March 18, 2019 / 11:08 AM / a month ago

Breakingviews - Airbus can only nibble at Boeing’s 737 lunch

Garuda Indonesia's Boeing 737 Max 8 airplane, that parked at the Garuda Maintenance Facility AeroAsia, at Soekarno Hatta International airport near Jakarta, Indonesia, March 13, 2019. REUTERS/Willy Kurniawan

LONDON (Reuters Breakingviews) - Boeing’s losses are not Airbus’ gains. The $215 billion U.S. aerospace giant may have suspended deliveries of its ill-fated 737 MAX 8 jet after two crashes in five months, and that theoretically should benefit its European peer. Unfortunately for 91 billion euro Airbus, chock-full production lines and order books stretching for years mean it can’t take up much slack.

As the two pillars of a global aircraft-making duopoly, each firm keeps its eyes firmly trained on the other. A case in point is the Airbus A320neo, a 200-seater jet equipped with two state-of-the-art engines that reduced fuel consumption by as much as 15 percent. When cost-conscious airlines jumped on the A320neo, Boeing responded by sticking the same engines onto its 737, the mid-range workhorse of the skies. Entering commercial service in 2017, the plane quickly became the bestseller in Chief Executive Dennis Muilenburg’s hangar.

Panicking over what happens to the 4,600 MAX 8s on Boeing’s order books partly explains the $23 billion wiped off its market value since the Ethiopian tragedy. Even if the ultimate downside isn’t a total scrapping of the model, Boeing’s pain should still be Airbus’ gain. For airlines with cold feet about large 737 orders – European low-cost carrier Ryanair, for instance, has orders for 135 – the logical next step is to shop elsewhere.

Yet while the European group’s shares are up over 5 percent since the disaster, that’s less than 5 billion euros ($5.6bn) in market value. Switching supplier carries financial penalties for operators, and Airbus can’t just magic up hundreds of new planes. Its A320neo production is already running at full steam to meet the 3,600 orders on its books. Its production lines are churning out over 50 units a month – but at that rate it will still take the best part of six years to meet demand.

Expanding production would take years and billions of dollars of investment, by which time Boeing would probably have ironed out whatever issues arise. Instead of a viable alternative, disgruntled Boeing customers would merely be joining the back of a six-year queue. Hence, instead of a major windfall for Airbus, the upshot could just be fewer overall planes globally.

Breakingviews

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