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The Boeing (BA) 797 or NMA (new mid-size airplane) probably is the aircraft that captures most attention at the moment. At times it seems to be capturing more attention than even the Boeing 787, which is impressive since the aircraft has not been formally launched yet. However, given that the Boeing 797 will be Boeing’s first clean sheet design after the Dreamliner, it should come as no surprise that the Boeing 797 makes headlines every now and then. AeroAnalysis has been covering the NMA subject since 2015 and has written an extensive report on the Boeing 797 prospects, which is available here.

Our free will not be to the same standard as the Boeing 797 case study for the simple reason that we could be running an article series on the Boeing 797 for a whole year if we were to discuss the various subjects as detailed as we did in the report. Nevertheless, we will discuss some subjects to a standard appropriate for this platform. If you wish to have a full insight in the Boeing 797, we highly recommend you purchase the 80-page study, but for most investors and probably for a lot of industry observers, the articles we publish on the Boeing 797 on Seeking Alpha will already suffice and provide unique insights. In this report, we will look at the revenue potential of the Boeing 797, where we consider the sales price as well as our take on demand for a NMA.

Figure 1: Placement Boeing 797 variants in payload-range space (Source: AeroAnalysis)

The NMA seat-range couple span a line in the MoM space (green) that’s positioned higher than the Boeing 757-200 and has a range capability better than the Boeing 767 standard range variants. The Boeing 797-3 would be placed between the 767-300 and the Boeing 767-300ER on the upper side and something similar would happen on the lower side of the Boeing 797 space where the Boeing 797-2 would be placed right in between the Boeing 767-200 and the Boeing 767-200ER. The Boeing 797 as it is envisioned now would carry 220-275 passengers over a 5,000 nautical mile distance. The 220-passenger variant would fly a bit farther at 5,200 nautical miles, while the stretch will be a range-payload trade.

Sales potential

In order to decide whether Boeing should go with a clean sheet design or not, it’s not only important to define the mission costs but also look at how big the sales potential is for this aircraft. The simple reason for this is that in order to justify any development, there needs to be a certain sales potential for the aircraft to recoup the costs. In the end, development costs, performance drivers and acquisitions costs are all interconnected and there is no use in making a cheap plane that doesn’t meet customer specifications or a well-performing product that does not fit the customer’s budget.

Boeing and Airbus (OTCPK:EADSF), in total, delivered more than 3,700 aircraft that can be considered MoM aircraft. If we were to take out the freighters, tanker sales, extended range variant and Airbus A330-200 sales which technically has its place outside of the core market and cater for growth, the total market would be around 4,200 units. This figure fetches quite well with the 4,000-5,000 units that Boeing previously considered to be the potential of the MoM segment. In a duopolistic market, we would get to a future sales of the Boeing NMA of 2,100 units when equally divided and roughly 2,300 sales when we give the Boeing 797 a slight edge.

When we had a look at the active fleet, we found an active fleet of around 1,511 aircraft, which would suggest around 3,850 sales for the entire MoM segment and the sales potential for the new mid-size aircraft would be 1,925-2,115 units.

During the 2017 Q2 earnings call, Dennis Muilenberg gave an indication of the market potential of the NMA aircraft, which would be anywhere between 2,000 and 4,000 aircraft. These figures, however, are not written in stone as demand for the MoM, which is the entire segment, was earlier estimated to be 4,000 to 5,000 aircraft during the 2017 Paris Airshow and a figure over 2,000 was given for the NMA sales potential after reducing the market by sales to Airbus.

We think the total market is around 3,800-4,200 units, which coincides with the lower end of the range that Boeing previously indicated. The total sales potential for the NMA is estimated to be between 1,900-2,300 units with the mid-point being at roughly 2,100 units.

Sales price

For Boeing, the big challenge is not only to develop an aircraft with the desired efficiency allowing the aircraft to compete with the upper side of the single-aisle product lines but also to get the aircraft to the customer at the right price. What airlines are looking for is next-generation cost efficiency with a price tag close to that of legacy products such as the Boeing 767 with little to no premium compared to the prices for which the last Boeing 767s for passenger service were sold. Compared to the Boeing 767-300ER, if it were sold today, the Boeing 797 would sell for a premium. In order to be able to sell the aircraft at the right price, the supply chain needs to be aligned extremely well.

That Boeing really has to get it all right with the Boeing 797 became even clearer when the chairman of Air Lease Corp., Steven Udvar-Hazy, said that airlines want to pay between $70 and $80 million. The last Boeing 767s sold for around $75 million in 2017 dollars, though due to the availability of alternatives, the price of a Boeing 767-300ER if it were to be in production today would likely be even lower in the range of $60 million.

In 2002, the biggest Boeing 757 had a list price between $72.5 million and $80.5 million or $105.8 million translated to 2017 dollars while the Boeing 767-200ER had list prices of $154.8 million. Applying discounts of 50% that, we get to a price range of $53 million to $77.4 million. With aircraft designs becoming more and more complex, the sales price goes up and the smallest Boeing wide body, the Boeing 787-8, sells for a price that is around $115 million. In recent years, Boeing’s appetite to build the Boeing 787-8 has faded somewhat due to limited profitability, though we expect that significant cost improvements have been realized and will be realized in the near future. We do think the high costs of the Boeing 787-8 is an indication of how high manufacturing cost for next generation jets are. It should, however, also be taken into account that a major part of this pricing also is a direct outcome of the mission requirements

For the smaller Boeing 797-2, we estimated a sales price of $75.3 million while the bigger Boeing 797-3 would sell for $79 million in a low pricing scenario and $83.6 million in a higher pricing scenario. So it seems that getting the Boeing 797-3 into the airline desired pricing range will be very challenging. Since the stretched variants give jet makers higher profits, this of course is not the ideal scenario.

Revenue potential

Now the only thing we are missing to get a rough idea of the sales potential is how sales for the Boeing 797-2 and Boeing 797-3 are mixed. 86% of the airlines would be happy with an aircraft that carries less than 250 passengers. For those airlines, the Boeing 797-2 would be a good fit. The remainder of the airlines should opt for the bigger Boeing 797-3.

Depending on the pricing scenario for the bigger Boeing 797-3, the average sales price would either be $75.8 million or $76.4 million. Combining the lowest ASP with the sales potential, we would get a revenue potential between $145.9 billion and $174.3 billion with a midpoint of $160 billion. Doing the same for the higher ASP, we get to a pricing range of $147.1B to $175.8B with a midpoint at $161.4B. Using the mid-point of our unit sales estimate, we would end up in the range of $160B as well.

Conclusion

Just like with every development, it is key to get the aircraft in the correct range-seat spot. This obviously adds to the appeal of the aircraft but also works its way into the cost profile via the design requirements.

Last year in a first analysis, we estimated the revenue potential around $150B. This year as we included more moving parts into the equation, our revenue estimate ranges between $145B and $176B with a mid-point of roughly $160B. In the end, we do think that Boeing will launch the Boeing 797, but it is in development costs and supply chain where Boeing can make a big difference in the overall cost profile for the Boeing 797.

For investors, it’s important to note that the revenue potential can give a very deceiving image making the Boeing 797 look like a no-brainer.