Boeing's workhorse 737 must confront new competitors

The hottest buzz around the Farnborough Air Show near London will be the push by Canada's Bombardier to break the longtime stranglehold that Airbus and Boeing have on the vital single-aisle, or narrow-body, jet market.

The 737 narrow-body is the best-selling Boeing jet ever, and a workhorse airliner on domestic routes in the U.S. and overseas.

But expected orders at the show for Bombardier's new narrow-body CSeries jet, which competes directly against the Boeing 737-700 as well as the Airbus A319, would signal the beginnings of a significant challenge.

Both Boeing and Airbus face a tough strategic decision: how to handle the immediate threat from the CSeries and, further out, the proposed Chinese C919 and Russian MS-21 narrow-bodies, all powered by new, highly efficient engines.

The 737 is a cash cow for Boeing, which has said it will decide this year whether to put a new engine on the 737 or design an all-new replacement jet. That decision will affect the long-term future of 10,000 workers in Renton who produce almost 400 of the jets a year.

Bombardier's forthcoming plane has already shocked the aviation world with its first U.S. order: In February Indianapolis-based Republic Airways, until then an Airbus customer, ordered 40 CSeries jets.

"If the CSeries gathers steam, Airbus and Boeing need to move faster than they have been," said Richard Aboulafia, aviation analyst with the Teal Group. "The market is speaking quite loudly. That's the exciting aspect of Farnborough. It might get a lot louder."

"It comes down to the great narrow-body war," he said.

The key CSeries selling point is its new-generation Pratt & Whitney engines that promise about 15 percent better fuel efficiency than the engines on the 737. For airlines, that would mean enormous savings. The plane is scheduled to enter service in 2013.

What will Southwest do?

As existing 737 airline customers assess the future, none is more important to Boeing than Southwest Airlines. It has 545 of the jets in its fleet and will need to replace about 200 of its older models in the next decade.

"We need new economics," said Mike Van de Ven, Southwest's chief operating officer. "We're indifferent whether that's a new airplane or a re-engined airplane."

But Van de Ven ruled out waiting for some later, more revolutionary engine technology.

"Doing nothing until 2025 is not an option," he said. "We want some options in the near term."

Van de Ven said he's interested in any solution using the "engines ready for service now" — including the Pratt & Whitney engine — that deliver the fuel efficiency Southwest needs.

So could Southwest eventually consider an order for the CSeries?

Van de Ven said he has talked to Bombardier, but he expresses confidence in the carrier's close 39-year relationship with Boeing.

"Boeing is in the business to get the most competitive narrow-body in the marketplace," he said. "We want that. I feel like their needs and our needs are very tightly aligned."

Analyst Aboulafia thinks the pressure on Boeing to match the fuel efficiency of the CSeries sooner rather than later inevitably will lead to the quicker alternative, mounting a new engine on the existing 737.

"I don't see any other Boeing technologies that would be compelling in the next five years," he said. "And I don't see the airlines patiently waiting longer than a few years."

Airbus is adding to the pressure. A person familiar with the European plane-maker's plans said Airbus will not formally launch a new engine option for its A320 narrow-body family at Farnborough. But it is closer than Boeing to pulling the trigger on re-engining and has lined up several airlines ready to buy.

Re-engining is not trivial. Boeing would likely have to spend around $1 billion to strengthen the 737 wing and attachment points for the heavier new engines. The landing gear would also need to be modified. Still, developing a whole new airplane could cost 10 times as much.

High stakes for jobs here

Rogers Weed, director of Washington state's Commerce Department, said Boeing's decision is freighted with implications for the state as well as the company.

Choosing to add a new engine could preserve what Boeing has in Renton for years to come.

But if Boeing opts to replace the 737 with a new plane, Washington will have to persuade the company to do final assembly here.

Which way will Boeing go? In the narrow-body war, the generals try not to give away their strategic thinking.

Company executives have publicly played down the benefits airlines could expect from re-engining the 737 and have been quietly dismissive of the CSeries threat.

Randy Tinseth, Boeing Commercial Airplanes marketing vice president, said the CSeries's maximum capacity of 149 passengers gives it a limited market. Boeing's 737 family stretches from 100 seats to just over 200.

The CSeries "will have a niche in the market, but how big?" said veteran Boeing engineer Joe Sutter, who played a lead role in developing the original 737.

While Aboulafia agrees, he still thinks the CSeries could sell well enough to produce 50 a year. And if Boeing and Airbus don't opt for new engines, Bombardier could find a market for more like 100 a year, he said.

"Why not buy a niche aircraft with significantly better operating costs?" Aboulafia asked.

Farnborough will reveal the level of market interest.

Qatar is expected to announce a CSeries order. If a Chinese airline also orders the jet, as expected, that'll give Bombardier's plane an entry into what most observers see as the key market in the coming decades.

Winning a CSeries order from a major jet-leasing company would be an enormous boost for Bombardier, showing that third-party financiers have confidence in its success. One tantalizing possibility is an order from Air Lease Corp, the startup headed by former International Lease Finance Corp. boss and market-maker Steven Udvar-Hazy.

Eyes on China, Russia

Meanwhile, though the proposed Chinese C919 narrow-body jet family is in early development, Boeing continues to talk up that threat as greater than the CSeries.

"Out in the 2015-2020 time frame, we see the C919 coming into the market and we expect them to sell," Tinseth said.

Irkut, the Russian company offering the MS-21 narrow-body jet family, will display a mock-up cabin at the air show.

Aviation analyst Adam Pilarski, of consulting firm Avitas, regards both the Chinese and Russian jets as serious competitors. The Chinese and Russians have selected Western avionics suppliers and both planes feature next-generation, fuel-efficient engines similar to the CSeries.

But each project still has many details undecided.

"The Russians and the Chinese themselves don't know that much yet," Pilarski said. "The governments decided something big will happen and the attitude is, 'We don't yet know 100 percent how to do it, but we will do it.' "

Pilarski said the first planes produced likely won't match those of Boeing and Airbus, but both China and Russia will be persistent.

"The first planes that come out will not be great (but) the first 737s were not that great," he said.

"The Chinese and the Russians want this to be a big industry for them," Pilarski added. "If they decide that, it will happen."

He foresees the C919 and MS-21 selling mainly in their home market as cheaper, serviceable jets.

In contrast, he said, Boeing and Airbus will have to aim higher and add value.

If Boeing chooses to go for an all-new 737 replacement, Pilarski said, one speculation is that it might not be a narrow-body at all, but a radical short twin-aisle design.

"Technology does not sell airplanes," said Sutter, the still-vigorous 89-year-old who now advises Boeing Commercial Airplanes Chief Jim Albaugh on strategy. "The guy who comes up with the right airplane for the market is going to get the biggest share of the pie."

That's why, faced with the threats ahead from newcomers, Boeing's decision on the future for its 737-size jets is crucial. It cannot risk doing nothing.

"That's probably right," said Sutter. "It's interesting to watch the youngsters fight with that problem. There's going to be a lot of discussion at Farnborough."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com