Boeing 797: Which Airlines Want It and Why?

For Boeing (BA), most of 2019 has been about the 737 MAX. The aircraft, which started flying in 2017, was grounded in March this year after its second fatal crash. On March 10, Ethiopian Airlines Flight 302 crashed near Addis Ababa, killing 157 people on board. Just months earlier, Lion Air Flight 610 crashed in Indonesia, killing 189. Regulators around the world grounded the 737 MAX in March, citing flaws in the MCAS software.

Boeing has since diverted all its attention to getting the 737 MAX back in the skies. While most airlines don’t expect commercial flights of the 737 MAX to return before March 2020, Boeing is hopeful it will get clearances before the end of the year.

Boeing has curbed the decision about whether to build its New Midmarket Airplane, dubbed the Boeing 797, until the 737 MAX crisis is resolved. Now that the 737 MAX crisis is nearing its end, it will be interesting to see which airlines would be happy to have the 797 in their fleets.

With a range of up to 5,000 miles, the proposed Boeing 797 is touted as a replacement for the older 757 and 767 models. If Boeing decides to build it soon, it could be in service by 2025. GE (GE) and United Technologies (UTX) subsidiary Pratt & Whitney are the main contenders to power the plane after Rolls Royce pulled out of the race in February. At its range, the plane will sit in the sweet spot between the twin-aisle narrow-body 737 MAX and the wide-body 787. The range will allow for transatlantic flights.

The project was almost ready for kickoff before the 737 MAX grounding. However, the grounding has changed Boeing’s plans. It’s estimated that the Boeing 797 will cost $15 billion to build. Having spent billions of dollars on penalty fees related to the 737 MAX fiasco, Boeing will have to make a tough capital allocation decision about whether to develop the 797 or let Airbus win the midmarket battle and focus on the single-aisle market instead.

Airbus is pitching itself aggressively to the airlines seeking a midrange replacement for Boeing’s 757. Its A321XLR, which it launched in June 2019 and which will start flying by 2023, is already on the market. Several airlines have already placed orders for the variant of the popular A321 series. American Airlines (AAL) has ordered 50, while JetBlue has ordered 13. Some other airlines waiting for the Boeing 797 may also go with Airbus if the delay continues. The Airbus A330 series, which has a higher range and costs more than the A321XLR, could also be modified to suit the midmarket.

The Boeing 797 may hold certain advantages though. First, the 797 will have more seats. A higher number of seats could mean better unit economics for Boeing 797 customers. Second, by going with the 797, US carriers can escape President Trump’s 10% tariffs.

In October, the Trump administration levied 10% tariffs on Airbus planes made outside the US. Although Airbus manufactures A320s in its manufacturing facility in Mobile, Alabama, the facility’s output may not be enough to fulfill demand. Airbus supplies A320s from the facility to Air Canada, Delta Air Lines (DAL), Spirit Airlines (SAVE), and others. Apart from A320s, the facility also produces A220s in collaboration with Canada’s Bombardier.

Delta is the biggest operator of Boeing 757s, with 127 in its fleet. That represents about 20% of 757s in service worldwide. Apart from 757s, Delta also holds 77 units of 767s in its fleet. In September, Delta Air Lines CEO Ed Bastian told Bloomberg that the carrier was still hopeful Boeing would build the 797. Bastian added that Delta could be looking at “200 aircraft over the next decade” while talking about demand for the 797.

During his Bloomberg interview, Bastian admitted that Airbus was bargaining hard for the A321XLR. He said, “Obviously Airbus is at the table and they are offering us product today, but we want to wait and see what Boeing can create.”

While Boeing’s planes make up most of Delta’s fleet, the airline has been gravitating toward Airbus lately. It chose Airbus A320s over Boeing 737s. Of its 248 new orders, not a single one was for Boeing. While the Boeing 797 may change that, any delay in Boeing’s decision on the model could push Delta toward the Airbus A321XLR.

United Airlines (UAL) is another big consumer of 757s and 767s. The airline has 74 of the former and 54 of the latter in its fleet. United is also waiting for the 797 but has “little time” to replace its older fleet. United CFO Gerry Laderman said in July, “As we always do, we have conversations with both manufacturers about their products, and Boeing is aware – and this is not just us – that the industry is wanting to know timing on the NMA.” However, he has said that “the [Airbus A321] XLR doesn’t solve the 767 replacement issue.”

United Airlines has 14 Boeing 737 MAXs in its fleet. They’ve all been grounded since March. The airline has removed the planes from its schedule until March 2020. It may cancel over 5,000 flights in November and December and about 3,500 thereafter until March 4.

American Airlines (AAL) also holds 757s and 767s by the dozens. The company has 34 of the former and 17 of the latter in its fleet of 940 planes. As noted earlier, American Airlines has already ordered 50 Airbus A321XLRs. In fact, American is the largest operator of Airbus A321s and A319s in the world.

American may not need Boeing 797s to replace its older Boeing fleet, but it may consider the plane for growth. American may also use Dreamliners for its midrange operations. The company has 42 Dreamliners in its fleet and another 47 on order.

The Boeing 737 MAX crisis has hurt American Airlines. AAL has 24 in its fleet. The company has suffered more than 20,000 flight cancellations since the 737 MAX’s grounding in March, and it has another 76 of the model on order. The extended 737 MAX crisis could push the company further toward Airbus.

It’s not just US carriers that are eyeing the Boeing 797. SpiceJet is also a Boeing loyalist. It’s ordered up to 205 Boeing 737 MAX 8 planes and has taken delivery of 13 aircraft. However, there are signs of a fallout between the companies due to the 737 MAX crisis.

As a result, SpiceJet may come knocking at Airbus’s door for an order of 100 A321 planes. In September, SpiceJet Chair Ajay Singh said to Bloomberg that Airbus had “pushed us hard since the day we started flying Boeing aircraft, and of course with the current problems, they’ve pushed us harder.” Airbus has already given SpiceJet an offer on A321s, and the company is looking into it. Any further delay in the 797 decision will only help Airbus land that order.

Boeing expects the market for the Boeing 797 to be around 5,000 planes. In February, CEO Dennis Muilenberg said, “We do see a market for 4,000 to 5,000 airplanes that’s between our current 737 and 787 families.” However, Airbus seems to be in a better position to tap the market with a ready product. Any further delay in Boeing’s 797 decision will only make life easier for the Airbus A321XLR marketing team.