Buckingham lowers Boeing to Underperform (sell), others increasingly bearish

Update: 24/7 Wall Street just published this gloomy outlook about Boeing.

Buckingham Research Group today lowered its call on The Boeing Co. from Neutral to Underperform, the equivalent of Hold to Sell. As far as we can tell, this is the first research analyst to put a sell on Boeing in recent years.

According to Thompson/First Call, 10 analysts rate Boeing as a Strong Buy, nine as a Buy and seven as a Hold. None rated Boeing as an Underperform or a Sell (Thompson separates the two ratings; Buckingham’s Underperform is a Sell). According to Thompson/First Call tallies on Yahoo Finance, there hasn’t been a downgrade to sell since 2008, when the 787 program problems were ramping up.

Buckingham has become increasingly pessimistic in recent months about Boeing, so the new rating isn’t necessarily a surprise, and Buckingham isn’t alone. Bank of America Merrill Lynch recently downgraded Boeing to Neutral and in June RBC Capital Markets downgraded Boeing to Sector Perform from Outperform. Wells Fargo and Credit Suisse analysts have been raising concerns in recent notes but haven’t downgraded Boeing, and UBS has been bearish for some time.

Buckingham cited anticipated worsening free cash flow as its principal reason for the downgrade, driven by BRG’s forecast of lower 777 production rates and higher than Boeing’s forecasted $25bn in deferred production costs for the 787. BRG also cited about 1,500 737s not yet added to the accounting block it believes have been sold at steeper discounts than historically.

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Airlines, not passengers, at fault for recline wars

A third incident of “recline wars” has been reported, this time on a Delta Air Lines flight in which a dispute broke out between a passenger who reclined his seat and the passenger behind him who didn’t like it.

The New York Times has an article on the entire issue.

While the focus and debate has, so far, centered around who has rights–the passenger to recline or the passenger claiming reclining violates his space–the real issue, and blame, ought to rest with the airlines squeezing down legroom to a seat pitch of 28 inches (in the case of Spirit Airlines and Allegiant Air) to an increasingly common 30 inches on legacy carriers.

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Odds and Ends: Malmo and CSeries; Boeing’s Terrible Teens; MH 370

Malmo and CSeries: Malmo Airlines, a small carrier in Sweden that is a subsidiary of Braathens, last week said it withdrew as the launch operator of the Bombardier CSeries. Malmo has five CS100s and five CS300s on order.

First delivery was scheduled for the second half of next year. The oil line failure in a Pratt & Whitney GTF engine on May 29 has set the flight testing back, although BBD hasn’t said by how much. We believe it will likely be a day-for-day setback and it’s possible that EIS will actually slip to 1Q2016.

The flight test fleet is expected to return to the air this month.

According to the Ascend data base, Lufthansa Group’s Swiss Airlines subsidiary was to be the second operator, also in 2015. We don’t expect Swiss to change its planned delivery schedule.

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Focus on Bombardier after more executive changes

This report has been updated since it was issued to our E-subscribers last Monday to reflect our new estimate of the return to airborne status for the flight test program.

Bombardier two weeks ago made more executive changes to the CSeries program, replacing the vice president of marketing and other officials. The company said additional changes might be forthcoming—a clear signal that something more is afoot.

Bombardier has been stuck on 203 firm orders for the CSeries for the better part of this year, although the number of orders and commitments has swelled to 513 with a much better than expected Farnborough Air Show. Still, MOUs and LOIs aren’t firm orders with deposits and progress payments, and poor sales of the CRJ, Q400 and business jet divisions combine with the R&D costs of the CSeries to put a huge financial squeeze on the company. Layoffs and cost cutting, along with the management changes, add to the perception that BBD is a company in trouble.

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Odds and Ends: Order bubble, revisited; MRJ lands JAL; MH370

What order bubble, Revisited: We recently asked the question, What order bubble?

The orders don’t stop coming. Boeing landed a big fish with a large order from BOC Aviation, bringing net orders to 918–easily on the path to 1,000. Airbus lags at just over 800 net orders through July (it only reports monthly, not weekly as does Boeing), but we see Airbus hitting 1,000 this year, too. There were 121 MOUs announced at the Farnborough Air Show for the A330neo and we expect most of these to firm up, if not all. (There will likely be some swaps by Air Asia from the A330ceo to the neo, however.) We expect more A320 orders as well.

Boeing’s BOCA order was the lessor’s largest ever and included two 777-300ERs. Boeing is attempting to combine -300ER orders with 737 and 777X deals in order to bridge the production gap between the 777 Classic and the 777X.

GE Aviation and GE Engines naturally benefited from the 737 and 777 BOCA deal, since they are the sole-source engine providers on the airplanes.

MRJ lands JAL: Japan Air Lines ordered 32 Mitsubishi MRJ90s for delivery from 2021. This is the fourth customer for MRJ. JAL’s rival, All Nippon Airways, was the launch customer for the MRJ90. JAL also ordered up to 27 Embraer E-Jets.

MH370: New information emerged this week on the flight path of Malaysian Airlines MH370, which disappeared on a flight from Kuala Lumpur to Beijing and is believed to have crashed in the south Indian Ocean.

We’ve been asked by local media if MAS can survive. We believe it can, given the government backing. It’s the flag carrier and we don’t think Malaysia will allow the airline to go out of business. Korean Air Lines survived following a series of crashes and the Soviet shootdown of KAL 007 during the 1980s. MAS may become a very different airline, but we think it will continue.

Qantas defers 787s, Boeing gears up response to A330neo

Financially ailing Qantas Airways has deferred some of its order for Boeing 787s, a move that ordinarily would be seen as a negative to Boeing. But in this case, it comes at an opportune time that will actually help Boeing respond to the Airbus A330neo.

Qantas’ deferral is from 2016 to 2017 and only for a few airlines. But having posted a record loss and previously canceled and deferred aircraft, we wouldn’t be surprised if this happens again.

The A330neo is planned to enter service in 4Q2017. Airbus is counting on near-term availability to help sales.

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Odds and Ends: Russian MC-21 subsidy; C919 assessment; ExIm countdown

Two news items popped up today on emerging aircraft.

MC-21 subsidy: Government subsidies for commercial aircraft development have been a sore point between the US and Europe (i.e., Boeing and Airbus) for decades. Although the US and Europe went through years of international disputes at the World Trade Organization on behalf of Boeing and Airbus, with adverse decisions now under appeal by both sides, and even though Canada and Brazil previously won cases over illegal subsidies to Embraer and Bombardier, nothing has come of the decisions–and nothing has been done about government subsidies by Japan and China to their aerospace industries. No complaints to the WTO have been filed against either country, which are members of the WTO.

This article updates some information about Russian aid to Irkut, which is developing a competitor to the Airbus A320 and Boeing 737 families. The MC-21 and China’s COMAC C919 are directly sized against the best-selling single-aisle airplanes. Russia is not a member of the WTO, so there is no legal basis (that we know of) to file a complaint.

Long-time readers know we disdain the entire WTO process anyway as more political than practical. The WTO has no enforcement powers and sanctions that might be authorized by the WTO against offenders don’t have to be implemented (as in the case of Canada and Brazil) or even applied against the offender’s products–another industry altogether may be sanctioned, a silly and unfair prospect.

C919 assessment: This article provides an assessment of the prospects for the COMAC C919. What’s especially interesting in this article is what we aviation geeks have known all along, and that is China uses Western technology to develop its airplanes (and trains, the article points out). Airbus and Boeing identify China as the next viable competitor in the airliner field, albeit perhaps a generation in the future. But the technology is coming from Airbus, Boeing, Embraer, Bombardier, the engine makers and the supply chain. They are creating their own future competitors.

While China’s industrial espionage contributes to its understanding and acquisition of Western technology, most of it comes from joint ventures between Chinese companies and the Western OEMs and suppliers.

ExIm countdown: The authorization for the US Export-Import Bank expires next month, and Boeing is pulling out all stops to get a recalcitrant Republican Party to agree to extend the life of the bank, reports The Hill, one of the specialty publications that covers the US Congress.

Killing ExIm will put Boeing at a disadvantage to Airbus, which uses and will continue to use European Credit Agencies (ECAs) to support sales of its aircraft. Boeing will have to fall back on its internal Boeing Capital Corp. or attempt to help customers find private financing if ExIm tanks.

After-market support becoming key to winning engine orders

Maintenance and power-by-the-hour parts and support contracts are increasingly becoming the deciding factor in deciding which engines and which airplanes will be ordered—it’s no longer a matter of engine price or even operating costs, customers of Airbus and Boeing tell us.

Ten years ago, 30% of engine selection had power-by-the-hour (PBH) contracts attached to them. Today, 70% are connected, says one lessor that has Airbus and Boeing aircraft in its portfolio, and which has ordered new aircraft from each company.

“We’ve seen a huge move in maintenance contracts,” this lessor says.

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Boeing on path to surpass Airbus in single-aisle production

Note: This has updated information from its distribution to our e-newsletter recipients a week ago.

Boeing is on a path to overtake Airbus in producing single-aisle aircraft by the end of this decade.

In the hotly contested single-aisle sector, which Airbus currently leads,  both OEMs are essentially sold out through 2019. Few delivery slots can by found by either of the Big Two. Airbus already plans to boost production of the A320 family to 46/mo in 2016, when its new Mobile (AL) plant comes on line. It will initially produce 4/mo but has the capacity for 8/mo. It’s Tianjin, China, plant is producing at a rate of 4/mo and likewise has the capacity to go to 8/mo. The Toulouse and Hamburg plants are understood to be at capacity now, giving Airbus a total capacity of 59/mo: Hamburg can produce 25/mo and Toulouse 18/mo.

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Odds and Ends: Dual sourcing; FAA overflight bans; Super Constellation

Dual sourcing: There is always much angst in Seattle among the labor groups and Washington State’s elected officials when Boeing decides to put work outside the state. Much of this angst is because Boeing uses this as a sledgehammer to beat up unions for concessions and the state for tax breaks.

But dual sourcing isn’t really a bad thing. Pratt & Whitney is dual sourcing to avoid a single point of failure, as this article explains. Boeing, of course, has made the same point but it always gets submerged by its heavier-handed tactics. We’ve often made the point that if Boeing wants to set up assembly lines elsewhere, why not use the Natural Disaster Risk Diversion as the reason–and nobody could argue the point (well, they could, but it is a valid concern).

FAA overflights: It’s big news here in the USA, likely far less so in the rest of the world: the racial unrest in the small Missouri town of Ferguson, a suburb of St. Louis, where an unarmed 18-year African-American male was shot six times by a white policeman. Police say the young man attacked a police office. Witnesses say he had his hands up to comply with the officer’s orders. A grand jury will attempt to sort out facts. In the meantime, demonstrations–some peaceful, some not, some with looting–have turned Ferguson into an armed camp of police looking like the Army, in Humvees, battle gear and automatic weapons.

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