UBS predicts 30%-40% 737 rates cuts

UBS Securities today (April 13) predicted Boeing will have to cut rates on the 737 line by 30%-40%, forecasting an announcement later this year.

This is more agressive than the 30%-35% suggested in January by ILFC CEO Steven Udvar-Hazy and greater than anything we have heard that is being discussed in Boeing. UBS’ forecast suggests a monthly production rate of 21.7 (30%) to 18.6 (40%) per month. The lowest number we’ve heard being discussed in Boeing is 24-26 a month (23%-16%). Boeing currently produces the 737 at the rate of 31 a month.

UBS forecasts 361 737 deliveries this year, or 30 a month; 300 next year (25) and 240 (20) in each of 2011 and 2012.

The company forecasts just 25 787 deliveries next year and 60 in each of 2011 and 2012.

21 comments on “UBS predicts 30%-40% 737 rates cuts

  1. UBS….

    Scott Carson…..

    Who would I trust?

    UBS for sure, but I think they miss one point:

    Aibus is totally willing to keep dumping A-320′s on the market.

    So why Should Boeing cut back? Less profit is still profit, especially when the opportunity to realize it is fleeting.

    Especially when you balance sheet is a mess.

    And particularly when you have only 2 models generating meaningful cash flow in the commercial division, and you already cut one.

    Michael O’ Leary. Are you listening?

  2. Onemancrew,
    What do you mean by ‘Aibus is totally willing to keep dumping A-320’s on the market.’

    In February they had made a statement revising the production rates of the SA family, adding that they ‘do not exclude further production cuts if the need arises’.
    http://www.airbus.com/en/presscentre/pressreleases/pressreleases_items/09_02_19_revised_production_rates.html

    Last week Aviation Week reported that:
    ‘…Airbus says it remains overbooked for 2009 and 2010. In fact, Tom Williams, Airbus executive vice president for programs, notes that Airbus recently had to start looking at which airlines would not get an aircraft this year’.
    http://www.aviationweek.com/aw/generic/story.jsp?id=news/AIR040609.xml&headline=Airbus%20Sees%20480%20Deliveries%20In%202010&channel=comm

    I would hardly call this ‘dumping’.

    Both Boeing and Airbus do indeed talk to their customers wrt delivery timing and financial aspects. Therefore, I would be inclined not to take what UBS says as gospel, particularly in view of their own poor financial management and forecasting.
    http://www.guardian.co.uk/business/2009/mar/11/ubs-losses

  3. What do I mean by ‘dumping’?

    Exactly what the term implies.

    The delivery of A-320′s at heavy discounts in volume, in order to maintain market share, and put pressure on Boeing, a company that actually has to turn a profit.

    A-320 production rate cuts have so far been insubstantial. You know have the two aircaft makers playing chicken to see who will cut deeper sooner.

    There is some sound reason for this.

    The faster the production rate, the lower the cost. Slowing down means thinner margins. Both obviously think that they will make more discounting prices at faster rates, than maintaining prices but slowing production.

    The other end of the pickle is the customers. Nobsody wants to get into a scenario of economic recovery, increaseing traffic, and higher fuel prices with outdated, inefficient equipment.

    Thus both aircraft makers and customers are walking a tightrope in a stiff wind, trying to let the economic situation play out with as few changes as possible.

    There will be a decision points reached at some point in time, each on an individual basis. This may come in a fairly compact time period if there is some sort of precipitating event, or it may be spread out if the world economy continues to meander around bottom.

  4. ‘The delivery of A-320’s at heavy discounts in volume, in order to maintain market share, and put pressure on Boeing, a company that actually has to turn a profit.’ — This comes straight from ‘Aircraft economics in my world’ by R. Aboulafia, Chapter 1, first paragraph.

    So I guess you mean to say that Airbus doesn’t have to turn a profit? I invite you to read the annual financial EADS report, where you can see the figures for yourself.
    http://www.eads.com/1024/en/investor/News_and_Events/presentations/Financial_Presentations.html?display_media=/xml/content/OF00000000400004/3/92/42484923.pdf

    Or you mean to say that Boeing doesn’t do discounting? The ‘rape’ claim by MOL would suggest otherwise or the LH deal struck for the 748.

    You make it sound like Airbus produce planes like cars, hoping to sell them on for at least something (in the process giving discounts left, right and centre) thus dumping the A320s on the market. The planes being delivered had probably been ordered end of 2006 or in 2007 when the aviation was experiencing a huge boom and both manufacturers could command higher fees for their products. The planes are delivered at contract prices. Those prices are different to the current ones but you are not going to get a plane now if you order one.

    The fact is, both Airbus and Boeing have been very consistent (at least they agree on something) in agreeing what the cuts should be in manufacturing. All those predictions given by ‘analysts’ like UBS are based on what? What sort of studies have they carried out? Do you actually see their maths? My guess is they took what SUH said, added another 5% for ‘risk’ and bingo, out goes another financial report. I would at least listen to what the manufacturers say because they are dealing with customers directly, not UBS. I am not trying portray that things are rosy and there are difficulties but I would not trust the UBS figures or those of SUH for that matter, who has his own agenda on the table.

    ‘Nobsody wants to get into a scenario of economic recovery, increaseing traffic, and higher fuel prices with outdated, inefficient equipment.’ — Precisely, and that is why there won’t be 35-40% cuts in production.

  5. EADS finacials matter not one bit. The consortium’s host countries and the EU would never let it go down.

    And absolutly, Boeing is discounting, apparantly right up to delivery these days, and that ticks me off to an extent.

    Those sorts of discounts cannot be sustained at lower production rates.

    Airbus has prodcued whitetails before. Boeing NEVER does that intentionally. EVER.

    But I will agree that 35-40% cuts just aren’t going to happen. Probably more on the order of 25% or less for Boeing, unless MOL gets his deal of the century.

    Airbus? They will keep pumping out A-320′s at cost if they have to.

  6. “Airbus has prodcued whitetails before.”
    List them please. Airbus builds planes to contracts and delivers them according to contractual terms, from the very beginning.

    So you don’t want to look at the EADS financials but then say that they will be pumping A320s out “cost if they have to.” They don’t have to and they won’t are the answers.

    You are blaming Airbus for dumping A320s and preventing Boeing from making a profit, then go on to say that “Boeing is discounting, apparantly right up to delivery these days”. Well then, here is the problem.

    Lastly you said originally “Who would I trust?
    UBS for sure” then go on to say “I will agree that 35-40% cuts just aren’t going to happen”.

    I am not really sure you know what you want to say.

  7. “At one stage, Airbus had 16 “whitetail” A300s – completed but unsold aircraft – sitting on the tarmac.”

    http://en.wikipedia.org/wiki/Airbus_A300

    I can LOOK at EADS finacials all I want. It doesn’t really matter. Because in the end, The host countries and the EU will pile on as much largesse as required to keep Airbus healthy.

    I’m a Boeing investor, not a Boeing fanboy. Even at a discount, I expect Boeing is still turning a profit. Just not a very good one, in days where cash flow is already poor.

    Airbus can and will keep pumping aircraft onto the market, and if they have to park some whitetails to confound Boeing, they will. They will offer deals Boeing cannot, to seize market share.

    They have used down markets to do so before.

    Remember how they hooked United on A-320′s back in the early 90′s?

    A fifty jet deal on a 3 year walk-away lease. In a down market, when production was being cut. It was an absurd deal, completly obscene and indirectly backed with government money.

    Airbus can cut margin to zero, and may well. And their Governement patrons will be right there to assist them.

    My contradictory statement combines my distrust of Boeing’s management, with the analysis of the statement by UBS.

    UBS IS more trustworthy than BA management. BA just happens to have stumbled into being a tad more right. Or a little less wrong. Remember, the last we heard before the 777 rate cut announcement was “maybe a 10% cut in total production in 2010″ made By Scott Carson. Do you believe that? I don’t.

  8. *caugh* … the whitetails were produced second half of the 1970ies, a time when Lockheed still was in commercial business. Maybe we could accept that things done 30 years ago are no perfect indicator for business decisions in 2009. If I see correctly, the last B747-400 actually is a whitetail, too.

  9. Onemancrew,
    Here is an interesting extract from flightglobal:
    “Some observers have questioned
    why more than 230 A320 family aircraft
    were delivered last year when
    the idle fleet of the narrowbody is
    hovering just below 100 units.
    XXXX dismisses the accusation
    that it is overproducing: “We never
    build a whitetail.”

    Can you guess the year? 2004…. any parallels with today? XXXX stands for Forgeard by the way… http://www.flightglobal.com/pdfarchive/view/2004/2004-02%20-%200010.html

    Bringing up the first 14 aircraft from more than 30 years ago, in the context of the current situation, trying to show some sort of trend is a little desperate. Airbus was then just born and entering the crowded market is always difficult. We can argue all day long about government support for their industries and companies, providing all sorts of links and quotes, in the end being and investor you will defend Boeing, me being European, will defend Airbus.
    Clearly you have it in for Boeing management and in particular Scott Carson, so bring up your concerns at the next AGM.
    What drives company forward is the product line and the profit. Airbus will not be selling planes at cost and this is shown by their financial statements.

    “Airbus can and will keep pumping aircraft onto the market, and if they have to park some whitetails to confound Boeing, they will. They will offer deals Boeing cannot, to seize market share.” — I thought I had included a quote earlier…. ‘…Airbus says it remains overbooked for 2009 and 2010. In fact, Tom Williams, Airbus executive vice president for programs, notes that Airbus recently had to start looking at which airlines would not get an aircraft this year’.

    Clearly they will not be ‘pumping out’, ‘dumping’ or ‘parking aircraft’ to ‘confound’ Boeing. You had set yourself in a mindset, which will not be broken, whatever the quotes or links are provided.

  10. leehamnet,

    The article from Seattle certainly indicates some back up, there is no doubt about that in this environment.

    However, it certainly is not overwhelming and Boeing indicates that each plane has a carrier designation. There has to be a number of failures anticipated but the more important question is how well Boing handles it order book and gets these planes to other carriers willing to accept earlier deliveries.

    Southern China Aiurlines just announced additional funds made available and those two planes may end up elsewhere.

    It is not a good sign but it is not a dire as UBS wishes to make it.

  11. The majority of the parked planes (from the link above) are freighters. Since the freight traffic is in a worse situation than passanger, I guess it is to be expected. The introduction of A332F and B748F next year may not be easy and in fact both manufacturers could delay their delivery and concentrate on the pax planes.

  12. It was said airbus doesn’t do whitetails. I proved otherwise. They have before, and can do it again. Easily. It was said airbus doesn’t discount away margin, all the way to zero. I’m confident that happens as well. Want proof? Go find it yourself. The 50 jet deal with United in the early 90′s serves as evidence enough for me.

    And so the next denial I expect is that airbus doesn’t recieve subsidy or launch aid, nor does it have lattitude to make predatory deals.

    Deny all you want.

    If Boeing cuts 737 production 20% or more, look for Airbus to cut, but not near as deeply. Then watch the EADS cash flow start to erode, but it’s balance sheet get fortified by it’s patrons.

    Were I James McNerney, I’d give O’Leary his deal, And try to gain profit via efficiency. A small profit is better than none.

    That goes for Turkish as well.

  13. “And so the next denial I expect is that airbus doesn’t receive subsidy or launch aid” — Onemancrew, don’t even start… :-)
    Nobody is denying Repayable Launch Loans, it was stated in the bilateral agreement in 1992 from which the US had pulled out. I guess you don’t want to know that they are being repaid.

    “If Boeing cuts 737 production 20% or more, look for Airbus to cut, but not near as deeply.” — I’d agree with that.

    “Then watch the EADS cash flow start to erode” — How would you know? You don’t want to see their financial reports.

    “I’d give O’Leary his deal” — MOL is probably already selecting his one-liners for the press conference.

  14. With respect to United: Boeing offered the 737-400 to the A320 and would not improve the performance. UAL ordered the A320 as a result. Engine maker IAE also was very sporty on terms.

    Having lost UAL, an exclusive Boeing customer, Boeing designed the 737NG.

    Boeing has given walk-away deals in the past (AA 767 vs A300, which were also walks). Boeing also deeply cut the price on the 737-600 to win SAS and kill the MD-95. The point: Boeing has also done sporty deals. Finally: McDonnell Douglas did walk deals with AA to sell the MD-80. US manufacturers will do what it takes on occasion, as with Airbus.

  15. The question isn’t IF Boeing did sporty deals, but why, and what effects it had/has.

    It has to do them, because not only will aribus do them, airbus will do them in a down market.

    But it hurts Boeing far more than airbus. Boing stock prices matters. EADS stock price is a second tier consideration to the europeans.

  16. Is competition so unfair as indicated above that EADS can discount with impunity to gain a market share and Boeing can only do so at the loss of a published bottom line that effects the price of its stock and shareholder equity.

    How long can this imbalance go on for without accountability?

  17. Onemancrew,
    I did a little comparison between Boeing and Airbus from the financial reports (I know you don’t like to read them) of the operating margin (Boeing CA) and EBIT % of revenue (Airbus). All the figures came from their websites.
    Boeing Airbus
    1999 7.3%
    2000 9.5%
    2001 5.5% 8.1%
    2002 7.1% 7.0%
    2003 3.2% 7.1%
    2004 3.6% 9.5%
    2005 6.7% 10.4%
    2006 9.6% LOSS
    2007 10.7% LOSS
    2008 4.1% 6.5%

    This gives an interesting trend. 2003/04 are the years when both were delivering planes ordered in the last downturn post 9/11. 3.2% and 3.6% are fairly low (Ryanair effect? :-)) and Airbus managed to outperform there. In fact Airbus had been able to get consistently higher margins on their deliveries (couldn’t find ’99 and ’00 data). 2006 and 2007 were a disaster for Airbus with the A380 mess. However, the conclusion that I can draw from this is that Boeing’s cost base is much higher and the efficiency drive is not where it should be. In http://leehamnews.wordpress.com/2009/04/09/washington-state-lags-competitively/#comments, Scott had linked a document showing that Airbus revenue per employee is higher than that of Boeing. I guess this supports the above analysis. Perhaps your anger should be more directed at Boeing management rather than saying “Airbus can cut margin to zero, and may well. And their Governement patrons will be right there to assist them.” As you can see, there is no question of zero margins and if as you say “Boeing is discounting, apparantly right up to delivery these days”, certain questions should be asked of them. So please stop saying that Airbus is flooding the market with their products at zero margins, which stops Boeing making a profit.

  18. Pingback: Boeing and Airbus defy the odds, but are there repercussions? | Aviation Suppliers

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