Peak Boeing and Air Travel After C19

I’ve always felt that what’s good for the country is good for Boeing Aircraft. Indeed, from time to time, I’ve purchased Boeing stock (BA) as a good proxy for a bet on the US economy overall and indeed the world economy, as Boeing aircraft are the dominant passenger aircraft worldwide. But now we face a situation in which the Covid Pandemic is causing an unimaginable disruption in passenger air traffic at the same time as Boeing itself has made a cacophony of unforced errors.

Let’s begin with Boeing’s “own goals”: The engineering failures of the 737-Max resulting in two total-fatality air crashes are well known. However, even worse than the design and training missteps, the company’s disastrous public relations response – allowing news media to speculate on “pilot error” when the firm knew about the likely MCAS problem – led to immeasurable reputational damage to the company, to the FAA and to American aviation as a whole. The original sin was Boeing’s strategic decision to squeeze ever larger modern engines into a 60 year-old airframe design, rather than starting with a new narrow-body aircraft model.

The next strategic mistake in this litany of self-inflicted wounds concerns wildly successful 787 Dreamliner of which about 1,000 have been built. The company decided to stick it to its highly unionized Washington state workforce and move all production of the 787 into its Charleston, SC, manufacturing facility. Production was previously split between highly unionized Everett, WA, and management-friendly South Carolina. There have been so many quality problems with the Charleston planes (largely debris and tools left behind during assembly) that some airlines have refused to take delivery.

Thirdly, Boeing took its crown jewel 777 widebody and messed with success. There are more than 1,500 Triple-7s delivered and it has become the premier two-engine long-haul plane that has in many cases replaced the iconic 747 on trans-oceanic flights. While it is perhaps understandable that Boeing had the desire to take lessons learned from the 787 and apply them to the 777 (carbon-fiber wings and advanced electronic controls) the result has been a plane that metaphorically can’t get off the ground. In the context of the 737 engineering lapses, there is such enhanced scrutiny on the new 777X that the plane will likely be more than 3 years late in service. Boeing’s failure to deliver on schedule has allowed airlines to cancel several hundred orders as the demand for air travel has radically shifted, post Covid.

So this brings us to speculation about what air travel will look like after the pandemic. While it’s tempting to jump right in to wondering about V-shaped recoveries or not, it may be most helpful to acknowledge that the product class “jet airliners” had matured into two categories: Narrow body, single-aisle planes such as the Boeing 737 and the Airbus A320 series; depending on configuration, these have a capacity of about 190 passengers. Although there are plenty of 5 to 6 hour routes using these aircraft, the overwhelming majority of flights by narrow bodied aircraft are 2 hours or less in the US, Europe and within Asia.

Wide bodied planes include the Airbus A330 (capacity up to 440) and Boeing’s 777 (about 450 passengers) and 787 (between 250 and 296 seats, depending on variant). These are twin-engine aircraft have largely replaced the higher consumption four-engine Airbus A340 and Boeing. One of the signals of a product category reaching product maturity is when some examples push the limits to impracticality – think of the ever larger “land yacht” automobiles from Cadillac and Lincoln that would no longer fit in a standard garage or parking space. The double-deck 600 passenger Airbus A380 is the example that stretched the limits of efficiency. While it was hailed as a plane that would, as it were, create its own tail wind, by raising consumer demand for air travel, we can say that the concept has failed. Firstly, as the Wall Street Journal wryly observed, the demand for cheap coach class seats on even the most popular routes such as New York to Paris isn’t all that great on a rainy Thursday afternoon in February. Secondly, the cost-per-seat is only attractive in an A380 if all those seats are filled. What we observe is that low-cost carriers can operate quite profitably with narrow-bodied aircraft in which every seat is sold. While Emirates may still continue to fly their hub-to-hub A380s, my first prediction is that the few other operators (Air China, Qantas, British Airways) will park these planes and get rid of them as soon as possible.

Boeing itself predicts that air travel will return to pre-pandemic levels “within 3 years.” This is and oddly specific prognostication and doesn’t fit with the bifurcated product category, narrow body and wide body. My prediction for the narrow body air travel market is that it is likely to bounce back quite quickly. Most short haul tickets are sold for discretionary travel, and while a good deal of business travel may default forever to Zoom meetings, once vaccines are in place, leisure travelers – particularly young adults – will want to make up for lost time, or indeed, to make visits before the next lockdown occurs. It follows that you should feel confident about the efficient low-priced carriers such as Ryan Air and Southwest. It follows less that there is a huge demand for new planes. The existing fleet of narrow bodies is sufficient for all foreseeable demand, especially as weaker carriers have failed during the pandemic.

As for wide body inter-continental travel, I predict that it will change dramatically. I doubt that passenger volume will ever return to 2019 levels. Businesspeople have learned that more can be conducted by video conference than they ever thought possible. And both business and vacation travelers will be wary of the risks of new, unknown infections, particularly in Asia. It is quite possible that quarantines and vaccination certificates will become permanent features. This leads to my prediction that there will be a significant consumer preference for point-to-point flights such as San Jose to Chengdu, or Edinburgh to Mexico City. In turn, airlines will have a preference for Boeing’s 787 and the comparable Airbus A350, rather than the larger 777 and A340.

However, the demand for point-to-point tickets will not lead to a demand for many new planes. Two major fliers of the 787 have collapsed: Norwegian Air (nearly 40 of the type) and Hainan Airlines (a similar number). These planes, leased and owned, will be dumped onto the market in 2021 and that will suppress demand for new orders from Boeing.

I conclude that we have reached “peak Boeing.” Deliveries of commercial aircraft from the firm rose from about 300 a year in the early 2000s to 806 in 2018. Deliveries in 2020 slumped to 157. With reduced demand for air travel and a world awash in low mileage used planes, don’t expect a recovery any time soon.