Risk Adjusted Business: Aircraft and leasing values

By William Loh, International Aviation Advisors and

Dr. David Yu, CFA, Senior ISTAT Appraiser, AAVA Group, NYU Shanghai and Stern

Special to Leeham News

Oct. 3, 2023, © Leeham News: Investing in aircraft has become increasingly popular over many decades now, and for good reason.  The returns can be most attractive and well-chosen assets tend to hold their value well over the medium term.  Some of them have the option to extend the useful life out to 40 years or more in a freighter conversion.

As with most investments though, owning aircraft involves risk and requires subject matter expertise to avoid surprises and pitfalls.  Some of this will involve aircraft selection, understanding industry dynamics, and incorporating these into the modeling of future values/lease rates and equity returns, which have been a focus of ours for several years.

Rather than the traditional method of producing bi-annual static forecasts of future values, our approach has been to develop a simulation model of possible future outcomes.  This results in a market-driven probability distribution of the future asset value, rather than a single point forecast (rarely achieved in practice).  Most traditional forecasts are discrete points including the classic high/low/base versions. Our forecasts are updated whenever it is appropriate based on market changes.

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Analysis: With Gentile out at Spirit, here’s what Shanahan’s hiring likely means

By Bryan Corliss

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Oct. 2, 2023, © Leeham News – Tom Gentile is out as CEO of Spirit AeroSystems, the victim of a number of serious production missteps and a failure to lead the Tier 1 supplier into a stronger position following the Covid-19 pandemic and the grounding of Boeing’s 737 MAX. 

Interim Spirit AeroSystems CEO Pat Shanahan.

The new interim CEO is Pat Shanahan, a long-time Boeing and Pentagon executive who has been serving on Spirit’s board since 2021. 

Spirit said its board is conducting a search for a new chief executive.

  • Markets respond to news
  • Shanahan faces huge challenges as CEO
  • Shanahan’s resume fits Spirit’s need 
  • Our takeaway: What this means for Spirit’s future

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Mammoth quietly drops trade secrets theft lawsuit

By the Leeham News Team

Oct. 2, 2023, © Leeham News: Mammoth Conversions quietly dropped its long-running trade secrets lawsuit against Sequoia Conversions, a competitor, for alleged trade secrets theft.

Mammoth and Sequoia settled and dropped the lawsuit, with each side paying its own costs, on Sept. 8. The case was filed in the US District Court in Southern California. Sequoia’s David and Wayne Dotzenroth were also defendants. The action against them also was dropped. The case was scheduled to go to trial in January.

Mammoth previously dropped its lawsuit against the University of Wichita’s NIAR engineering center and Split Rock Aviation, a consulting firm working with Sequoia. Each side bore its costs in these dismissals.

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Analysis: Boeing’s options for Spirit AeroSystem

Breaking News: Tom Gentile, the CEO of Spirit, is out. He’s been replaced by Pat Shanahan, a Spirit Board member, on an interim basis while the search for a permanent CEO is underway. Shanahan is a former Boeing executive and former deputy secretary of the US Department of Defense. This story will be updated.

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By the Leeham News Team

Oct. 2, 2023, © Leeham News: Boeing is in another bad spot with a major contractor and the depth of the problems is quickly becoming apparent.  Spirit AeroSystems in Wichita has been seriously underperforming with inspection escape after inspection escape seriously hampering Boeing’s ramp-up of the 737 rate.

Spirit isn’t making money on Boeing 737s and 787s.  Boeing is charging Spirit for rework, and a glance through Spirit’s second-quarter earnings report was full of items where they did not have a firm handle on their losses and future exposures attributable to operations with Boeing.

Spirit’s repeated quality and production problems led to speculation that Boeing might buy Spirit, to bring direct control over the Wichita (KS) plant back in-house. Spirit was once “Boeing Wichita.” It was sold on orders of then-Boeing CEO Harry Stonecipher. The resulting spin-off, Spirit, remained Boeing’s supplier for all the commercial airplanes then in production. Nose sections were supplied for all but the 737. Spirit produced the entire 737 fuselage and does to this day. Boeing has a workforce in place at Spirit to help sort out the problems.

At the Paris Air Show, Boeing shot down the speculation, saying purchasing Spirit wasn’t going to happen. Since then, more quality control and production issues emerged on the 737. Two-thirds of the 737s in inventory and an unknown of aircraft in service or new production models are affected.

Speculation over the possibility of Boeing purchasing Spirit continued. Doing so would not be simple, even if Boeing was so inclined.

LNA takes a deep dive into the issues.

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Bjorn’s Corner: New aircraft technologies. Part 32. Design for production

By Bjorn Fehrm

September 29, 2023, ©. Leeham News: We are discussing the Detailed design phase of an airliner development program. We have talked about program management methods, development techniques, and tools for Detailed design.

But there is one area that is more important than even the aircraft aerodynamic, structural, and systems design for a new Heart-Of-The-Market aircraft: how to produce it in higher volumes and at lower cost than before.

Figure 1. The production of an A350 composite airliner. Source: Airbus.

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Further developments of Airbus’ A321

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By Bjorn Fehrm

September 28, 2023, © Leeham News: We recently looked at the latest developments around Airbus’ A321XLR certification. When the certification is completed, it extends the A321 to a true Trans-Atlantic airliner.

After the A321XLR, what will be Airbus’ next development? A clean sheet replacement for the A320/A321 series won’t be needed until Boeing replaces the 737 MAX family next decade, and we have described why we think an A220-500 will not happen anytime soon.

The A320/A321 is Airbus main source of revenue and margin. It would, therefore, be a logical focus for further development to keep the success going into the next decade. But what can be done? Is the A321neo with the A321LR and XLR the end of the development of the A321? We use our Airliner Performance and Cost Model (APCM) to analyze A321 fundamentals and look at how to increase capacity and efficiency further.

Figure 1. The Airbus A321XLR. Source: Airbus.

  • From launch 40 years ago, the A320 family has increased capacity by 66%, more than doubled range, and reduced fuel burn per passenger mile by over one-third.
  • What can be achieved over the next 20 years and how?

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Pontifications: “We’re sick and tired of new technologies:” Avolon CEO

By Scott Hamilton

Editor’s Note: As Airbus and Boeing consider new airplanes, their current generation aircraft are plagued with technical issues. The engines on the A320neo and 737 MAX families continue to have problems years after entry into service. The Boeing 787, which had ground-breaking technology when it was designed, has production issues. Flight testing early on revealed technical problems with the engine on the 777X, prompting the president of Emirates Airline to publicly suggest he won’t accept delivery until the engines are fully “mature.”

Aviation Week’s Check 6 podcast last week examined Boeing’s path toward a new airplane. Boeing CEO David Calhoun insists on waiting for new technology. But “new technology,” while in theory is a great idea, the phrase also scares people. LNA reported on this in March 2020. We’re reposting this article from then.

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By Scott Hamilton

March 16, 2020, © Leeham News: “I can tell you from our perspective, we’re kind of sick and tired of new, new technology. It’s not proven to be the home run.”

This blunt assessment comes from the chief executive officer of the big aircraft lessor, Avolon.

Domhnal Slattery

Domhnal Slattery, the CEO, was giving his critique of whether Boeing should launch a new airplane once the 737 MAX crisis is over. (Update: Since this interview, Slattery retired from Avolon.)

Boeing was on a path to decide whether to launch the New Midmarket Airplane when the MAX was grounded one year ago this month.

Airbus was waiting for Boeing to move before deciding how to respond.

  • Airbus and Boeing should “stick to their knitting.”
  • Focus on incremental improvements for now.
  • 2030s to 2050s will be the next big advance in technologies.

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eVTOL operator profitability: an elusive dream?

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By Judson Rollins

Sept. 25, 2023, © Leeham News: As the hype grows around electric-powered short-haul air mobility, questions linger around the industry’s ability to be profitable without government subsidy.

LNA’s Bjorn Fehrm has written extensively on the cost hurdles facing eVTOL operators. His analysis predicted operating costs of approximately $2.14 per seat-mile, significantly higher than startup Lilium’s 2021 estimate of $1.75. But even the latter is a high bar to clear, as this article will show.

Source: Lilium.

Other startups have been pitching business plans with even lower unit costs. But, as aviation consultant Kevin Michaels pointed out last year, such plans often rely on impossibly high assumptions of load factors and/or utilization.

For instance, Lilium’s cost projections are predicated on 10 hours of average daily utilization. By comparison, US DOT data from 2019 show turboprop utilization averages 7.3 hours, small regional jets average 6.2 hours, and large regional jets average 9.4 hours.

  • Helicopter services demonstrate the difficulty of making urban air mobility profitable.
  • Comparing eVTOL costs to potential revenue highlights a lack of markets.
  • Market forces will allocate scarce pilots to where they generate the most revenue.

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Bjorn’s Corner: New aircraft technologies. Part 31. Detailed design -3

By Bjorn Fehrm

September 22, 2023, ©. Leeham News: Last week, we discussed program management methods for the Detailed design phase of an airliner development program. While the modern Agile work methods suit smaller projects, the sheer size and complexity of an airliner project that involves hundreds of companies require more structured management methods with Agile used for areas where it’s suitable.

We now go a step deeper than program and configuration management and look at development techniques and tools for Detailed design.

Figure 1. The development plan for a new airliner. Source: Leeham Co.

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The Airliner Production Problem, Part 2

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By Bjorn Fehrm

September 19, 2023, © Leeham News: The Airliner OEMs can’t increase their production rates as planned after the pandemic, and it’s become clear it’s not a short-term problem. We started looking at the root causes of the difficulties last week.

We looked at the complex puzzle the production of a modern airliner is and the importance of the learning curve for the result. Now, we analyze the effects that the pandemic had on airliner production and why things are not the same as before the pandemic.

Figure 1. The Boeing 737-8 is sold out for years. Source: Boeing.

  • Last week, we looked at the importance of skills in the supply chain and their influence on production rates.
  • Now, we analyze what happened with skill levels in the industry before, during, and after the pandemic.

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