OEMs are ramping up services as profit centers

Original Equipment Manufacturers are ramping up their focus on services to increase these as profit centers for company financial performance.

The news April 10 that Boeing will relocate its Commercial Aviation Services unit from Seattle to its fading facility in Long Beach (CA) is another example. After-market support services for all DC- and MD- models and the out-of-production 7 Series airplanes previously were relocated to Southern California. Now, support for the in-production 7 Series (except the 787), the 737-based P-8A Poseidon and the forthcoming KC-46A will shift to SoCal. The 787, 737 MAX and forthcoming 777X support will be in Seattle.

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McNerney may seek retirement waiver: our view

Boeing’s Jim McNerney may seek a waiver to the mandatory retirement age of 65–he’s 64 this year–to continue as chairman and CEO.

As soon as the news was out, we got a call from one Wall Street analyst who opened the call by saying, “Short the stock.” We initially thought this was some solicitation call.

We’re not that pessimistic but we do have these observations:

  1. McNerney staying beyond 65 is good news for Charleston, where Boeing is increasing its presence at a rapid rate. McNerney has a clear affinity for South Carolina: its local, county and state governments seem to have an open check book for Boeing. And it’s non-union and has lower wages. As long as McNerney is CEO, Charleston will continue to grow rapidly.
  2. It’s bad news for the unions. He just doesn’t like them. We don’t really need to pontificate on this point. Boeing is cutting back on union jobs here and transferring the work to non-union locations.
  3. It’s generally bad news for Washington State. It’s pretty clear that McNerney isn’t a fan of this state, given it’s costly to do business here, wages are higher, environmental rules are stricter and the State hasn’t exactly been innovative when it comes to thinking up stuff with which to incentivize Boeing. Gov. Christine Gregoire, like Gary Locke before her, pretty much took Boeing for granted until the company used the proverbial 2×4 upside the head to get their attention. Gov. Jay Inslee, Gregoire’s successor, so far has offered up more of the same to “win” the 777X assembly: more workforce training, better infrastructure and faster permitting–all-in-all, not at all innovative or outside-the-box thinking.
  4. More blackmail for Washington: Boeing has always been good at prying concessions out of states and local jurisdictions. McNerney has elevated this to an art. Assemble the 737 MAX derivative in Renton? Of course, said Jim Albaugh, CEO of Boeing Commercial Airplanes. Not so fast, said McNerney, in a highly public and humiliating rebuke to Albaugh (who was gone within the year after this faux pas). Assemble the 777X derivative here? Don’t count on it, says McNerney. Assemble the 787-10 derivative here? Don’t bet on this, either. In the end, the MAX was located here, but we think that was payoff to labor (which also gave in return) in exchange for dropping the NLRB 787 lawsuit. Without this card, it’s up to the State to be blackmailed for more incentives (we really don’t think Inslee’s package is worth much on 777X).

We were pretty happy with McNerney’s ascension to chairman and CEO after the disastrous rule of Phil Condit and Harry Stonecipher. But McNerney’s performance throughout the 787 and 747-8 debacles was wanting, we (and many others) concluded. We think McNerney was slow to make changes in these programs, and he was on the Board of Directors who signed off on the McDonnell-Stonecipher-driven outsourcing approach on 787 that proved so disastrous. McNerney has been at war with the unions, who saved Boeing’s bacon during these programs. We certainly understand the need to control costs and we opined a lot on the medical and pension cost issues, generally coming down on the side of the company. But we can’t help but sense ingratitude from Chicago for all the hard and dedicated work performed here in Puget Sound.

Most significant, perhaps, is the thin bench there is to succeed McNerney. Shortly after he became CEO, McNerney said one thing that was his priority personally and professionally was to create a good succession plan. Who is there from within to possibly succeed McNerney in a year or 18 months? The answer is, at this point, nobody.

Ray Conner is well regarded, but he probably needs a couple of more years than a McNerney retirement timeline suggests. Pat Shanahan hasn’t any commercial sales experience. Dennis Muilenburg has no BCA experience.

McNerney may well have to get a waiver because so far he has utterly failed to have a succession path.

2012’s Most Influential Person in Commercial Aviation

In 2011 John Leahy of Airbus was voted the most influential person. Who do you think is the most influential this year? We’ll hide the results until the voting is complete.

Boeing 737 MAX update

Update: Aviation Week has this piece that has some good close-ups of artwork.

Boeing held a tele-conference updating the 737 MAX program. Beverly Wyse, VP and GM of the 737 Program are Michael Teal gave the briefing.

Beverly Wyse (BW)

Michael Teal (MT)

BW: 737 MAX has met firm design concept. Honeywell will provide an electronic bleed air system. Flight deck will have large displays from Rockwell Collins. MAX production will have future growth capability.

MT: We have in place a plan to preserve training commonality with large flight deck displays. We engage with regulators for training regulations and feel this will not be an issue.

Development team made significant progress to have aerodynamic design. We removed nose gear door bump from earlier iterations. We can get longer gear within the wheel well. LEAP 1B reached architectural freeze in September, freezing fan size and core size. Final design freeze will be in April 2013.

With the completion of firm concept, the completion of production design can move forward.

BW: It is important we maintain stability in our production plan. The 737 MAX transition allows us to maintain stability with NG rate increases and into the MAX.

Q&A:

BW: Third production line begins in 2015 with construction of first flight test aircraft. Eventually will use the third line for future rate increases beyond the planned 42 a month.

MT: Will only offer radial tires on nose gear, nose gear retracts further into the wheel well.

MT: 13% fuel reduction is a per-seat off the 737NG from today’s most efficient NG (19% better than original 1997 NG.) MAX will continue with the same maintenance cost as today’s NG.

MT: Goal is to have the same field performance as NG.

BW: 737-7 MAX: Many of our customers select a primary model but have substitution rights into other model. We see the -7 as being part of a family of aircraft where airlines can use -7 on thinner routes. It also serves missions in high-hot regions, such as in Tibetan plateau. We see the -7 serving these critical missions. I would no say “no question” that we will build it, but customers have asked about it and it is in our family today.

MT: Flight test plans for -8 will have four test planes. Expect to have two flight test airplanes for the -9 and -7.

BW: Part of the reason for more flight test airplanes is to proceed as fast as possible.

MT: Can’t give you at this time an exact count of the amount of change of MAX vs NG. This is part of the design process between now and the middle of next year.

MT: This airplane is an amended type certification, do not see re-certification.

[Editor: UBS Securities issued a new research note even as the teleconference was proceeding, with this comment:

[Systems changes represent onset of scope creep: This morning BA announced that it had achieved “Firm Concept” on 737 MAX including new bleed air system from HON, new tail cone, new winglets, and surprise move to upgrade 737 NG displays from HON with 787 large format displays from COL. BA’s move to incorporate updated systems beyond the engine represents a departure from its stated strategy of minimal design changes on 737 MAX.

[When MAX was announced, former CEO of BCA Jim Albaugh said he wanted minimal changes. The MAX has, for some time, appeared to be undergoing design creep, hence the questions about commonality and re-certification.]

BW: Right now we are saying 2017 EIS, [Southwest Airlines previously told us 4Q17, Jim Albaugh hoped to advance this schedule); as we move forward we will get more definitive about the schedule.

Albaugh retires, replaced by Ray Conner

Update: 8:00am PDT June 27: The Seattle Times has a detailed story, including indications why Albaugh chose to retire.

Original Post:

In shocking news, Boeing announced that Jim Albaugh is stepping down as CEO of Boeing Commercial Airplanes and retiring Oct. 1.

Albaugh is just 62. He had been a candidate for CEO of The Boeing Co. when Harry Stonecipher was fired, a job that went to Jim McNerney. McNerney later tapped Albaugh, who was CEO of what was then known as Boeing Integrated Defense Services, to head Boeing Commercial Airplanes when BCA CEO Scott Carson was largely forced out following yet another delay in the 787 program.

Conner was widely assumed to be one of two candidates–Pat Shanahan was the other–to succeed Albaugh, who was assumed to be the CEO of BCA until retirement at age 65–three years from now.

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Boeing comments on 787 delamination, delivery expectations

Jim Albaugh, CEO of Boeing Commercial Airplanes, today commented on the delamination issues on the 787 and the effect on deliveries and production going forward. He spoke at a JP Morgan conference. there are several stories that can be found on Google News, but here’s a link to a Reuters piece that neatly sums things up. Here is a link to Aspire Aviation’s synopsis.

Among other things, Albaugh said Boeing should deliver 70-85 787s and 747-8s, roughly evenly split between the two, or about 35-42 of each airplane. Jon Ostrower also Tweeted that the plan is to deliver the last re-worked 787 in 2014. Some may recall that Boeing’s Scott Fancher, at the time the head of the 787 program (now heading up 777), once said it would take “years” to complete the rework on the plethora of 787s lined up at Everett’s Paine Field. Ostrower also Tweeted, quoting Albaugh, as saying the first “clean” 787 will be line #66 (it had been forecast to be #63).

The other key point is about the delamination. While this has gotten a lot of high-profile attention, particularly in the context of the overall 787 program difficulties, independent sources we checked with tell us that while this is another annoying and embarrassing event for Boeing, the fix in relatively simple and the problem not particularly consequential. Boeing, of course, has said as much but skeptics continue to question Boeing’s credibility due to the history of the program often turning out to be worse than Boeing’s statements. Case-in-point is Boeing’s continued insistence that it will meet the goal of producing 10 787s per month by the end of next year and the disbelief expressed by every aerospace analyst and consultant we’ve seen. (Granted, there may be some who accept the goal as doable, but we’ve not seen them.)

Separately, an interesting public dispute between Air India, a 787 customer, and Boeing emerged. Air India says Boeing agreed to pay $500m for delays of 27 787s. Albaugh says that’s news to him. We ask, what precisely did Air India say? The news reports are too ambiguous. Did Air India say cash compensation or that Boeing is paying $500m in compensation, which, of course, could take many forms such as discounts, services, parts, etc? This would make Albaugh’s statement that no check is being written correct. So it goes….

Our choice for momentous event: IAM-Boeing contract

Note: Highs and Lows for 2011: see AirInsight.

In our previous post, we gave readers a choice of the most momentous event for 2011 for Airbus and Boeing; and who was the most influential person for the year and what would be the predictive momentous event for 2012.

We agree with three of the four readers’ choice but disagree for the momentous vote for Boeing. We think it was the IAM-Boeing contract agreed to nearly a year ahead of the amendable date of September 2012. This agreement extended a new contract for four years and is heralding a new era of cooperation between the union and the company.

Here’s why we think this agreement beats out the 787, the readers’ choice, as Boeing’s most momentous event in 2011.

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Odds and Ends: MAX prices, Albaugh on MAX, BBD on CSeries

737 MAX: Boeing has ann0unced the prices for the MAX and Reuters has this story comparing the competition with NEO:

Airplane Families 2011 $ in Millions Average
737 Family
737-600 59.4
737-700 70.9
737-800 84.4
737-900ER 89.6
737 MAX 7 77.7 (+6.8)
737 MAX 8 95.2 (+10.8)
737 MAX 9 101.7 (+12.1)
747 Family
747-8 332.9
747-8 Freighter 333.5
767 Family
767-200ER 151.5
767-300ER 173.1
767-300 Freighter 175.4
767-400ER 190.2
777 Family
777-200ER 244.7
777-200LR 275.8
777-300ER 298.3
777 Freighter 280.1
787 Family
787-8 193.5
787-9 227.8

What’s interesting of the MAX prices vs NG is the price premium of up to $12m, nearly twice that announced by Airbus for the NEO. Recall, too, that Boeing dissed the Airbus plans to charge a premium for the NEO; Boeing used the NEO premium as a talking point to promote the value proposition of the 737NG.

Boeing: Jim Albaugh, appearing at a Reuters event, says Boeing expects to begin converting the 948 commitments to firm orders very soon. Who are the commitments? Only four are announced out of 13 customers.

We’ve listed most of them before. We now understand that there are five top lessors who have committed (only one has announced). We’ve previously identified GECAS (no surprise here). We knew of another but did not have the name. ILFC, ALC and CIT are obvious candidates but we don’t have definitive information that these are the others.

Announced firm order

  • Southwest Airlines

Announced commitments

  • American
  • Lionair*
  • Aviation Capital Group

Lionair says theirs is more than a commitment while at the same time saying it won’t be “firmed” until January. The announcement was in November and it is not on the Boeing order list yet.

Unannounced but we’re comfortable these have committed:

  • GECAS
  • Three other lessors
  • COPA
  • GOL
  • Norwegian Air Shuttle

That’s 11 of the 13. We have heard the names of the other two but aren’t sure enough of them to publish them.

Bombardier: Pierre Beaudoin, president of the Canadian manufacturer, gave an interview to the Montreal Gazette on the challenges facing the company on the new CSeries. Hints of a six month delay are becoming more frequent.

Southwest Airlines: For those still wondering, it’s now official: Boeing and Southwest agreed to transfer AirTran’s outstanding order for 53 737s to Southwest, according to an SEC filing. Southwest also canceled purchase rights of its own for 20 737s as part of the order for 58 737-800s announced at the same time the MAX order was announced.

Softening Freighter Market: In another worrying sign about the global economy, Cathy Pacific has deferred to Boeing 747-8Fs to 2013 from 2012, according to AirWise. Global cargo demand is often a leading indicator of passenger demand.

Embraer forecasts a “crisis” in the Brazilian economy next year but an increase in commercial aircraft sales nonetheless.

IAM-Boeing, the day after

Here are several stories on the day after the historic IAM-Boeing contract vote. The importance of the success of this vote cannot be understated.

CNBC interview with Jim Albaugh.

Seattle Times, with comments from IAM 751 president Tom Wroblewski.

Washington Post.

The Street.com.

Odds and Ends: Frontier Airlines, first 737 at rate 35, Embraer

Frontier Airlines: At the Paris Air Show, Republic Airways Holdings ordered 80 A319/320neos with CFM LEAP engines, and the order was touted as the death knell by some for the Bombardier CSeries–also ordered by Republic for Frontier (40+40). As we wrote at the time, the Airbus/CFM deal was clearly a financial bail out for Frontier, which leased Airbuses from GECAS and had maintenance agreements with CFM. The leases and maintenance agreements were restructured for the ailing airline, and Airbus agreed to contribute a modest amount of cash to the airline.

We were of the opinion then–and are more convinced now–that Frontier won’t survive t0 take delivery of either the Airbus or Bombardier orders. It’s squeezed between United and Southwest airlines at Denver and between Southwest and Delta at Milwaukee. This article in the Denver Post neatly summarizes the current situation.

Will Frontier’s likely demise kill off the CSeries? Not hardly. We would be willing to bet BBD is double-booking these order positions. Doing so against weak airline orders is common practice among the OEMs.

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