Odds and Ends: Boeing earnings; Shandong is a new 737 order; MH370; Boeing SkyInterior; Azul and Airbus; 186-seat A320

Boeing earnings: Boeing announced its 1Q2014 earnings today and they were better than expected on a per-share basis. David Strauss of UBS remains grumpy about the 787 deferred costs:

787 deferred production grew by $1.5B, in line with our forecast, with balance now at $23.1B as compared to BA’s ~$25B target. We estimate deferred production per unit at ~$50M, lower from $75-80M on positive production mix of nearly all 787-8s from Everett as problems continue on 787-9. We continue to believe that deferred production peaks at $30-35B as compared to BA’s $25B target.

Boeing’s earnings call is later this morning.

Shandong’s 737 order: Early this week, Chinese media announced that Shandong Airlines had ordered 50 737NGs and MAXes. Boeing’s statement the next day acknowledged the news report. With more than 600 737s listed in Boeing’s Unidentified customers, we asked if this was a new order or one from the Unidentifieds–Boeing told us this is new.

MH370: Flight Global’s safety expert reporter, David Learmont, doesn’t think the Boeing 777 that was Malaysian Airlines Flight MH370 will be found. We only found this story (pun intended) five days after it was posted. As Readers know, we wrote weeks ago that former NTSB investigator Greg Feith made this prediction.

Boeing SkyInterior: Boeing posted a video on its website about some of the thinking that goes into creating the SkyInterior, which is similar across the 787, 747-8 and 737 lines. Passenger experience has become an important part of Boeing’s product strategy (as with Airbus, Bombardier and Embraer as well), so in a departure from our usual practice of generally not linking “house videos,” we’re doing so on this one to give Readers a peek at what goes into some thinking at the OEMs.

Azul trans-ocean jets: Brazil’s domestic low cost carrier, Azul, will order Airbus wide-body jets for its planned trans-Atlantic service, according to Reuters.

A320 at 186 seats: Airbus is seeking certification of the A320 for 186 seats, just three short of the maximum of rival Boeing 737-800, according to this article in Aviation Week. (We had heard the effort was to 189 seats.)

Odds and Ends: No to 757 MAX; Fallout from Boeing job transfer; 8,000th 737; Fire sale pricing on 777LR

No to 757 MAX: Steve Wilhelm of the Puget Sound Business Journal writes that Boeing has no plans to build a 757 MAX. This refutes the Motley Fool article we linked Tuesday. Then yesterday a different Fool write wrote why Boeing won’t build a 757 MAX. That may be, but as we wrote we had heard rumblings that Boeing was at least talking to the market about the prospect of such an airplane. But this could be nothing more than what we term, “Boeing being Boeing” exploring everything.

Fallout on engineer shift: The Seattle Times wrote that the fallout over Boeing’s plan to shift another 1,000 engineering jobs out of the Puget Sound area is pretty bad among the local work force. The morale at Boeing, The Times writes, is bad among its white collar engineers and technicians. We’re also told the IAM 751 membership continues to have poor morale in the wake of the Jan. 3 contract vote related to the 777X, with a major retirement expected among workers just in advance of the 2016 switchover to the 401(k) style pension plan. There seems to be a growing belief Boeing may face a workforce shortage just at a time when it’s ramping up production the following year on the 737NG, preparing production for the 737 MAX, in the early stages of production for the 777X and ramping up production again for the 787 as it prepares to introduce the 787-10 in 2018–as well as the KC-46A production ramp up and perhaps on the P-8A Poseidon.

And then there is the continued overhang of the potential NLRB action related to the 751 vote. Although a long shot, what happens if the NLRB requires a new vote and this time it fails? Boeing is already committed to building the 777X in Seattle: ground has been broken and the timeline too late to go elsewhere. Bonuses have been paid out. This could become a real mess.

8,000th 737: On the plus side, Boeing delivered its 8,000th 737, to United Airlines this week. It’s quite the accomplishment.

Fire sale pricing on 777-200LR: Air India, a financial basket case, plans to sell three more Boeing 777-200LRs, apparently for whatever it can get, in order to raise cash. It previously sold five 5-year old -200LRs for $335m–an average of a mere $67m each. According to the appraisal firm Collateral Verifications, a five year old -200LR should have a current market value of about $98m.

Inmarsat to offer free tracking: Inmarsat, the satellite company that proved key to tracking Malaysian Airlines flight MH370, will offer free tracking service, The Wall Street Journal writes.

Airbus and Boeing square off at ISTAT

Andy Shankland, senior vice president of leasing markets for Airbus, and Randy Tinseth, vice president of marketing for Boeing, were next up at the ISTAT annual meeting in San Diego today.

The following is a synopsis and paraphrasing of their presentations and free-wheeling discussion.

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The case for an NSA in 2025 — successor to 737-8 MAX — (continued)

 Editor’s Note: Given the amount of interest in the prospect of replacements for the single-aisle airplanes, including the Boeing 757, our Guest Columnist provided a follow-up think piece.

By James Krebs

With the reengined Boeing 737 MAX and Airbus A320 neo families selling like gangbusters, it may seem premature, before one even flies, to be considering a New Small Airplane (NSA) successor to enter service beginning in 2025. But I’m convinced the NSA will come before conventional wisdom expects. The marketplace will demand them.

A combination of market forces could make a compelling case for a NSA in service in 2025.

-   Continuing high fuel prices

-   Increasing urgency to reduce aviation carbon emissions

-   Availability of technology for 20% fuel savings vs 737-8 max and A320 neo (at same seat number) at acceptable risk

-   Traffic growth calling for more seats for 2025 and beyond.

-   Growing pressure from the airlines later in this decade for cleaner, more economical short haul NSA’s

-   Huge global market potential for NSA families — with their performance improved through the years

-   A short haul market share by 2017-18 (neo’s and MAX in service) very disappointing to Boeing.

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Odds and Ends: Airbus neos; 757RS/A320RS; charity efforts

Airbus neos: The conversation continues, with Tom Williams, EVP of programmes, giving an interview to Flight Global about the A330neo and the A380neo. Plane Talking has another version of the Williams interview. Notable in Plane Talking’s report is the indication Williams said it will be a year before a decision is made on the A330neo. Our information is that a decision, whether yes or no, is due this year. PT also reports Williams indicated an A380neo would be a 2020s product. This suggests the prospect of a new engine from Rolls-Royce, which is under development, or conceivably a Big Engine Pratt & Whitney GTF could be considered.

757RS/A320RS: Aerotubropower, whose expertise is engines, discusses the implications of the planned improvements in fuel burn on the Pratt & Whitney Geared Turbo Fan and what this means for the replacement of the Boeing 757, 737 and Airbus A320 families.

Charity efforts: IAM 751, the touch-labor union for Boeing, is often portrayed as a bunch greedy members who feel a sense of entitlement. One can certainly debate this point, but what isn’t debatable is 751′s efforts at charity throughout the year. Every once in a while, we pop over to 751′s blog. Today (Feb. 19) the first four items are about philanthropic efforts in Pierce and King counties.

Just as 751 members are often cast as greedy, so is Boeing, so it is only proper in this context to point out that Boeing also engages in philanthropic endeavors throughout the US (we don’t know about abroad). Here’s a link to some of Boeing’s efforts.

Filling the production gap at three OEMs

HawksWinHawksWinHawksWin!!!

Airbus, Boeing and Embraer face production gaps of several years in three key product lines. Two of these, Boeing and Embraer, relate to transitions from current generation airplanes to new derivatives. Airbus faces a large gap for its ambition to continue one popular airliner well into the 2020 decade.

Airbus wants to continue production of the A330 at least to 2022 and perhaps later. Boeing last year launched the 777X to succeed the 777 Classic. Embraer also launched a new derivative, the E-Jet E2, to succeed the E-Jet E1. Based on current production rates, the OEMs’ current backlogs produce the following picture:

Airplane

Backlog

At 12/31/13

Production

Rate Today

Per Month

Current Backlog Ends

EIS of New

Airplane

Production

Gap

A330

267

10

May 2016

2022*

6 yrs

777 Classic

314

8.3

Feb 2017

2020**

3 ½ yrs

E-Jet E1

279

8

Nov 2016

1H2018

1 ¼-1 ½ yrs

* Publicly identified continued production goal

** Boeing says 2020;we assume 1H2020; Market Intelligence indicates Boeing would like to achieve a 2019 EIS.

Leeham Co. Chart. Sources: OEMs.

The key, and obvious, question is what do the three OEMs do to bridge this production gap.

 Embraer arguably is in the best shape. EMB’s chief executive officer told Bloomberg News last week that he sees about 150 E-Jet orders through 2015—but the news report didn’t specify how many might be today’s E-Jet E1 or the re-engined, next generation E-Jet E2. If these 150 turn out to be the E1, the production gap is basically filled. If these 150 are a mix of E1s and E2s, EMB could still have challenges. EMB could, like Airbus and Boeing, combine current and next generation deals into one.

 EMB officials have also gone on record that they won’t cut prices to spur sales of the E1. What else can they say publicly? They are certainly not going to say they’re open to bidding wars, and we’re not at all convinced there isn’t sharp discounting in EMB’s future. Bombardier has famously refused to offer discounts demanded by potential customers and mediocre CSeries sales reflect this. Boeing and Airbus claimed they would maintain pricing on the 737NG and A320ceo families in advance of the re-engined derivatives, but both complained about price cutting by the Other Guy and our Market Intelligence certainly tells us each has engaged in sharp, sharp discounting against each other (and in Airbus’ case, against Bombardier’s Cseries).

 We fully expect Boeing to offer discounted package deals to customers to sell the 777 Classic with the 777X and Airbus certainly expects Boeing will cut the price of the 777 Classic to close the production gap.

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Click this link: Airlines beginning to push for discounts on 777 Classic.

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 Airbus has the greatest challenge: currently a six year gap between today’s backlog and the previously stated goal to maintain production to at least 2022. Airbus has been more successful with the A330 than officials ever expected (helped in no small measure by the 787 program debacle). With a production line long-since paid off (which is also true for the 777 Classic), Airbus has a lot of pricing flexibility (as does Boeing). But while Boeing has a successor product for the Classic, Airbus positions the A330 as a complementary airplane to the A350, not a successor. The launch last year of the A330 Regional is an effort to refresh the line and add sales, but so far none has been announced. Proceeding with an A330neo would breath new life into the program, probably adding 10-15 years to production.

 Another way to bridge the production gap is to reduce rates and spread out delivery dates. But this repositions cash flows and profits, and it’s something we don’t think the OEMs will want to do.

 We think price discounting, as with the 737NG and A320ceo, will be the more likely solution.

 

Looking ahead to 2014

Here’s what to look for in 2014 in commercial aviation.

Airbus

A350 XWB: The high-profile A350 XWB program continues flight testing this year. Entry-into-service has been a sliding target. The program is running about 18 months behind original plan and EIS was intended for mid-year following initial delays. Even this has slipped, first to September and then to “the fourth quarter.” Currently first delivery is scheduled in October to launch customer Qatar Airways, which is slated to get four A350-900s this year. Emirates Airlines is listed as getting two of the total of six scheduled for delivery.

A320neo: Lost in the shadow of the A350 program is the A320neo. Final assembly of the first aircraft is to begin in the spring and first flight, followed by testing, is scheduled for this fall. The Pratt & Whitney Geared Turbo Fan is the initial variant. First delivery is scheduled in the fall of 2015.

Others: Airbus continues to evaluate whether to proceed with developing an A330neo. Based on our Market Intelligence, we expect a decision to proceed will come this year. Concurrently with this, we expect most if not all of the remaining 61 orders for the A350-800 to be upgraded to the A350-900 and the -800 program to be officially rescheduled if not dropped. The -800 is currently supposed to enter service in 2016, followed by the A350-1000 in 2017. But recall that as delays mounted on the A350-900, Airbus shifted engineers to the -900 and the -1000 at the expense of the -800. Salesmen have consistently shifted orders from the -800 to the larger models. We long ago anticipated the -800’s EIS would be rescheduled to 2018, following the -1000. The -800’s economics aren’t compelling enough just justify the expensive list price. So we expect Airbus to upgrade the A330 to a new engine option, using either or both of the Trent 1000 TEN and GEnx with PIPs (Performance Improvement Packages) or with some modifications. EIS would be about 2018. This precludes Pratt & Whitney from offering a large version of the Geared Turbo Fan, which wouldn’t be ready by then.

We also expect Airbus and the engine makers to look at re-engining the A380, driven by desires of Emirates Airlines to see a 10% economic improvement. Emirates announced an order for 50 A380s at the Dubai Air Show but instead of ordering the incumbent engine from Engine Alliance for these, Emirates left the engine choice open. This leaves open the possibility the A330neo and the “A380RE” could share an engine choice.

Boeing

After many years of turmoil, 2014 should be quiet for Boeing (now that the IAM issues have been resolved—see below).

787: Barring any untoward and unexpected issues, Boeing seems at long last to be on an upward trajectory with this program—but we’ve said this before. There are still nagging dispatch and fleet reliability issues on the 787-8 fleet to resolve, but flight testing of the 787-9 appears to be going well. Certification and first delivery should come without trouble this year, to launch customer Air New Zealand.

737: Nothing to report on the Next Generation program except ramp-up to a production rate of 42/mo is to take effect this year. Development continues on the 737 MAX.

Others: The 777 Classic is humming along. Now that the 777X is launched, we’ll be closely watching sales for the Classic; Boeing has a three year backlog but six years to 777X’s EIS. How is Boeing going to fill this gap, and what kind of price cuts will be offered to do so?

The 747-8 continues to struggle, barely holding on. Boeing says it thinks the cargo market will recover this year, boosting sales of the 747-8F. We’re dubious.

The 767 commercial program continues to wind down. The 767-based KC-46A program ramps up.

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2013 Year in Review: 787 grounding was the top story

We’re back from what we had planned as a holiday hiatus. This was interrupted by the IAM-Boeing 777X contract issue, of which we felt compelled to initiate some special posts.

This leads off our 2013 Year in Review.

IAM-Boeing 777X Contract

Although it was not voted by Readers as the most important story of 2013, nor did it even make the Top Three, its importance can’t be understated. The relationship between the IAM 751 District, which represents Boeing “touch labor” workers in Puget Sound (and in limited numbers, in Oregon and elsewhere), is to put the best face on it, dysfunctional. Relations hit a lot point in 2008, with a 57 day strike, and 2009, when Boeing elected to put 787 line 2 in Charleston. We thought, as did many others, that 751 and Boeing entered a new era in 2011 when an agreement was reached extending the 2012 contract to 2016 in exchange for locating the 737 MAX construction in Renton. As it turns out, this guarantee had less promise to it than was thought; Boeing is using this assembly as a stick (or a carrot) in the current 777X contract proposal.

If the 777X is not assembled in Washington, this will likely mark the beginning of a serious migration of Boeing from Washington. What’s been happening up to down, with 787 Line 2 and a series of jobs relocations, is peanuts compared with what will happen as airplane programs wind down and Boeing has clean-sheet designs in the next decade.

Failure of 751 and Boeing to come to some accord (not necessarily one based on the January 3 contract vote) has grave implications for IAM jobs and aerospace in Washington.

Top Story of the Year

Readers voted and we agree that the top commercial aviation story of the year was the three month ground of the 787. Except for the Concorde, a special and highly limited case, there hadn’t been a grounding of a commercial jet since 1979 with the McDonnell Douglas DC-10. With only 50 787s in service at the time of the grounding, global disruption was limited but the number of 787s scheduled for delivery during this time magnified the global implications. Japan Air Lines and its rival All Nippon Airways, with more 787s in service than any other carrier, were disproportionately affected. The grounding may have helped influence JAL to break the Boeing monopoly and buy Airbus with the A350-900 order.

ANA is still considering a major order and having lost JAL to Airbus, Boeing can be counted on being motivated to cut virtually any deal on any terms and conditions to avoid losing ANA.

A350 and 777X

A mere handful of votes separated the first flight and flight testing of the A350XWB with the launch of the 777X. The A350XWB barely topped the 777X as the second most important story of 2013.

Flight testing by all accounts is going well. Airbus officials are so far sticking with an entry-into-service for next year, but when is a moving target. Officials initially said mid-year, then September then November or December. Based on customer comments, we moved EIS to 1Q2015 in our estimates months ago, perhaps January.

In mid-December, the new American Airlines did what we had expected: it dropped the US Airways order for the A350-800, swapping it into the A350-900. The days of the -800 are numbered, and we think this subtype will follow the 787-3 into oblivion as early as 2014.

Boeing finally launched the 777X in November at the Dubai Air Show. The launch was really anti-climatic: Lufthansa Airlines had already become the first customers in advance of the air show, but Dubai provided the well-expected, high-profile order of 150 from Emirates Airlines and more orders from Qatar Airways and Etihad Airlines. On December 20, Cathay Pacific Airways ordered 21 777-9s, giving Boeing some 280 orders and commitments for the airplane. How many of the commitments will actually be firmed up by the end of 2013 is something we’ll all know in early January.

CSeries First Flight and Flight Testing

Bombardier came in at a distant fourth in the Reader tally with the first flight of the CSeries. This is BBD’s attempt to leap into the Big Leagues, challenging Airbus and Boeing directly at the small end of the mainline jet market. First flight was delayed three times and the flight test program has been slow off the mark. Flight Test Vehicle 2 is behind schedule entering the program and, we believe, so is FTV 3.

Bombardier long said that EIS would be 12 months after first flight. Following the September 16 launch of FTV 1, BBD stuck with this plan publicly. This meant EIS would be September 2014.

Not a chance.

We already had moved EIS to 1Q2015 by the time BBD CEO Pierre Beaudoin told the Toronto Globe and Mail in November that EIS was still a “good year” away.

We now have EIS in 2Q or 3Q2015 in our estimates. BBD’s year-end earnings call is February 11. We expect an EIS update from the company at that time.

Other Stories

All other nominees for 2013′s Top Stories were also-rans to Bombardier. Here are the results at December 29.

Vote for the Top Aviation Stories of 2013

Answer Votes Percent
Airbus A350 XWB has first flight and enters testing 168 20%  
Airbus A380 gets big order boost from Emirates 16 2%  
American Airlines and US Airways merge 39 5%  
Boeing 777X is launched 164 20%  
Boeing 777X Site Selection competition 43 5%  
Boeing 787 is grounded 258 31%  
Boeing 787-10 is launched 11 1%  
Bombardier CSeries has first flight and enters testing 74 9%  
Embraer launches E-Jet E2 3 0%  
IAM 751 rejects 777X Contract Nov. 13 33 4%  
IAM International Forces Vote on Second 777X contract offer 24 3%   

The deeper, longer term implications of IAM’s Boeing contract vote January 3

There are deeper, longer term implications for the January 3 vote by IAM 751 members on the revised contract proposal from Boeing than have been discussed in the public domain.

  • Contract extension to 2024 brings “labor peace,” but also significantly weakens the union in the future.
  • The replacement for the Boeing 757 lurks in the background.
  • So does the replacement for the 737 MAX.

The near-term implications have been discussed ad nausea: for employees, vote for a contract that includes concessions, notably on pensions, or risk losing the assembly site for the 777X. For the states, Washington could be a winner, or a big loser. The state that’s awarded the assembly site would be a big winner. Suppliers will supply Boeing regardless of where the 777X is assembled.

Another near-term implication we’ve talked about: the fall-out on the IAM, both at the International level and the District 751 level. No matter how the vote turns out, there is a civil war within 751 members who are royally upset with their leadership and others who believe in it. The civil war between 751 and IAM International HQ will continue well beyond the vote, with the prospect that International could simply depose all the 751 leaders and place 751 under a trustee “for the good of the union.”

But there are much longer term implications of the vote.

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Assessing the Air Canada 737 order: factors that likely played a role

How did Boeing win the Air Canada mainline 150-200 seat jet order when only a couple of weeks ago Flight Global reported the Airbus won the deal?

We, too, heard that Airbus seemed to be the favorite, but the information was soft. We’re not rapping Flight Global—undoubtedly it was confident in its sourcing, but this just shows that a situation can change dramatically and quickly.

We’ve been following the competition for months, behind the scenes, and here are factors we understood that were involved.

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