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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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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FAA grounds 787; first since DC-10

The US Federal Aviation Administration grounded all US-registered Boeing 787. There are only six–all operated by United Airlines–but equivalent regulators typically follow the lead, though they don’t have to.

This is the first ground of a US-made commercial airliner since the McDonnell Douglas DC-10 was grounded in 1979, following a crash at Chicago O’Hare International Airport.

The move was becoming more and more widely talked about in aviation circles. We’re on a multi-stop trip in Europe and more and more people we’ve visiting had been talking about the prospect of grounding.

Buckingham Research issued a note about a company that is in the process of producing a new lithium-ion battery design of later technology:

From the Buckingham note

We think BA does have alternatives if it decides to replace the current Li-Ion batteries.

  1. We recently spoke with EaglePicher, a competitor to GS Yuasa (787 battery maker).
  2. EaglePicher has a Li-Ion battery technology currently being certified for a business jet.
  3. EaglePicher notes it could have a 787 Li-Ion battery designed and certified in 12-15 months.
  4. EaglePicher’s Li-Ion battery conforms to current (and far stricter) FAA standards for Li-Ion batteries.
  5. Consequently, we think BA has design alternatives if it decides to replace the current battery.

Key supplier says engine makers unsure of Boeing ramp up plans

A key supplier says engine makers aren’t as positive about plans by Boeing to ramp up production.

Allegheny Technologies hosted an investors’ day last month. In a note issued September 14 by Buckingham Research Group, BRG wites:

ATI has confidence in BA’s production ramp schedule but believes engine manufacturers do not. ATI is confident BA will achieve 787 production rates of 10/mo at the end of 2013 and successful ramp on the 737 and 777. Although ATI has faith in BA’s production ramp, CEO Richard Harshman noted that the engine supply chain may not have the same faith in BA’s production ramp. ATI’s observation is that the engine supply chain is being very tightly managed and that engine OEMs are being very guarded about getting ahead of airframe manufacturers (historically they have gotten ahead, anticipating production increase). This somewhat supports our view; although we think execution on the 787 has been better than BA expected, we think BA will be challenged to meet its production rate schedule of 10/mo by the end of 2013. We also think that view is well within buy-side expectations.

From our conversations with suppliers, we know that there is a general fear of the high rates announced by Airbus and Boeing, let alone those being studied. We believe these concerns are natural, given the unprecedented volumes announced and under study. Concern is also driven by a fragile global economy.

Spirit, Airbus and Boeing: take-aways from analyst day

Spirit Aerosystems held an aerospace analyst day March 7 and several reports have already been issued. Given Spirit’s close association with Boeing 7-Series programs, we thought the following is useful information. Spirit is also a major supplier to Airbus on the A35, building sections of the composite fuselage at its North Carolina facilities.

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Boeing’s clarity provided at BCC meeting

Update, May 11: UBS had Boeing’s Mike Bair, the head of the 737 future program, for presentations yesterday and issued its report. Much of the UBS report is similar to the Credit Suisse and Buckingham information captured below; here’s some of the new stuff.

  • While still not taking a re-engined 737 off the table entirely, it was clear from our discussion that BA’s preference remains an all new NB for initial delivery in 2019-20. While no major announcement is expected in Paris, BA anticipates material selection in 2012 (metal vs. composite), followed by component selection strategy
    (make vs. buy) in 2013 and official program launch in 2013-14, assuming a launch order is in place. BA envisions an eventual production rate of 60-70/month, which it sees as high enough to justify a dual source strategy for some major components.
  • While still not taking a re-engined 737 off the table entirely, it was clear during our discussion that Boeing’s preference remains an all new narrowbody with initial delivery in 2019-20.
  • Boeing does not expect to make a major announcement at the Paris Airshow. It commented that it would expect a launch decision on a potential new aircraft to come roughly five-six years ahead of first delivery, putting program launch in the 2013-14 timeframe,
    assuming a launch customer is in place by then.
  • Boeing commented that it would take a defection by a current 737 customer to get it to think more seriously about re-engining. Boeing sees this as unlikely and noted that Easyjet is the only 737 operator ever to defect to A320 and that it took very aggressive pricing by Airbus to achieve that outcome.

Our comment on the last point: Bair is wrong, of course: United and Frontier were two 737 customers to defect and Air Berlin also bought A320s; we believe there were more but don’t recall specifically.

Original Post:

In what is the clearest picture yet of Boeing’s intentions for program development, Boeing Capital Corp. officials met May 3 with aerospace analysts and financial types in one of BCC’s periodic meetings. What emerged from the meeting is a clear understanding of Boeing’s current thinking for the current 737 line and the New Airplane, which for this report we will identify as the 7X7.

This report is based on conversations with participants of the meeting, subsequent analyst reports that were issued and presentations to the group by Boeing.

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Boeing shelved 737RE–new airplane appears to be shelved for now, too

It’s stunning news: Boeing may be shelving, at least for now, the prospect of a new airplane widely anticipated to be announced at the Paris Air Show.

Boeing previously shelved the prospective 737RE (Re-Engine).

Buckingham Research, a boutique New York investment bank with a good track record of forecasting Boeing moves, issued a note today in which it said Boeing is rethinking the new airplane. Buckingham writes:

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Boeing to use 10 787s for tests

Update, Sept. 2: Boeing retracts its information to Buckingham.

Buckingham just put out a follow-up note to its one issued yesterday, cited below. Interesting to say the least:

BA is using 2, not 4 additional aircraft for 787 certification

Yesterday we reported that BA is using 10 aircraft in the certification process vs. 6 originally to prevent further 787 delays. Today, BA contacted us to clarify their initial statement calling for 4 additional aircraft in the 787 certification program. BA now states that only 2 additional 787 aircraft will be used in certification: aircraft #9 for ETOPS and another unspecified 787 for ground tests. We believed that first delivery could slip into 2Q from 1Q given the need for 10 aircraft in flight test. Eight aircraft in flight test improves our outlook and lowers the risk of another 787 delay. (Emphasis is Buckingham’s.)

Update, 3:30PM PDT:

Boeing issued this statement:

There will be limited testing on two additional airplanes for a total of eight airplanes (not four for a total of 10). The additional testing is driven by the requirement that some of the testing be done on airplanes in production configuration as opposed to flight test configuration. One airplane will do some ground testing. The other will do some flight testing.

We also received this statement from Boeing:

We will be doing testing on two airplanes in addition to the dedicated flight test fleet. Some of the later tests require airplanes that are in production configuration. This has always been part of the baseline plan.

Although Boeing says this was “always part of the base plan,” Buckingham’s report was the first time we’ve heard of more than six airplanes (whether it’s eight or 10) being involved in the test program. Analyst and media presentations never mentioned this, that we are aware of. In fact, those who followed the 787 program will well remember that Boeing was very clear: they felt they could do the flight testing in eight months (a timeline that drew universal skepticism on Wall Street) because there would be six airplanes doing the testing, an increase from the 777 test program.

What we now understand from our sourcing is that more than six airplanes were part of the contingency plans in case things went south.

Update, 1:15pm PDT: Guy Norris of Aviation Week has this report on why the Trent 1000 failed.

Original Post:

Boeing will use 10 787s to complete certification, a Wall Street aerospace analyst reported today in a research note, the first time this has been revealed.

Richard Safran of Buckingham Research writes:

Originally, BA intended to use six 787 test aircraft for certification. BA CEO Jim McNerney previously spoke about contingency plans to maintain the 787 flight test schedule. One plan was to shift ETOPS (Extended Twin-engine Over-ocean Performance Specification) testing from the original 6 flight test aircraft to 787 #7-10. In order to prevent further delays to the 787 schedule, BA is now using 10 aircraft in the certification process. The engine failure of 787 #9 in ground test delayed certification (and first delivery) because RR did not have a replacement. Since BA is now relying on 10 aircraft for certification and given the difficulty getting 787 #6 into the test program (now slated for September), we think it’s possible first delivery of the 787 could slip beyond 1Q11 to 2Q11.

Separately. we inquired of Boeing about some other aspects of the engine issue (Rolls-Royce, as is typical, did not respond for comment).

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New, 6-12 month delay forecast for 747-8

Buckingham Research forecasts a new delay in first delivery of the Boeing 747-8 of 6-12 months.

Boeing has indicated first delivery was likely to slip into 2011, but hasn’t announced the move yet. Boeing said design issues were the reason; Buckingham said oscillation and flutter issues remain to be resolved, including possibly a need to relocate the inboard engines.

Despite this and the new delay on the 787, Buckingham maintains a Buy rating.