Boeing simply can’t afford a cash deal for Spirit AeroSystems

By Scott Hamilton

Analysis

June 25, 2024, © Leeham News: News that Boeing over the weekend wanted to acquire Spirit AeroSystems through a stock rather than a cash transaction should surprise absolutely nobody.

Anyone following Boeing’s financial performance and weak balance sheet could see this one coming.

Boeing’s financial condition is a mess. Frankly, it’s unfathomable that the credit agencies still rate Boeing as investment grade, albeit at the lowest level.

Boeing’s production rate is a mess and so is its quality control. There is no end in sight. There is not assurance when certifications of the 737-7, 737-10 and 779-9 will occur. Boeing apparently shifted engineers from its X-66A Truss Brace Wing project these programs, things are so bad. This shifts development of a new airplane to the right by at least two years.

When it comes to reacquiring Spirit, Boeing simply can’t afford to pay cash for the company, which at the close of the stock market yesterday had a market cap of $3.8bn+. Essentially, in our view, it’s the same reason Boeing walked away from the Embraer joint venture in April 2020: it could not afford the $4.5bn cash price tag. (The decision by an arbitrator of whether Boeing’s walk was justified is expected within the coming weeks or months.)

Boeing can’t afford to buy Spirit. We’re not sure Boeing can even afford to acquire Spirit in a stock swap. The  money required to bring Spirit into shape is unknown, perhaps even to Boeing.

This is a mess that keeps on giving.

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Airbus lowers 2024 guidance amid A320/A321 supply chain and space system challenges

Bjorn Fehrm

June 24, 2024, © Leeham News: Airbus issued a press release today where it lowered guidance for 2024.

The release highlighted two areas as the drivers for the update:

  • Larger-than-expected supply chain issues for the single-aisle segment (A320/A321), where delivery ramp problems in engines, aerostructures, and cabin equipment mean that the guidance for 2024 goes from 800 aircraft in total to 770. Because of this, the ramp to 75 A320/A321 deliveries per month has been moved out a year to 2027 instead of as previously forecasted 2026.
  • The Defence and Space Systems management has, after an extensive review, found schedule, workload, and sourcing challenges for certain Space telecommunications, navigation, and observation programs. Airbus has decided to record charges of around € 0.9bn in the H1 2024 report to cover the problems in these programs.

As a result, Airbus has decided to update the 2024 guidance ahead of its 1H2024 results release, which is on 30 July:

  • Around 770 commercial aircraft deliveries (was 800).
  • EBIT Adjusted of around € 5.5 billion (was €6.5bn to €7bn).
  • Free Cash Flow before Customer Financing of around € 3.5 billion (was € 4bn).

Airbus adds the usual caveats to the guidance:
The Company assumes no additional disruptions to the world economy, air traffic, the supply chain, the Company’s internal operations, and its ability to deliver products and services. The Company’s 2024 guidance is before M&A.

Trent 7000 reliability under the spotlight

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By the Leeham News Team

June 24, 2024, ©. Leeham News: The Rolls-Royce Trent 7000 is the exclusive engine for the A330neo and the seventh in Rolls Royce’s Trent series.

Having entered into service in early 2019, the engine has already surpassed one million flying hours.

The powerplant – which is the Trent 1000 but with bleed air features vs the electrically-based Trent 1000 – features efficient hollow Titanium fan blades enabling a fuel burn improvement of 14% per seat compared to previous iterations of the A330.

Launched by Airbus in July 2014, the A330-900 Neo is powered exclusively by Trent 7000 engines. Credit: Airbus

However, there have been issues relating to the reliability of the Trent 7000 which have complicated the A330neo’s early years of service.

Industry insiders have told LNA that operators of the A330neo faced lower than expected time-on-wing for the powerplants, as well as a lack of spares that has impacted maintenance and return to service.

Experts say the protective coatings on the engine’s turbine blades have reportedly been a factor.

But RR strongly denies there have been any reliability issues with the engine.

A RR spokeswoman said: “Our fleet of Trent 7000 engines is performing exceptionally well, and has delivered industry-leading levels of reliability to our customers over the last 18 months.” Read more

Bjorn’s Corner: New engine development. Part 12. Speed change.

By Bjorn Fehrm

June 21, 2024, ©. Leeham News: We do an article series about engine development. The aim is to understand why engine development now has longer timelines than airframe development and carries larger risks of product maturity problems.

To understand why engine development has become a challenging task, we need to understand engine fundamentals and the technologies used for these fundamentals.

After covering the main thrust-generating device, which we can call a propeller, fan, or open rotor, depending on the application, we now look at the core, which provides the power to the thrust device. And there, we look at how we use the properties of the air as a gas to get it into a state that the gas turbine needs for different sections.

Figure 1. The gas turbine cycle. Source: Rolls-Royce: The Jet Engine.

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The all-important cabin. Part 4

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By Bjorn Fehrm

June 20, 2024, © Leeham News: We do an article series about the all-important cabin for an airliner. We have looked at different airliners and their cabins and how the seating differs widely depending on what market and customer segments the aircraft addresses.

If an aircraft is configured for the domestic market the seating increases by almost 50% compared with an international long-range aircraft.

We now look at what cabins to use for aircraft economic evaluations. These are not necessarily the same cabins that an airline would later use after selecting an airliner type.

Summary:
  • The evaluation cabin must not be the same as the cabins the airline plans to use.
  • Evaluation cabins are designed to minimize the skew that OEMs can introduce by making cabin rules fit “their” candidate especially well.

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Aircraft production woes stretch far beyond Boeing

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By Judson Rollins

June 17, 2024, ©. Leeham News: Estimating airplane delivery rates isn’t much more than a guessing game nowadays.

While many headlines point fingers at beleaguered Boeing and Spirit AeroSystems, aviation’s production woes are much more complex. Even in 2024, the labor shortage legacy of COVID-19 and raw material shortages exacerbated by the Russia-Ukraine war loom large over the industry.

Airbus struggles to deliver airplanes on time, and engine makers also see their deliveries constrained by supply chain issues.

Source: AFP via Aviation Week Network.

Summary
  • Boeing commercial production is far below advertised rates.
  • Airbus deliveries suffer from shortages of seats, other parts.
  • Embraer says deliveries would be higher without supply chain issues.
  • COMAC’s disruption opportunity is dampened by likely trade conflict.
  • Pratt and GE Aerospace slowly ramp up delivery of redesigned components.

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Bjorn’s Corner: New engine development. Part 11. Core cycle.

By Bjorn Fehrm

June 14, 2024, ©. Leeham News: We do an article series about engine development. The aim is to understand why engine development now has longer timelines than airframe development and carries larger risks of product maturity problems.

To understand why engine development has become a challenging task, we need to understand engine fundamentals and the technologies used for these fundamentals.

We have covered the main thrust-generating device, which we can call a propeller, fan, or open rotor, depending on the application. To drive the main thrust device, we need a lot of shaft power, which is provided by the core. We start with how the core, which is a gas turbine, generates power.

Figure 1. The core cycle compared to a piston engine cycle. Source: Rolls-Royce, The Jet Engine.

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Elliott’s plan for Southwest: new governance, curbed costs, monetize passengers

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By Judson Rollins

June 13, 2024, © Leeham News: Elliott Investment Management announced an activist shareholder campaign against Southwest Airlines’ board and management earlier this week.

The airline’s share price has declined 50 percent in three years and sits near its April 2020 value, one month into the COVID-19 pandemic. Elliott says this is due to poor board governance and day-to-day management.

Source: Elliott Investment Management.

“Southwest’s [board] has failed to hold management accountable for poor execution and has been unable to catalyze (or permit) the necessary strategic evolution,” Elliott wrote in a letter to the Southwest board.


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“Instead, the [board] has reinforced an insular culture and outdated thinking in the face of indisputable evidence that change is required.”

To gain a deeper insight into Elliott’s proposed ‘Stronger Southwest’ plan, LNA studied the firm’s letter and accompanying presentation and spoke with sources familiar with the situation.

Summary
  • Elliott blames subpar returns on insular, stagnant board and management.
  • Keys to restored profitability include curbing cost growth, passenger monetization.
  • New board, CEO with industry experience would drive business change.
  • Employee resistance is a likely headwind; will improved profit sharing help?

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Elliott takes 11% share in Southwest, demands leadership overhaul

By Judson Rollins

June 10, 2024, © Leeham News: Hedge fund Elliott Investment Management announced yesterday that it has a $1.9bn position in Southwest Airlines, comprising 11% of the company’s shares. It issued a letter to the airline’s board, calling for new directors, a new CEO, more executives from outside, and a comprehensive business review.

In its letter, Elliott wrote, “While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry.”

Source: Elliott Investment Management.

The announcement came as Southwest’s stock price remains near its April 2020 value, and management faces growing questions about excessive costs and middling unit revenue.

Elliott included with its letter a 51-slide presentation laying out its case for overhauling Southwest. One slide features a 2014 quote from founder and former CEO Herb Kelleher: “If things change faster outside your company than they change inside your company, you’ve got something to worry about.” Read more

Freighter market faces turmoil while passenger sector gets the headlines

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By Scott Hamilton

June 10, 2024, © Leeham News: Delivery delays of widebody airplanes are causing disruptions in freighter conversion plans as feedstock is retained for passenger operations.

IAI Bedek Boeing 777-300ER P2F. Photo: IAI Bedek.

Demand for passenger airplanes also is slowing Airbus’ plans for the A350 freighter, according to market intelligence.

Softening of the cargo market since the end of the COVID-19 pandemic also impacts the immediate need for converting airliners to freighters, sources say.

Although Boeing’s delays with the 787 and 777X get most of the blame, Airbus also gets some credit for the A350 program. Already, say potential cargo airplane buyers, the A350 freighter is looking at a delay beyond the 2026 entry into service (EIS) date. Uncertainties among Middle Eastern carriers Etihad and Emirates over the A350-1000 Rolls-Royce engine durability are also causing officials to rethink retaining Boeing 777-200LRs and 777-300ERs in service.

Certification of the IAI Bedek 777-300ER freighter conversion program is taking longer than expected. The reason: the negative halo effect dating to the Federal Aviation Administration (FAA) certification crisis with the Boeing 737 MAX.

It took Boeing 21 months to recertify the MAX after its grounding began in March 2019. The MAX 7 and MAX 10 still aren’t certified and aren’t expected to be until sometime next year.

Certification of the 777X, also affected by the negative halo effect of the MAX crisis, isn’t certified. EIS was intended to be in 1Q2020. Boeing has yet to receive Type Inspection Authorization (TIA) from the FAA, one of the final steps required before certification. Boeing officially hopes certification will occur next year. But quietly some within Boeing now don’t think TIA will come until 1Q2025. Emirates and Lufthansa Airlines, the first scheduled operators of the airplane, openly say they don’t expect deliveries until 2026.

The upshot: feedstock of the 777-300ERs for conversion companies is drying up.

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