Boeing Has 1 Very Good Reason Not to Design a New Jet Now — Barrons.com

Quality problems, regulatory delays, and eroding market share have many pundits wondering when Boeing will design an all-new single-aisle jet.

The sooner the better goes conventional wisdom. The engines, however, might be the gating factor.

Soon-to-be-retired CEO Dave Calhoun has been firm in his commitment to not design an all-new aircraft that could better compete with the Airbus A321. “I don’t want to fill a gap in a product line,” said Calhoun in November 2022.

That view may have changed if technologies could deliver significant improvement. “I want to build a product that’s going to differentiate in a way that absolutely substitutes the airplanes that came before it,” added Calhoun. “That [cost] number has to be at least 20%, 25%, maybe 30% better than airplanes it replaces.”

Engines play a big role in improving aircraft operating costs. A problem for Boeing is the next big thing in engine development might not be ready until 2035.

So part of the reason Boeing doesn’t want to design an all-new plane now “is the prospect of the CFM RISE program,” wrote Citi analyst Charles Armitage in a Tuesday report.

CFM is the 50/50 engine joint venture between GE Aerospace and Safran. Its LEAP engines power the newest 737 and A320 model jets.

The RISE engine targets 20% better fuel economy and could incorporate new materials, hybrid-electric systems, and an odd-looking open fan architecture. It won’t be ready to enter service until the mid-2030s.

That engine “likely renders any preceding aircraft obsolete,” added Armitage. “Combined with a six to seven-year development cycle, this means any new aircraft program with entry to service prior to 2035 is unlikely to produce enough aircraft to recoup the development costs, particularly when compared with the benefit of delaying five years and having a much longer production life.”

It’s a pickle for Boeing. Waiting until 2035 to match a new narrow-body jet with a new engine means a decade of lower market share, and cash flow, in the narrow-body, single-aisle portion of the market.

The cost of developing a plane is only getting more expensive. BofA Securities analyst Ron Epstein recently wrote the cost to develop the 787 was about $15 billion. With inflation, that number would be about $25 billion today. A new jet would cost about $30 billion. That’s a “reasonable estimate for the new program,” he wrote in a recent report.

All this is good for Airbus, wrote Armitage. He rates shares Buy and had a recent price target of EUR159 for the stock.

Counterintuitively, the engine conundrum isn’t all that bad for Boeing, he adds. There isn’t much risk of a new entrant or a new Airbus jet coming before the RISE engine is ready.

Armitage doesn’t cover Boeing. Citi analyst Jason Gursky does. He rates Boeing shares Buy and had a recent $224 price target for the stock.

Coming into Tuesday trading, Boeing stock was off about 28% year to date, underperforming the S&P 500 by about 40 percentage points.

Most of that drop came after the Jan. five emergency door plug blowout of a 737 MAX 9 jet operated by Alaska Air. The incident has led to slower production, unhappy airline customers, lower earnings estimates from the Street, and more regulatory oversight.

Boeing stock was little changed in premarket trading Tuesday.

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