand engineers spend over a century innovating and improving on something, you reach a point where making big leaps becomes extremely difficult. At this stage in the aviation world, most changes should be expected to be evolutionary, not revolutionary.
Wesley	on July 28, 2016 at 7:08 pm
Boeing facing a big problem in the single aisle market. The basic 737 design is more than a decade older than the Airbus A320, built in an age when no one imagined the kind of ultra-high bypass ratio turbofan engines that exist today. The result is that the CFM Leap-1B engine that powers the 737 MAX is at a 9″ disadvantage in fan diameter compared to the Leap-1A that is an option on the A320 NEO. Physics has finally caught up to the 737, and the Leap-1B is reportedly missing its fuel efficiency target by over 5-percent.
Boeing is consequently losing the larger size segment of the single aisle market to the A321 NEO (which offers better efficiencies and better range), and will likely lose the smaller size segment to the C-Series (which has out-sold the MAX-7 by more than four-to-one).
Boeing needs a new single aisle product, but can't afford to launch another new development effort right now (not with the 777X in development). Eventually the MoM will fill the larger single aisle niche (which has always been more profitable anyways), but they just can't afford to launch it now.
Mohammad Gorji	on July 30, 2016 at 4:43 am
if the existing conditions lets the seller export 737 classic and NG to Iran then I am sure the market will be divided to 2 main parts between A320 family and 737. even today the number of 737 classics is increasing in Iran and some of airlines are trying to import more .
David Hughes	on August 1, 2016 at 9:58 am
"Existing conditions" in this case meaning various political manoevering in the US Congress. Some representatives of Airbus noted recently that if these blocked their sales there would be serious consequences in terms of placement of US equipment on future Airbus products – Rolls-Royce and the rest no doubt cheered.