EU files subsidy complaint over 777X WA State tax breaks; we raised issue at the time

The European Union has filed a complaint with the World Trade Organization over $8.7bn in tax breaks offered by Washington State to Boeing in exchange for locating the 777X assembly site and wing production plant in the state.

Reuters has this report.

We raised concerns at the time the breaks were offered that these were illegal. These were extensions of the state tax breaks provided in 2003 for the Boeing 787 program, which were ruled illegal in 2012 under a separate EU complaint to the WTO.

Our stories are here and here. Boeing recently issued a card talking about the tax breaks. This may be found here.

Reuters reported earlier that the 777X complaint might be filed.

Update, 1:00pm: Boeing provided this statement in response:

“The EU already failed to make these claims as part of the current proceedings.

“The EU’s effort to again raise this issue is a mere diversion from the fact that European governments have provided, and continue to provide, massive amounts of illegal launch aid to Airbus for every airplane development program. It is an effort to further delay EU compliance with the WTO’s 2011 ruling that launch aid is an illegal, market-distorting subsidy.

“The tax measures the EU challenges today are not market-distorting subsidies. They are available to all aerospace companies, including Airbus and its suppliers.”

Air France-KLM defers 2015/16 777s, cites poor financial results, low fuel prices

Dec. 18, 2014: Air France-KLM said today that it will defer delivery of 10 Boeing 777-300ERs scheduled for delivery in 2015/16 due to lower than expected financial results and because the current fuel price environment makes taking the airplanes less compelling.

This is the first high-profile deferral that we know of citing the thesis we’ve been talking about: that the current fuel price environmental threatens the Classic wide-body airplanes (as opposed to the next generation of re-engined, new technology aircraft).

Bloomberg News has this report. The key passage:

The carrier had earlier planned to take about 10 Boeing 777s in 2015 and 2016 and will now look to postpone those deliveries, the CFO said. One reason the airline can afford not to take the new planes is that the lower oil price reduces any gains from having more fuel-efficient aircraft.

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A380, a deep analysis of its competitiveness

By Bjorn Fehrm

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Introduction

Dec. 18, 2014: In our Monday article we go behind the scenes of the doubts that were spread over the A380 by Airbus last week. To complete the picture we now update our competitive analysis that we did in February this year. We then compared the A380 to Boeing’s 747-8i, the 777-300ER and the forthcoming 777-9X. We also included Airbus closest aircraft, the A350-1000.

Leeham logo with Copyright message compactA lot has happened since then. Airbus has done a lot of work on the passenger area of the A380 to offer increased passenger densities and the pictures of the emerging Boeing 777-9X and Airbus A350-1000 is now clearer.

Sales efforts of the A380 has also progressed, with meager results despite adding a leasing proposition what should make the hurdles of operating a small sub-fleet of A380s lower. To understand why, we interviewed Mark Lapidus, the CEO of Amedeo, the leasing company which specializes in financing and leasing of A380s. We wanted specifically to talk to Lapidus about the reactions of the airlines to the A380 and what problems he saw in selling an aircraft of this type.

In preparing the article we also gathered additional info from Airbus and Boeing, from the former around their work on the cabin configurations and densities, from the latter the maintenance costs for the up and coming 777-9X.

Summary

  • In our February article we established that an A380 is roughly equal on fuel per passenger transported to the benchmark in the present non-VLA long haul market, the Boeing 777-300ER. We also found that this is highly dependent on how many passengers one assumes for both aircraft in the comparison.
  • We could also see that come 2020, when the replacement of the 777-300ER would be available, the 777-9X, A380 would trail with up to 20% in fuel efficiency, once again dependent on how many seats were used in the comparison.
  • At the time we only looked at a fuel consumption comparison; we did not include crew cost, maintenance costs, landing and en route fees to generate Cash Operating Costs (COC) or capital costs to come to Direct Operating Cost (DOC). In today’s updated analysis we add these costs items.
  • Finally we have talked with Amedeos CEO Mark Lapidus, asking about his discussions with the Airline CEOs and their teams, to understand what the reactions are from the airlines and why has he not placed any A380 with customers yet.

As we did this deeper study, a more nuanced and different picture emerged from the one seen in February. The results busts a number of deeply engraved myths, one being that four engines are more expensive to fly and maintain than two.

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UBS raises single-aisle production gap concern in lower oil price analysis

Dec. 17, 2014: There is a production gap for single-aisle Airbus and Boeing airplanes that could be exacerbated by the current dramatic drop in oil prices, writes the aerospace analyst for the investment bank UBS in a research note issued today.

Heretofore, focus has been on the production gaps for the Airbus A330ceo and the Boeing 777 Classic, with analyst consensus of those reports we have seen pointing to gaps they believe are insurmountable, and which will demand a rate cut.

Widebody Gap Dec 2014

Figure 1. UBS Graphic, modified by Leeham Co. Airbus announced Rate 9 for the A330 and indicated a lower rate. Boeing hasn’t announced any rate reduction for the 777 but analysts suggest the lower rates illustrated (left). Click on image to enlarge.

Airbus has formally announced the rate on the A330 will decline from 10/mo to 9/mo in 4Q2015. At its Global Investors Forum last week, Airbus displayed a graphic that shows a further rate decline. Although officials did not place a number on the rate, our interview with an analyst present said Airbus later indicated a “floor” of 6/mo is anticipated.

Boeing continues to insist it will be able to maintain the current production rates of 8.3/mo for the 777 Classic to the introduction of the 777X in 2020, but analysts predict rate cuts to seven then five and perhaps even four by the time 2020 rolls around.

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Spicejet grounded, no Boeing impact seen

Indian airline Spicejet, which has been struggling financially, was grounded today when credit was withheld to buy fuel. The airline has eight Boeing 737-800s and 42 737-8s on order. The -800s are scheduled to be delivered next year; the MAXes are scheduled for delivery in 2018-2023 on a roughly even number per year in the earlier years.

There have been a number of stories hand-wringing over the adverse impact to Boeing. While no OEM likes to lose an order of this size, should Spicejet cease operations permanently, we don’t view this as having any impact on Boeing. The company is already strained to find delivery slots for the MAX, so this gives Boeing slots to resell. The eight -800s scheduled for delivery next year, being close-in, could be more problematic, but we have no doubt homes can be found for these airplanes without too much trouble.

The hand-wringing is unnecessary.

We view the airline’s difficulty as another example of the problematic Indian marketplace. The blog Flying Engineer follows the Indian market closely and checking out a number of its posts will paint a comprehensive picture of the Indian market. We view this market as highly risky, with Airbus having a much greater exposure than Boeing. AirAsia, a carrier on our Storm Warning Flag list, recently expanded to add a new subsidiary service in India, a move we question given an environment that is essentially hostile to airline operations.

 

Boom times leads to looming cash flow shortfall across OEMs

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Introduction

Dec. 16, 2014: There have been record aircraft orders year after year, swelling the backlogs of Airbus and Boeing to seven years on some product lines, Bombardier’s CSeries is sold out through 2016, Embraer has a good backlog and the engine makers are swamped with new development programs.

So it is with some irony that several Original Equipment Manufacturers (OEMs) are warning of cash flow squeezes in the coming years.

Summary

  • With so many development programs in the works, the prospect of new airplane and engine programs are being trimmed.
  • Most airframe and engine OEMs under pressure.
  • The full impact of the pending cash flow squeeze hasn’t been appreciated by the markets yet.

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Boeing tries to tamp down oil price fall concerns

Boeing’s Investor Relations department in Chicago sent a message to aerospace analysts to tamp down concerns about falling oil prices and questions over the impact on airplane orders.

Its message is:

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The challenges in bringing a new turboprop to market

By Philippe Poutissou
Special to Leeham News and Comment
Introduction
Dec. 15, 2014: The market for turboprop aircraft has been strong for nearly a decade, yet there has been limited new product development in the segment. This has some regional airlines getting nervous about their future, in particular those who specialize in serving smaller markets with 30- to 50- seat turboprops built in the 1980s and 1990s. Which aircraft will replace the robust, but not indestructible, Bombardier DHC-8, Saab 340 and Embraer Brasilias?

Setting aside the technical challenges of developing and certifying a new aircraft type (of which there is ample evidence), the market challenge for smaller turboprops comes down to a question of limited revenue potential. Due to overall pressure on aircraft prices and demand that is highly fragmented, the business case for an aircraft OEM becomes risky and difficult to justify.

Summary

  • High-yield regional routes are increasingly rare and harder to protect.
  • Turboprop acquisition costs must remain in line with those of larger jets on a per-seat basis.
  • The 30- to 50- seat turboprop market is a highly fragmented, replacement market with limited potential for large volume orders.

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A look behind the headlines of Airbus’ Investors Forum

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Update, 0530 PST Dec. 15: Aviation Week posted an article that indicates Airbus and Rolls-Royce are closing in on an engine deal that will lead to the A380neo and a stretch.

Introduction
Last week’s Airbus Global Investors Forum proved to be a debacle due to a rogue customer and two miscues by management.

First, Group CFO Harald Wilhelm indicated Airbus may decide in 2018 to terminate the A380 program, causing consternation from Tim Clark, president of Emirates Airlines, which has 44% of the order book. Airbus Commercial management spent a good part of the next day in damage control.

Second, with little forewarning, Airbus told analysts that production rates for the A330ceo would come down in advance of introduction of the A330neo. This news shouldn’t have come as a surprise, but for some it did. If they had closely followed sales efforts for the A330ceo, the lack of success and the production gap, news that Airbus will bring rates down more than the 1/mo decline previously announced shouldn’t have surprised. Still, Airbus had not previously sent strong enough warning signals.

Third, profit and free cash flow warnings weren’t well received.

Finally, Akbar Al-Baker, the prickly CEO of Qatar Airways, chose the first day of GIF to announce he wasn’t going accept delivery of the first A350-900 three days later.

The result: the stock price plunged 10% on Day 1 of GIF and another 4.3% on Day 2.

Summary

  • It’s time to look behind the headlines of the debacle and analyze what the meaning is;
  • The implications of Wilhelm’s A380 statement;
  • Better detail on the A330 rate reduction; and
  • Implications for Boeing.

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New UTC CEO throws cold water on PW GTF growth

The new chief executive officer of United Technologies Corp., Gregory Hayes, threw cold water on hopes and dreams of Pratt & Whitney, a subsidiary, that the successful small- and medium-sized Geared Turbo Fan will grow into the wide-body market.

Aviation Week just published an article in which all three engine OEMs were reported to be looking at a 40,000 lb engine that would be needed to power a replacement in the category of the Boeing 757 and small 767. Hayes did not specifically rule out a 40,000 lb engine, leaving PW’s potential to compete for this business unclear.

Hayes has been CEO for two weeks. He was previously CFO. He made his remarks in a UTC investors event last night. The Hartford Courant has this report.

Hayes’ remarks were in response to a question from an analyst about research and development expenses. Here is his reply, from a transcript of the event:

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