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ANALYSIS: How the NMA might prepare Boeing for a 737 replacement

Boeing's new mid-market airplane (NMA) concept may be much larger than a single aircraft programme.

Industry observers say Boeing may view the NMA, also dubbed the "797", as a means to initiate a broad business overhaul aimed ultimately at positioning the company to develop a 737 replacement.

That overhaul could see Boeing adopt new aircraft design technologies, rewrite relationships with suppliers and capture a larger slice of the aftermarket pie, they say.

"It's a two-aircraft deal," Kevin Michaels, managing director at consultancy AeroDynamic Advisory says of the NMA. "You work out this new business model on the 797, and you take this to the new single-aisle later on."

Teal Group vice-president Richard Aboulafia agrees the NMA could be Boeing's "driver" of broader business changes, particularly supply chain changes aimed at reducing costs.

"This is why so much of Boeing's efforts right now are focused on getting the cost down and the operating economics right," he says.

Michaels and Aboulafia made their comments on 12 February at the annual meeting of the Pacific Northwest Aerospace Alliance, near Seattle.

Boeing vice-president of marketing for commercial airplanes Randy Tinseth also spoke, telling attendees Boeing "has a little bit more work to do" before making NMA decisions. "Our engineers are now working hard on the production system," he says.

The comments came several weeks after Boeing chief executive Dennis Muilenburg said Boeing's decision on whether to launch the NMA will come in 2020, not in 2019 as many insiders expected. Muilenburg said a decision to "offer" the NMA to customers will come this year.

Boeing has described the NMA as a widebody aircraft with 200-270 seats and range of 4,000-5,000nm (7,400-9,300km). It would serve missions currently served by 757s and, to an increasing degree, Airbus A321neos.

Muilenburg provided little explanation of the seeming one-year delay, but insisted Boeing continues evaluating the opportunity. He referenced Boeing's more-distant future, saying production systems developed for an aircraft like the NMA could benefit "some future narrowbody airplane".

Boeing tells FlightGlobal it is "still working through the business case" and remains committed to a 2025 entry into service. The company also says it has used the offer-then-launch decision process for other development programmes.

The company is considering the NMA though a "lifecycle lens," it says. "We’re thinking through how to design and architect an airplane so that it’s not only efficient to build and produce, but it's also efficient to support, maintain and upgrade over time, and that really creates value for customers."

Boeing adds it is unlikely to make technological leaps with its next new aircraft.

"We don't see the next new airplane, if we do middle of the market, as being a technology push airplane," it says. "There is significant technology reuse on things like composites manufacturing, and we would be more focused on manufacturing transformation for the NMA."

Observers describe the link between the NMA and Boeing's future as central to its deliberations. They say the NMA could propel the next in a series of business transformations by Boeing.

Michaels notes that from the 1950s to 1980s Boeing was vertically integrated, meaning it controlled much of the production chain and performed much engineering in-house. Suppliers it did have were largely US-based.

In the 1990s with development of the 777, Boeing introduced digital design techniques, forged closer relationships with suppliers – including more overseas suppliers – and glimpsed the potential of aftermarket sales.

Then in the 2000s with the 787, Boeing developed a global supply chain, shifted major systems production to suppliers and expanded aftermarket offerings.

Such changes, however, shifted aircraft programme value from Boeing to suppliers, which now scoop up 70% of profits (including aftermarket profits) generated throughout the chain. Some large suppliers post 15-20% profit margins, significantly greater than Boeing's or Airbus's, Michaels says.

BOEING RESPONDS

Now Boeing is transforming again, wringing concessions from suppliers, pursing vertical integration through acquisitions and joint ventures, and investing in new engineering and modelling technology, Michaels says.

"The likely launch of the NMA… or it could be the next single-aisle, is going to be the next evolution of the jetliner business model," he says. "This next-generation business model is actually shifting value from suppliers to the aircraft OEMs."

In 2018 Boeing acquired parts supplier KLX Inc and formed a joint auxiliary power unit business with Safran and a joint aircraft seating company with Adient Aerospace.

Boeing has achieved cost cuts from suppliers under its "Partnership for Success" initiative, now in its second iteration. New supplier contracts include revised payment terms and provisions like annual price reductions, and can require suppliers to pay royalties on aftermarket revenue to Boeing, says Michaels.

Michaels suspects Boeing will also wrest aftermarket royalties from manufacturers of the engines that power its next aircraft.

"That will be a game changer," Michaels says. "The rules are changing."

Aboulafia calls Partnership for Success the "no fly list", noting Boeing has shown willingness to replace suppliers who do not play ball. He notes Boeing in recent years replaced 777 landing gear supplier UTC Aerospace Systems (now Collins Aerospace) with Heroux-Devtek.

Boeing has also brought in-house some work – including design and assembly of nacelles and propulsion systems – formally performed by suppliers.

Boeing faces particular pressure to cut manufacturing costs because widebody production costs inherently more than producing the narrowbodies that the NMA would replace, Aboulafia notes.

"It is really tough to bridge that gap," he says.

The NMA could also play into Boeing's aftermarket ambitions, which became clear in 2017 when the company rolled all aftermarket work into the new Boeing Global Services division. Muilenburg said that move placed Boeing on course to achieve $50 billion in annual services revenue within ten years.

Boeing has made notable strides, thanks partly to the KLX acquisition. Global Services' revenue jumped 17% year-on-year in 2018 to $17 billion.

But observers express doubt Boeing can hit $50 billion without a new aircraft programme; competition for aftermarket work on existing aircraft is too intense, they say.

"What Boeing really needs is a white-sheet aircraft," Michaels says. Such a project would "lockup the [services] market and make a hell of a lot more money".

Insiders suspect that aircraft will be a project much larger than the NMA: a 737 replacement.

Industry watchers speculate Boeing will eventually commit to the NMA; some people point out that almost all aircraft programmes approved for "offer" – which the NMA is not, yet – are eventually approved for "launch".

Aboulafia pegs Boeing's likelihood of launching the NMA at 60-65%, saying the company could alternatively redirect $8-10 billion in potential NMA funds to shareholders via stock buybacks or dividend payments.

But he believes Boeing unlikely to ignore the success Airbus has had selling A321neos, which that company now offers in a longer-range derivative marketed as a 757 replacement.

Airbus holds about 2,160 A321neo backorders, while Boeing holds just 450 orders for its competing 737 Max 10s, according to Flight Fleets Analyzer.

"If I were Boeing, I'd say, 'I've got to do something here,'" Aboulafia says.

If Boeing moves forward, Airbus may need to react, possibly with a re-engined, re-winged variant of the A321neo – an aircraft some have assigned the handle A322neo, Aboulafia notes.

But Airbus has disclosed no such plans, with incoming chief executive Guillaume Faury telling reporters in January that he will let Boeing act first.

"They are in the situation where they are losing this part of the market because they no longer have the right products," said Faury. "This is on them to make the next move."

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