Bank of America’s Ron Epstein talks with Aviation Week editors about the business and technical implications of his call for Boeing to act fast.

Listen back to our interview in June with Boeing CEO Dave Calhoun here.

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Rush Transcript

Joe Anselmo:

Welcome to the Check 6 Podcast podcast. I'm Joe Anselmo, Aviation Week's editorial director and editor-in-chief of Aviation Week & Space Technology magazine. Conventional wisdom is held that investors would frown on any move by Boeing to launch development of a new clean-sheet airliner. After all, should the company really be committing up to $20 billion before it solves ongoing challenges across its commercial, defense and space businesses? But one prominent Wall Street analyst has just turned that conventional wisdom on its head. In a recent research note, Bank of America's Ron Epstein lays out in great detail why developing a new passenger jet is in the interest of Boeing and in the long-term interest of investors. Ron joins us today to explain his thinking. Rounding out the conversation are Michael Bruno, Aviation Week's chief business editor, and Graham Warwick, our longtime technology editor. But I'm going to start this podcast with a snippet from Boeing CEO Dave Calhoun. This is him speaking on this podcast in June, pushing back on calls to move more quickly to reverse a big loss of market share to Airbus in the narrow-body sector.

Dave Calhoun:

I think we've been very clear and I've been clear that we need something that delivers something in the neighborhood of 20-30% improvement over today's airplanes. That is what will justify airlines making a move out of a family they're in into a family they want to be in. And then these programs have to last, not 20 years - 20 years is a disaster, 30 years is a disaster - they've got to last 50 years and they have to be designed to last 50 years. So the notion that we should in any way, shape or form be looking at niche opportunities or competitive dynamics over a short period of time when you're going to invest billions, tens of billions in a program for 50 years is just sort of a silly notion. So it's a great worm to put on a hook, but it's not a worm I want to bite.

I would rather develop, invest in capabilities that, when we package them together, we'll someday meet that objective. I don't have the timeline for the maturity of those capabilities today. I have an idea on the variety of things that we would like to package at some point in time. And as soon as we get to a stage where they're mature enough, meaning we can build them and build them efficiently and not go through 15 years of development after we've introduced it, which is what this industry has historically done. I'm just not ready to do it, so our team is not ready to do it.

Joe Anselmo:

So Ron, I read through your research note. You don't agree with all of Mr. Calhoun's logic, do you?

Ron Epstein:

I don't exactly, right? And I would argue that some of the technologies required to do a new aircraft are here today and some aren't in the too far distant future, and particularly some of them are in a future where you can plan to. And ultimately Boeing is an airplane company and the decision to use your resources, right - I mean, every company has a finite level of both human resources and capital resources. Of course, Boeing has to deploy some of those to deal with some of the current issues and challenges they have. But longer term, you do have to think about where product development is going to go. And the current narrowbody, the 737 has been in many ways a fantastic machine. It's been around for a very long time. I just had my 56th birthday and the 737 went  into service about the time I was born.

So if you think about that, if you don't do another new airplane, and in a reasonable period of time, you'll have a platform that's been in the market for over 60 years, and that's even pushing beyond the 50-year level that Boeing was talking about. So when we look at it, we think about where you could have some gains today, and maybe in the not-too-distant future. One of the big additive points in an airplane will be new engine technology. We don't have an in-service unducted fan today, but it's probably not too far off. And you've got both major engine manufacturers looking at them, the [GE/Safran] RISE program they've talked about, and Rolls Royce is also working on one. And then the materials for the airframe itself have come a long way. So when you think about the usage of composites and maybe even advanced metal alloys from when the 787 first went into service to today, designing in those materials, fabricating those materials, has come a long way as well. So there's some material science on the airframe, and then there's even things you can do to the airframe.

So we envision, and it's just a baseline case, an airplane that could be brought to market with a high wing, unducted fans, made out of a composite or other advanced material and done in such a way that maybe you have a little bit more aspect ratio. You can do the cross-section of the fuselage. So maybe you have a narrowbody airplane per se, but actually a twin-aisle, right? You have two seats, an aisle, two seats, an aisle, and two seats. Maybe a little bit wider than you think, but you might be able to turn the airplane around quicker if you're an airline and you maybe have better passenger acceptance of that.

So we think there's a way to do it. We think some of the technologies, if they're not here today, they're not in the too-far distant future. And what I worry about is just not doing anything, right, and something needs to be done. And if you look at the market share between the two major narrowbody platforms, between the 737 and the A320, particularly at the larger end, the A320 has been doing better. The A320 has outsold the 737, particularly the A321. And it's one of those things where we think, if nothing changes, the A320 will end up with maybe 60-65% market share, and the 737 will be relegated to that smaller part. And we don't think that ultimately is the best thing for the company or for investors.

Joe Anselmo:

And Ron, for those few listeners of ours who aren't familiar with who you are, you're not just a number cruncher, you're an engineer, right?

Ron Epstein:

Yep. I have a Ph.D. in aerospace engineering, worked in the industry for a while, and I've been very close to the technology for literally, sadly, decades.

Joe Anselmo:

Michael Bruno, you're our senior business editor. You've heard Ron talk about all this, so what's your view?

Michael Bruno:

First of all, I was in the room. I was privileged to be at the AEROone Conference in Michigan the morning that Ron had rolled this out. He of course sent it out to his investor clients first, Bank of America investor clients. But we all happened to be at this conference in the Midwest, and Ron was also able to get up and speak there. And I can tell you that it was well received and not just because everybody in that room loves Ron Epstein because he's smart and always want to hear his point of view about something. But what Ron did, which was very helpful actually to the industry, was come in as sort of a backstop and say, "Well, you can achieve these technologies. Some of these things we're talking about, these are not pie in the sky, it's not unobtainium kind of thing. It is possible."

And also as a business for Boeing, Ron laid out the case about why it was necessary to pursue. Now, there was immediate feedback I was hearing from other people both there and sources elsewhere who were emailing me and talking about, saying this is all wonderful, but there's a separate question as to whether Boeing could actually pull this off. And I want to get into that in a moment with Ron. But first I actually, I want to turn to Graham because I don't understand any of the technologies as he and Ron do, but I think it's really worth drilling down a little bit into understanding what those technologies are and why they could actually be achieved in a relatively midterm or near term.

Graham Warwick:

So I think the question is how soon is soon? If you look across the research activity that's underway today, both in the US and Europe, pretty much all of it is targeted at 2028, 2029, at reaching what they call a Technology Readiness Level 6, which is demonstration at full scale in a representative environment by 2028, 2029. And that has been for a long time taken as being the milestone at which a technology has been proved to be mature enough to be incorporated in a product development program. So TRL 6 has been for the longest time kind of the target for the R&D community to get the technology to TLR 6. And if you look across what everything's happening in Europe, everything that's happening in the US with NASA, with the Clean Aviation program in Europe, you keep coming up with this '28, '29 date. Now, that is the date that both manufacturers have talked about having to make a product launch decision if they want a brand new clean-sheet airplane available by 2035.

Now, a couple of things, as Dave Calhoun said we have got used to generational changes where there's a 15% improvement in efficiency generation over generation. There's pretty much an agreement across the industry that that's not good enough anymore and because of what's happening with sustainability, they're looking for twice that - they're looking for 30%, at least 30%, generation-on-generation improvement in efficiency, which means fuel consumption, emissions, et cetera, et cetera. So if you look at all the technologies and the ones that Ron mentioned, you talk about the high wing, the truss-braced wing. Airbus has a similar long, thin wing. It's not truss-braced, but it's the same idea, very long, very thin, very low drag. You look at the high-rate composites, this is composites that you can produce from day one at very high volumes, not today's composites, which are very, very labor-intensive.

And then you look at either second-generation or third-generation geared turbofans or open rotor engines, all of those are kind of targeted at 2028, 2029. If we push Boeing, if the market pushes Boeing to make a decision on a product launch before 2028, it will leave a lot of technology on the table and it will produce an aircraft that will not be competitive with what Airbus launches in 2028. Airbus is not under any time pressure to launch an airplane. It can wait until 2028, '29 to launch a clean-sheet replacement for the A320. Boeing wants to wait to 2028, '29 to launch a clean-sheet replacement for it's 737. If it was forced to go sooner, knowing that Boeing's very risk averse at the moment, they would leave a lot of technology on the table. They'd probably come up with a 15%-improvement airplane and it would get slaughtered in the market as soon as Airbus comes on with its 30%-improved airplane.

A second very short point I want to make is that the airlines have become very, very unhappy with the performance of new technologies in service. So I don't even think that TRL is any more the number that we need to be looking at. The engines that are giving the airlines problems now went through more testing than any engines have ever done before, yet they've still proved to have problems. The airlines are going to be looking at Boeing and Airbus and saying, any technology you put on my airplane, however much I want it, has to be ready for service. So again, that puts extra pressure on giving time to absolutely prove those technologies are matured before you put them in an airplane. So any pressure to move quickly takes technology off the table and you don't get as good an airplane.

Michael Bruno:

I want to jump back in here. This plays into what I was hearing at the conference, Graham. It does take a little time to develop these technologies. But I want to throw it back at Ron because Ron, you've made the point both at the conference, and many times before, you say: "Hey, everybody, remember that Boeing is an aircraft company, right, and what they do, the lifeblood of the company, is developing, producing aircraft." And I'd love for you to explain about the imperative about pursuing a new airliner, whatever we want to call it, the new mid-sized whatever, or the ‘Roncraft’ if we want to try to give it that kind of a name. But why is it imperative for Boeing to still do this?

Ron Epstein:

Yeah, I think across a number of things. One, to keep your design muscle and your product development muscle fresh and active. It's been a while since Boeing brought a new aircraft to market, a whole new clean sheet [airplane]. And those skills can go stale if you don't use them. So one is that. Two is keeping your workforce, right? I mean, it's a way to keep your engineers engaged, attract new engineers, particularly in a world where there's been a lot of investment in aerospace and defense, new technology, and everything from electric aviation, eVTOL, commercial space. I guess I could frame it as a war for talent – good, smart engineering talent. They don't have to just go to Boeing or Airbus if they want to work in the industry on novel, neat things. So it's a way to keep your workforce engaged.

And then three, necessity is always the mother of invention, and my fear is this 2028 target could move to 2030 and then 2032 and then 2035. There's never a convenient time to do it as you could always argue the technology is going to be better tomorrow because, guess what, it will be, right? I mean, that's just a fact. If you do the airplane today, in 10 years the technology will be better and 10 years after that it'll be better. And my hope is here with what we're saying is, by putting this in the minds of investors and positioning the way we did, if you're really serious about doing this in 2028, you got to be thinking about it today. You got to be planning for it today. And there's technologies today that if you look at, and maybe you place some bets on, that could be very mature at the time that this comes to market.

Now, we're not assuming that we're going to have hydrogen-powered airplanes in this timeframe, or you're going to have a real huge paradigm shift in propulsion. What we are saying though is there are things like an unducted fan, or a next-generation geared turbofan that can give you 20-30% better fuel efficiency over today. There are materials, and some of them exist today and are technically ready, to get a lighter airframe, a stronger airframe. You can do things with the airframe, computer-aided design has come a very long way from when the 737 was first brought to market. I mean, to put that in perspective, right, when the 737 came to market back in 1968 and went into service with Lufthansa the largest selling car in the year was the Ford Mustang. Car of the Year at Motor Trend was the Pontiac GTO. And then if you think about the 737 - and not to put the airplane down because it's had years of service - it's been a wonderful aircraft, but it's a rigged up airplane. It's rigged up like a bicycle.

And even modern bicycles have electric derailleurs and electric brakes. A modern bicycle is essentially a fly-by-wire machine as are almost every other modern aircraft.Even new bizjets coming out today are fly-by-wire machines. So in many ways, the 737 has just become this anachronism and everything, in my view, with the MAX, you're just taking a bridge and you're really trying to build it too far. So the time has come to replace the machine, and I fear that it'll just keep getting pushed off and pushed off. And if they're very serious about doing this, which I think they should be, and if they're going to do it in a timeframe, say 2028, you've got to really start thinking about it and planning for it today.

Joe Anselmo:

And Ron, I wanted to underscore a key point in your report, something you just mentioned. You say quote, "We disagree with Boeing's assessment that 20-30% efficiency gains are not possible given current accessible technology. We conservatively project that a clean sheet model could be roughly 40% more efficient than current aircraft, three-quarters of that coming from the engine and then the rest from the wings and airframe." So you're saying that the technology exists today to do something in 2028, right? That's a little different from what we just heard Graham say.

Ron Epstein:

Yeah, it exists or nearly exists. And if you're going to try to get there, you got to start really putting pressure on that. And I think this is an important point. It's a big market opportunity, right? I mean, we don't want anybody to develop an airplane just for the sake of developing an airplane because it's cool and because we're engineers. If you look at the market, we think it's a market for upwards of 6,500 or so airplanes, a big chunk of that replacement and some of that coming from new routes, right? And the 787 itself developed almost 300 new routes, I think it's 270 or so, and then also down-gauging from larger airplanes to this airplane.

So we think there's a good market there. We think it could possibly be in total gross profits over a program's life, a $100-120 billion. It's an airplane that we think could get done in today's dollars for maybe $15-20 billion. And that assumes some unknown unknowns creep into that, and not everything goes perfect. So we do think there's a business case for it. And I think the point is exactly when do you do it? Is it two years off or three years off? The whole thing is if you're really going to do it in '28 or '29, you got to start planning for it today.

Joe Anselmo:

Has he won you over Graham?

Graham Warwick:

I don't disagree. I absolutely think that Boeing should be going from saying ... I mean, Calhoun has said some surprisingly positive things about truss-braced wing - but we need to move from just saying that to actually talking about a new airplane. And I also want to emphasize that this idea of is it ready or isn't it ready? What we now call an open rotor engine has not flown on anything, right? We have flown what we used to call propfan engines, we flew them back in the Nineties. What we are talking about now is a different engine. And that has not flown at full scale on anything. A long-span, high-aspect-ratio, low-drag wing has not flown on anything. That's what the product development engineers need to see if they're going to put it in a design that they're then going to put in front of a customer with performance guarantees, price guarantees, delivery guarantees, right?

And we are so close, we are so close with so many technologies that we can't fumble it now. Absolutely, I mean, Ron's point about pushing it to '29, pushing it to '30, pushing it to '32, that is the danger. And that's really where the customers come in. The airlines have got to be very vocal to both Airbus and Boeing, saying that "We can't wait any longer than 2035 as the absolute latest for a 30-40% better airplane to hit the market with the production capability behind it to go to high-rate quickly." That is what the industry needs. It's what the airlines need to be telling Airbus and Boeing. And Airbus and Boeing, particularly Boeing, need to be publicly talking about how to meet that need.

Joe Anselmo:

We are running short on time, but Michael, Bruno, you wanted to bring up one point about whether Boeing could even do this if it wanted to. So why don't I let you and Ron talk about that before we log off?

Michael Bruno:

Yeah, just simply that Boeing of course has been hurting in many ways over the past several years, and we don't need to retread all of that, but I do want to bring everyone listening up to date with the fact that Boeing is currently sitting on a total consolidated debt of about $52 billion. And before the whole MAX crisis and COVID, it was only $14 billion of total consolidated debt. Its mountain of debt has increased dramatically over the past five years, and it's only very slowly going down. Ron mentions it could be $15-20 billion to develop a new aircraft. They've spent probably the same amount of money trying to fix the MAX crisis to date. And so there is some investor hesitation, which Ron can speak to, but one of the big things I hear about from other people is workforce-wise and engineering capacity-wise, could Boeing pull this off?

And that bleeds into the investor community because if you have concerns that Boeing just needs to right the ship and get its current production back in order and put all of its eggs in that basket and worry about a new aircraft another day because you can't have engineers trying to work on two big things at the same time. You need to focus them on getting the company going again, then you just don't have that engineering capacity. They didn't go off and buy Embraer Commercial like they once thought and get all those young engineers. It's very hard to find them, as Ron alluded to before. So I do think there are deep concerns to whether just capability-wise Boeing could pull it off. I'd love to hear Ron's assessment of that. And I'll ask Ron the same question I asked him at the conference, which is, if Boeing can't do this, can someone else? Is there the potential for the dark horse to emerge to do something like this?

Ron Epstein:

Yeah, so a couple of thoughts there. Boeing has a big balance sheet, it's a big company, and if they wanted to finance a $15-20 billion product, one way or another, they could. And right now their credit rating is investment-grade and even with the debt. And so I'm not so concerned about the how do you finance it side. Two, when you think about the engineering capability, and I think you all know this is true, if you build it, they will come, meaning engineers. If you don't build something, you're not going to keep your engineers. So if you want to keep your engineers around, you have to build something. So I think if you come out and you say, "Hey, you know what, we're really serious about this." You'll attract talent, particularly the Boeing company talking about a new airplane. I think you'd see engineers come out of the woodwork to be very excited about that.

If they don't do it, could someone else? Yeah, most certainly they could. If you look at the global fleet of airplanes today, it's about 25,000 airplanes. It's a really big market and someone else will try to do it. You could speculate who, but there only a handful of companies that have the capability to certify an airplane, have relationships with airlines, and so on and so forth.

So I do believe that someone else will do it. If they don't do it, would it be immediately? No. But if they drag their feet long enough, someone else for sure would attempt to do it. And that's not to say it's an easy thing to do, but there are companies out there - we all know them - who have certified airplanes before, many of them in fact. And, then, I think the final point is if Boeing were to announce this, probably investors would hate it because it increases risk. However, investors at one point will start to think about terminal value and growth and where the business is going. So it's a balance between that near-term risk and longer-term growth that ultimately the market would have to get its head around.

Joe Anselmo:

Well, Ron Epstein, we went a little longer than our normal podcast. This is such a fascinating conversation. I wanted to get it all aired out. People often derive the investment community as short-term thinkers. I think you're proof that that's not the case for everyone. So thank you very much for joining us today and providing your insights. That is a wrap for this week's Check 6 podcast. A special thanks to our podcast producer in London, Guy Ferneyhough. And if you're interested in the airline industry, I recommend you listen to Aviation Week's Window Seat podcast. In this week's episode ATW editor-in-chief, Karen Walker interviews Carsten Spohr, CEO of Lufthansa Group who just visited Washington, D.C. Spohr talks about returning the Airbus A380 to service, North American route expansion, ITA Airways, and more. You can find the Window Seat podcast wherever you're listening to this one. And one final request, if you're listening to us in Apple Podcast and want to support this podcast, please leave us a star rating or write a review. Thank you for your time and have a great week.