Analysts split on Boeing 2Q earnings

Aerospace analysts split in their reaction to Boeing’s second quarter earnings. Many were upbeat on the commercial aircraft results, while others didn’t like the higher-than-expected, continued deferred expenses for the 787 program and a big charge on the KC-46A program.

Bloomberg News was quick to point to the KC-46A program charge and the implications that this is yet another costly new airplane program for Boeing.

Traders didn’t like the news, either, with stock falling more than $3 despite higher profits for the period and higher profit guidance going forward.

The Bloomberg article cites several analysts who didn’t like elements of the earnings report.

Here are initial notes, pre-earnings call, based on the press release:

 

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Counting options, Letters of Intent

Should manufacturers be counting options and letters of intent toward program certainty? We’ve always thought this was pretty cheeky, but in reality there is a reasonable foundation and history for doing so. Years ago Boeing regularly ridiculed Airbus for announcing “commitments,” denigrating these as not being “real” orders (and, of course, literally they weren’t). But then came the losing battle between the A320neo and the 737 MAX. Lo and Behold, Boeing touted “1,000 orders and commitments” for the MAX in a PR effort to bolster the competitive position of the MAX. Of course, these “commitments” (in the form of options, MOUs and LOIs) converted to orders eventually.

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EU may challenge 777X tax breaks from Washington State

Reuters is reporting that the European Union may challenge the $8.7bn in tax breaks Washington legislators voted to grant Boeing in return for locating assembly of the 777X and its wing in the state.

Readers know we worried about this when the Legislature voted for these in a hurry-up session. We were blown off by the state and even the mainstream media in raising these concerns.

State officials asserted at the time that the State was merely “extending” the 2003 tax breaks voted for the 787, totaling $3.2bn, for the 777X. The 787 tax breaks had been ruled illegal by the World Trade Organization, and state officials brushed this aside saying the ruling was under appeal.

We found this to be an astounding position, particularly considering that Gov. Jay Inslee, as a Congressman, demanded that the WTO findings of illegal tax breaks to Airbus be considered during the KC-X USAF tanker competition, despite a pending appeal.

In the Reuters story, Tim Hepher writes:

Boeing said tax decisions by Washington were meant for the whole industry in the state, including some Airbus suppliers, and have been designed to comply with WTO rulings.

“The $8.7 billion figure that’s mentioned is the state’s estimate of the total value of its incentives for the entire commercial aerospace industry over 16 years,” Boeing spokesman Charlie Miller said. “The benefit to Boeing will only be a fraction of that amount.”

The first statement is certainly true. We’re a bit flabbergasted by Miller’s claim that Boeing will receive only a “fraction” of the tax breaks.

The tax breaks have come under much after-the-fact criticism when Boeing announced that more engineering jobs would be moved out of state. Critics of the tax breaks noted that there had been no job guarantee provisions in the Legislation, freeing Boeing to move jobs–and it is doing just that.

Although Boeing hasn’t said how many jobs will be associated with the 777X in Washington, it’s clear that more automation and robotics will be used on the X than on the 777 Classic.

 

Odds and Ends: A330neo decision could be near; KC-46A; Countdown to Superbowl; A400M

A330neo decision: Aviation Week reports that a decision to proceed with the Airbus A330neo could be “imminent.” The report also discusses the advocacy by Tim Clark, COO of Emirates Airlines, to re-engine the Airbus A380. As with the Reuters and Bloomberg articles we previously linked, the Aviation Week piece also confirms much of what we were the first news outlet to report in December. We have a launch in 2014 rather than 2015 reported in Aviation Week, although we both have a decision to proceed for this year. Aviation Week and Bloomberg report that the decision could come as early as March.

Aviation Week confirms our report that Pratt & Whitney would be unlikely to bid on the project because the short time lime precludes development of the big engine version of the Geared Turbo Fan.

KC-46A at ‘high risk’ for delay: A US government report suggests the Boeing KC-46A tanker is at ‘high risk’ of a six month delay.

These are not unusual for military programs, nor, it seems, is it any longer unusual for new or derivative aircraft programs. Boeing believes the program is on time, but even if a six or 12 month delay does emerge, by today’s standards, this indeed is “on time.”

Countdown to Super Bowl: Boeing painted a Boeing 747-8F test plane in the Seattle Seahawks livery and this week “skywrote” the number 12 on a flight. The Seahawks play the Denver Broncos Sunday in New Jersey for the Super Bowl. The number “12” represents “the 12th man,” of the collective Seahawks fan base.

We think it would be super for the 747 to overfly the game Sunday, the ultimate 12th man appearance. Alas, Boeing says there are no plans to do so.

A400M: Cool picture. No other words needed.

Odds and Ends: CSeries timeline; KC-46A roll-out; China’s new airplane

CSeries timeline: Bombardier last week announced a third delay in the CSeries program, this time for as much as a year.

This probably should have been expected. BBD originally planned a five year period between program launch and entry-into-service. As we saw with the Boeing 787, launched with a four year timeline, even five years was too ambitious.

CSeries Timelines. Leeham Co Chart

CSeries Timeline. Leeham Co Chart

The EIS period for the 787 turned out to be the standard seven years, almost eight–and even then, the EIS was anything but smooth.

Airbus’ launch-to-EIS for the final A350 version is somewhat more than eight years. Even though BBD is a sub-contractor on the 787 program and said it benefited from lessons learned, it’s clear officials were far too ambitious.

KC-46A roll-out: Boeing’s first tanker for the USAF based on the 767-200ER will roll out this summer. The Everett Herald has this story. The airplane is a somewhat revised 767-200ER called the 767-2C. In addition to upgrades with the airframe, the Pratt & Whitney PW4000 engines will have upgrades which improve fuel consumption.

China’s new airplane: China isn’t just developing the ARJ21, C919 and some military airplanes. It’s also developing the world’s largest amphibian.

Odds and Ends: AirAsiaX orders A333; WA and Airbus; Boeing names COO

AirAsiaX orders A330-300s: As forecast earlier this week, the budget carrier ordered 25 Airbus A330-300s. According to reports, AirAsiaX may not be done. Group CEO Tony Fernandes wants Airbus to develop an A330neo. Stay tuned.

Washington State and Airbus: The Associated Press wrote a story about the courtship of Washington State of Airbus, making a link between the Boeing 777X site selection Schizophrenia and the Airbus effort. Some headline writers made an even more direct cause-and-effect link. This vastly overstates what’s been going on. Gov. Christine Gregoire began reaching out to Airbus in 2010, but the effort was stalled by the then-contentious and bitter competition between Boeing and Airbus over the USAF KC-X tanker competition. Gregoire, who was just named chairman of the advisory committee to the US Export-Import Bank, naturally backed the Boeing bid but was wisely measured in her rhetoric when it came to the EADS KC-330 offering. The Washington Congressional delegation, however, was often vitriolic and as a result, Gregoire’s efforts largely stalled.

Once that competition was over in 2011, Gregoire resumed her efforts in the last year of her governorship, meeting with EADS and Airbus officials at the 2012 Farnborough Air Show. The WA Dept. of Commerce had continued efforts throughout. This past summer, Commerce and the Pacific Northwest Aerospace Alliance hosted an Airbus suppliers meeting in the Seattle area, attended by about 120 suppliers (about 30-40 had been expected).

So while the AP story is factually correct overall, any linkage to 777X and the Airbus courtship is overstated. This has been a long-term effort by Airbus, PNAA and it is a concept we called for in October 2009 in a speech before the Governor’s Aerospace Summit just days before Boeing announced it was locating 787 line 2 in Charleston (SC). The Airbus effort, if anything, has more of a link to that event than to the 777X.

Boeing names Muilenberg COO: Dennis Muilenberg, CEO of Boeing’s defense business, has been named COO of The Boeing Co. He is succeeded by Christopher Chadwick. Ray Conner, CEO of Boeing Commercial Airplanes, was named Vice Chairman of the Board and continues in his current position. The press release is here.

McNerney reaches retirement age next year but given the timing, we think he’ll stick around a bit longer to give Muilenberg more time in the #2 corporate position. Since Muilenberg is younger than Conner, we think Muilenberg is the more likely choice for successor.

Another Day, Another 777X story: The obsession continues. Seattle Times columnist Danny Westneat has this commentary worth reading. The Everett Herald has a good wrap up of where things stand in Washington State right now. The Seattle Times looks at Long Beach (CA) in depth and its potential for the 777X.

Odds and Ends: EMB, BBD split AA order; WTO on Airbus subsidies; IAM, Boeing bargaining; KC-46A

EMB, BBD split American order: Embraer took the lion’s share of the long-awaited order from American Airlines for regional jets. EMB won 60 firm orders and 90 options for the E-175 and Bombardier won 30+40 CRJ-900s. Flight Global points out that none seem to be going to American Eagle.

The order is welcome by both OEMs, which had gaps in their respective production lines.

WTO on Airbus subsidies: Bloomberg News reports that the World Trade Organization won’t rule until the end of next year on a US complaint that Airbus failed to comply with WTO findings that it received illegal subsidies. (No link available).

Bloomberg writes, The EU says it had secured repayment of some $2.3 billion in launch-aid loans and terminated the launch-aid loan agreements in question, while also addressing subsidies given in the form of capital contributions, infrastructure support and regional aid.(Emphasis added.)

     The U.S. counters that the largest launch-aid subsidies—for the A380, Airbus’s super jumbo jet—remain in place and that the actions the EU claims to have taken with respect to earlier subsidies “appear to do nothing to withdraw them, or to remove their adverse effects.”

As we’ve written, Boeing is now requesting essentially the same thing in its Request for Proposals for the 777X site selection.

IAM, Boeing bargaining: It’s a relief to see Boeing and the International Association of Machinists District 751 bargaining for a new contract amendment for the 777X site selection, but no deal is imminent. The Seattle Times reports things could move quickly, however.

First KC-46A airframe, wings joined: Aviation Week has this story about the progress of Boeing’s KC-46A tanker program.

Odds and Ends: 787 software; Hazy on 777X; 787 reliability; A340 lemon; 777X won’t be built in WA: MO politician; Chinese war games

787 software: Aviation Week reports that continuing software issues bedevil the Boeing 787.

AvWeek also takes a closer look at Japan Airlines’ decision to take the 787 off certain routes due to the icing issues of the GEnx engines. Most incidents occurred on the 747-8 but one happened on the 787. The 747-8 also uses the GEnx engine.

Hazy on 777X: Steve Udvar-Hazy, CEO of Air Lease Corp and one of the most influential people in commercial aviation, offered his assessment of the 777X specifications in an interview with Aviation Week. He also commented on the future of the A350-800 and the prospect of an A350-1100.

787 reliability: Aviation Week also reports about Boeing’s efforts to improve the reliability of the 787.

A340 Lemon: Bloomberg News, tipped by our select e-newletter distribution yesterday, wrote this story about an Airbus summit to discuss the future of the A340 family in the secondary market. We’ll publish our e-newsletter for general readership with an expanded version next Monday in this column.

Boeing will nix WA for 777X: So says a Missouri politician. KOMO TV (ABC Seattle) ran a piece yesterday in which a Missouri politician said all indications they’ve had from Boeing is that the 777X won’t be built in Washington State. The clip is not on the KOMO website, however, but we saw it while watching the news.

Pacific War Games: “War is Boring,” a blog, ran a war game involving the current Chinese action declaring a defense identification zone in airspace between China and Japan. We’ve no clue over the quality of this blogger or the war game, but we were reminded that the Pentagon had war game scenarios that were important in the KC-X competition. This was one reason the Northrop Grumman-EADS KC-330 MRTT won the competition (later overturned)–because of the vast distances involved in the Pacific and the assumption that China may be successful in a conflict of what’s called Anti-Access, Access Denied (A2AD) that would have isolated US bases in Guam and Japan. The USAF concluded the EADS KC-330’s longer range vs Boeing’s KC-767, greater loiter time and greater refueling capacity was important to the selection.

USAF considers scrapping KC-10 in sequester

KC-10 scrapping: The US Air Force is considering scrapping the KC-10 aerial tanker fleet as a result of budget cutbacks in the sequester, The Army Times reports. This is stunning news, considering the seven year battle to recapitalize the Boeing KC-135 tanker fleet.

There are 59 KC-10s, based on the McDonnell Douglas DC-10. McDonnell Douglas  merged with Boeing in 1997.

Boeing one day hopes to develop a tanker based on the 777-200LRF to replace the KC-10 and we expect Airbus Military will offer the A330 MRTT or even a tanker based on the A350, but we certainly didn’t expect any prospect of retiring the KC-10 prematurely.

FedEx takes first 767-300ERF; sources say readies 767-2CF order

FedEx took delivery of its first Boeing 767-300ERF yesterday.

FedEx FED 767-F - FA294247 K65968

Boeing Photo

As we reported way back on June 16, our market intelligence tells us FDX is lined up to become the first commercial customers of the 767-2C, the new platform on which the KC-46A tanker is based. The 767-2C is about six feet longer (165 ft 6 in) than the 767-200ER (159 ft 2 in) on which the 2C is based but shorter than the -300ER.

KC46A schematic

Boeing rendering

Separately:

  • Aspire Aviation has a long analysis of the DOJ lawsuit against the American Airlines-US Airways merger that further decimates the heart of the case.