Analyst takes on Boeing’s investors’ days

Here is what the analysts are saying about the Boeing investors’ days this week:

From Wells Fargo:

  • 787 and Ramp Up. Overall, we believe the biggest issues that investors have been trying better to understand are (1) the ability of Boeing to ramp up production of the 787 to 10 per month in 2013; (2) the program accounting for the 787; and (3) the plan for replacing the 737NG and its impact on R&D. Management did not give any more clarity to the production ramp up and thinks it has increased its visibility into the supply chain through MRP & IT systems and that it believes the Tier 1 suppliers should be able to support the ramp to 10 per month. Management is more concerned about Tier 2 & 3 where it has less visibility into their readiness.

  • BCA Volume Increases. While commercial airplane units ordered may decline in 2011 vs. the 530 in 2010, management indicated that it expects 40% of the orders to be higher dollar wide-body airplanes vs. 20% in 2010. This likely means the dollars of orders and backlog are not significantly different. More importantly, the over 7 years of backlog at Boeing Commercial Airplanes remains very high and the production rate increases are meant to try to bring that down. Even excluding the late 787/747 backlog, management indicated that Boeing is sold out on the737 line through 2015 with positions sold even in 2016-2017 and 4 -5 years of backlog on the 777. This is supportive of another rate increase to 42 per month.

From Goldman Sachs:

  • Next-gen wide-bodies finally happening; both positive catalysts: BA stated 96% of its 787 flight tests are complete, and c. 40 FAA deliverables remain, versus the original 4K. Focus should now shift to the ramp, which will see 4-5 steps at 6-month intervals. It is widely expected that 747-8 will see another delay, but the aircraft tour was impressive, only F&R and ETOPS remain, and BA expects multiple 747-8 orders in the very near-term (freight and passenger). EIS targets were reiterated and should be near-term catalysts.
  • BCA calls backlog too big; discusses upside to all rates: BCA leadership believes it has overdone its intentional undersupply of the market, and now needs to increase output. BA strongly hinted at a summer announcement of 42/month on 737. However, different managers provided conflicting comments on 777 stopping at 8.3/month (although all say there is clear upward pressure given very strong demand and the current competitive position versus Airbus).

From Credit Suisse

  • 787 Ramp to 10/mth by 2013 Seems Optimistic: While EIS looks solid, we think BA faces a challenge to ramp 787 given the immaturity of its global supply chain, the intro of 787-9 in the midst of the ramp (EIS 2013), the bifurcated line (Everett & Charleston) and significant change incorporation required on the first ~20 units. Currently, it is at 2/mth moving to 2.5 this summer. Although BA was not specific about incremental rates, we believe they will rise to 3, 5, and 7/mth in 6 month increments thereafter.
  • Product Development: Re-engine Re-emerging on NB, 787-10X Gains Steam: While it was never off the table, a NB re-engine was referenced more frequently than expected.  While we think mgmt still prefers a clean-sheet solution, a re-engine could be introduced two years earlier (2017) and offers lower development costs.  BCA CEO Albaugh spoke confidently about the prospect of a 787-10X (~320 seats, ~7k nm range) competing effectively with a potential A350-1000 (~340 seats), and we note that the -1000 may still need a new engine and wing.  We gained confidence in our theory that BA’s strategy in the small narrowbody market (below 150 seats) is to simply offer the 737-700 with aggressive pricing to maintain decent share.

From Bernstein Research:

  • This week’s Boeing Investor Conference reinforced the views expressed in our March 11, 2011 Research Call, Boeing, EADS: Product Strategies – Too Many Airplanes, Not Enough Time; AirbusMust Execute, Boeing Must Decide“. In that earlier work, we described how Boeing has the potential to achieve a dominant position in long haul aircraft (outside of the Very Large Aircraft or VLA space) if it can deliver a compelling 787-10 derivative. At the same time, we have long advocated that Boeing should pursue a reengined 737 in response to Airbus’ A320neo. Boeing management continues to say that it is leaning toward an all-new airplane, but discussions in Seattle reinforced our belief that the end decision will likely be a reengine.
  • On widebodies, it now appears that challenges in weight reduction on the 787-9 are closer to resolution than in the past, which could enable the critical 787-10 derivative. The BCA leadership now believes that it can launch a 787-10 stretch (potentially going as high as 335 seats) that would have a range greater than 6,000 nautical miles, without requiring a redesign of the main gear or extensive changes to the wing (some work would need to be done to allow a higher wing loading). The key has been weight reduction in specific areas (e.g. tail design, wing-body join), rather than a thinning of the composite skin, which might have added more complexity to production lines and, as it turned out, did not provide sufficient savings. This means that the 787-10 would come in just below the A350-1000 in size, enabling Boeing to make an eventual 777 replacement that could run from 350 seats to 420 seats.
  • The combination of the 787 and an eventual 777 replacement would fill out the medium to large widebody market much more effectively than Airbus could with the A350 alone. In the long run, the 787-10 would also add to profitability because of the pricing advantage without a commensurate increase in costs – this would not come, however, for several years.
  • The A350 remains a challenging program, with Boeing believing that the A350-1000 (the biggest threat to the 777) will likely not go into service before the end of the decade (versus the Airbus plan for EIS in 2015). Our understanding is that Airbus is limiting the A350-1000 to 350 seats, despite customer pressure to make it larger. Sufficient restraint on the design may enable Airbus to meet an EIS date well before 2020. Still, we understand that Airbus has needed to increase the size of the wing by 3% through an enlargement of the trailing edge and that there is uncertainty on Rolls Royce’s ability to deliver the required thrust (originally 94,000 pounds) with the same engine core as for the A350-900.

23 comments on “Analyst takes on Boeing’s investors’ days

      • Boeing increases the delivery of the 737NG starting in 2012 because of “strong demand”. I believe Boeing will try to clean and reduce the backlog to amore manageable size. They need to “burn out” a huge part of the 737 backlog. As mentioned in my blog entry http://wp.me/piMZI-1so , I expect the 737 book-to-bill ratio in 2011 will be much less than 50%.

        • Boeing needs to drain the backlog through the paygate
          instead of having it evaporate.
          Going cheap with near time delivery is imho the only
          niche available to Boeing in the NB marketplace
          in this decades outlook.

          it will be interesting to see if they will try to
          sell another “best thing after sliced bread” type
          _and_ if successfull that then will turn out to
          be slightly overhyped and mouldy again.

  1. I hope, that while Boeing is still considering re-engining the 737, rather than
    coming up with an all-new aircraft, they will decide on the latter, for the
    following three principal reasons:
    1. The high costs associated with the major structural changes required to the
    737 wing and fuselage to accommodate the larger diameter engine, are
    likely to make a re-engined 737 about as efficient compared to the
    A320NEO, while it will most likely NOT be much better!
    2. In stark contrast, an all-new 737, based on the (costly) experience Boeing
    already gained with carbon-fiber structures on the 787, which Airbus is still
    slowly acquiring with the A350, will provide Boeing with the opportunity to
    have both, a more modern and a much more efficient airplane in the 737/
    A320 category,compared to the A320NEO, with which Airbus is and will be
    stuck for a decade or more, into the 2020s.
    3. Because fuel prices are expected to continue to go up substantially, Boeing
    cannot afford to continue to rely on the marketability of the 737 as-is,
    which I believe will make an all new airplane, the only viable option.

    • Isn’t that exactly they are doing right now? Don’t airlines and lessors pay a big chunk of the aircraft price at delivery?

      As I wrote in my blog entry, I suggested that they would be producing about 450 737NG per year (a significant increase vs today level) and lower the orders intake to a more reasonable level in order to reduce the backlog. It is not necessarily a good idea to accumulate a big backlog. A backlog does not mean money. Backlog only becomes cash at delivery.

  2. Boeing put the price of a B737 Re-Eng at 2bln. Given the large operator base, I think re-engine still is a viable option. Rather do that than do nothing. Remember: Airbus still can launch a new A320 late this decade, and will only be on the market a few years later than Boeing.
    The current technology options do NOT recommend an all-new design.

  3. Delta, United, SWA, RYR … are all high up on John Leahy’s list of strategic targets. When it comes to seducing any of these giant 737NG/757 operators into a fleet relooking involving aircraft from the other side of the Pond, there is no end to the lures up Leahy’s sleeves, Le Bourget oblige !? I mean, when you have to cope every day in and day out with issues of the nature as are reported in the below referred UK Govenment Report, typically times some 520 aircraft, times six to eight ground rotations per each aircraft per each period of 24h, if in Richard Anderson’s (Jeff Smisek’s) (Gary Kelly’s) (MOL’s) shoes, you’d better think twice before extending the severe ergonomy shortfalls that bulkloaded RJs or SMR Feeders inflict upon Handlers @ airports round the world, agreed ?! Bulkloaded cargo holds are OBSOLETE, that’s the 737NG’s Achilles’ heel, its iron ball – hence Mike Bair’s Chinese puzzle these days, a hard nut to crack with the existing 737NG airframe …

    http://www.hse.gov.uk/research/rrpdf/rr674.pdf

  4. I think the re-engining decision is absolutely 50%-50%. The benefits are a bit less for the 737 than for the A320 and cost a bit more. Both manufacturers have to go clean sheet at some point and now is not a bad time while they have a big backlog cushions.

    Make no mistake, though. An unre-engined 737 will struggle to make sales against a re-engined A320. In addition to the current backlog, the 737 will need to sell a further 2500 copies over the next 10 years to tide them through until the new model comes on stream around 2020. The answer will decide whether they re-engine the 737 or not. Will they get the 2500? I think probably, yes. Some incremental sales, some mix and match sales with the new model, and some sales engendered by an earlier availability compared with the more popular A320 NEO.

    • Unre-engined or re-engined, the 737NG remains a bulk-loaded airframe. The business case for a bulk-loaded SMR Feeder (we’re talking of post 2015-16 deliveries) is becoming uncertain, if not frankly questionable. Except for the Leap-X (but not for long ?) all the early strategic NEO slots are presently reserved forward for the early A32XNEO customers of John Leahy : because of their samba dancing, Boeing have lost their rank in the queues @ CFMI and P&W for NEOs … Meanwhile, the C919 and MC-21 are getting busy – featuring container handled cargo holds, both of them : the residual values of OBSOLETE bulk-loaded 737NG series aircraft, risking CWA strikes or HSE bans, will drop. Except for HARD DISCOUNTING and unless Mike Bair is a fervent adept of Mark Twain, the 737NG is on a count-down to become a zoombie, on the way to be eclipsed from the SMR Feeder market, R.I.P.

      • Zombie? probalbly not.

        This might result in market (sink and source ) separation.
        Boeing loosing in the nonUS market while all others reduce US interaction.

        Compare to the automobile industry where the US and the remaining world used to live in segregated markets.

  5. Uwe :
    Boeing needs to drain the backlog through the paygate
    instead of having it evaporate.

    Of course. Most of the payment comes in at delivery. “Burning” backlog means taking less orders than deliveries. It is as simple as that.
    On Airbus side, it seems that they are still trying to grow the backlog, which in my opinion is not necessarily a good idea.

    • In a “normal” industry, the backlog determines the pricing. If you can’t produce your goods fast enough to meet demand, you put your prices up. You don’t lose sales (because you can’t produce any more anyway) but you get better margins. As an unre-engined 737 will be significantly less desirable than the A320 NEO, either Boeing would discount its price to maintain business or Airbus would increase its price to get better margins.

      In the aircraft business, I believe, they worry less about incurring backlogs because: (a) it’s a cyclical business and they want to smooth out the peaks and troughs; (b) a big incumbency effect encourages airlines to purchase strategically and not just on one deal; (c) aircraft manufacturers want to maintain the all-important residual values over a product lifetime that stretches to decades.

  6. That analysis makes no sense. You can also burn backlog by producing more at a steady intake, and, since the key issue is the backlog ratio (you wouldn’t want to end up with no backlog), you can also address backlog when you take in more orders than deliveries. You just need to make sure that the ratio goes from, say, 1.5:1 to 1.2:1.

    The only issue with a big backlog is when you expect to have to switch to a new model, and you have to deal with the old orders somehow. That’s not a problem at present for either Airbus or Boeing, since their backlogs do not extend beyond the introduction of a new frame.

    It’s all very nice to continuously plug your blog here, but it would be more convincing if you had a better sense of the issues.

    • Andreas,
      The issue is for the A320 Classic deliveries in 2014 and 2015. Most of them may well be cancelled.
      Boeing is not yet willing to announce anything, but it clearly is “burning” the backlog by managing the book-to-bill ratio below 1. If my speculation is right, this year Boeing won’t sell more than 250 737NG.
      Let’s just wait and see.

      • If interest vanes your BB rate will automatically go below 1.

        With growth staying healthy the demand
        will suck up every frame available.
        Be that Airbus OEO or a made over old geezer like the 737 family.

        With the further rise of eco oriented
        legislation in the non US world
        relative fuel hogs will go to the
        “we can’t maim our industry” US market.

        As I said elsewhere I expect the market to bifurcate.

      • They may well be cancelled? Do you also have the lottery numbers for Saturday?

        Boeing is not clearly doing anything. It is pure speculation that the current sales numbers indicate a drive to keep sales down.

  7. Imho, two facts govern B’s 737 decision: Their need to get the 787 program on track, so that they cannot devote resources to the 737 which might mean that their resources are insufficient to deal with the 787, and the fact that the neo means that A will not build a new A320 replacement until 2030, so there is no pressure on B to build a new plane, regardless of what SW or Steven U-H may demand.

    Resolving the 787 mess is vital for B for obvious reasons, but also for a reason which B’s horrible management of the program may have obscured. If the 788 turns out to be even close to what B and its customers are claiming, then the plane will dominate the 200-250 widebody mkt because A has no direct competitor, something Scott, I and many others pointed out when A announced the current A350 family. This is a very important point for B because it at least gives them a shot at the same great pricing power at the lower end of the 200-400 seat widebody mktg which they now enjoy with the 773ER at the upper end. While VV is correct that backlog issues are important, the most important consideration for B is always High Margins, High Margins, High Margins. To me, this means B must focus like a lazer beam on getting 787 production well beyond 10/month, perhaps even separating 788 and 789/10 prroduction between SC and Wash, so they can meet the 788 demand and also the demand for the 789/10.

    So to me, the 737 question for B is what do they need to do to the 737 to make it slightly better than the A320neo, including as a 757 replacement for delivery by 2015-6? If they can deliver AND have high production at time of delivery to meet the burgeoning mkt they will get a good mkt share with good margins so long as the overall mkt stays hot. Put another way, why build a new plane now when the new tech needed for it is in a state of flux, when by improving the 737 can bring high margins with much lower risk to the 787 program. And of course there is the subjective issue: Who would believe B’s claims of when they would deliver a new 737 replacement or what its specs would be after their dissembling on the 787 program? Better to go with the neo.

    • Recent info from Boeing contained the snippet:
      787 booked out till 2019 :
      ~850 / ( 8year * 12month ) ~= 8.5 frames / month (avrg).
      compare A330 : 350 backlog for ~3.5 years

      Q:
      Is the 787 produceable at acceptable cost?
      With all those bungled details and for “the sake
      of being different” design decission do you expect
      the Dreamliner to excell in all areas?

      What forces Boeing to introduce “hybrid laminar flow control”
      for the -9 ( contrary to some popular opinion the motivator
      here is not “incompetent Alenia”.)

  8. I think the B737 rate increase also helps to get cash flow right. Let’s be realistic: the B787 program will not earn money the next two years. The first 200-300 aircraft were not priced well, production cost have gone through the roof and the -9 needs lots of changes. So – like the A380 – the program will weight on the company rather than adding money. I think the B787 will not contribute to company cash flow until 2013ish.

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