Odds and Ends: 737 rate hike on cash flow; How the Chicago ATC fire impact unfolded; New PW engine chief

737 rate on on cash flow: The Seattle Times has a good article that described the impact on cash flow the decision by Boeing made to boost 737 production to 52/mo in 2018. The rate hike comes at a time when we believe production rates on the 777 Classic will be bottoming out to perhaps as low as five per month, which of course will negatively affect cash flow at Boeing.

We expect Boeing to further increase production rates of the 737 in 2019. The 777X production will just be in its infancy, with entry-into-service planned for 2020. (Information continues below the picture.)

Later this month, we will unveil a new, updated Leeham News and Comment with a combination of paid and free content. Watch this space for more information.

Later this month, we will unveil a new, updated Leeham News and Comment with a combination of paid and free content. Watch this space for more information.

The decline in production rate of the 777 Classic, which we think will happen in 2017 and a like rate reduction for the 747-8, which we believe will occur as early as 2016, represents the reason why Wall Street analysts are turning more and more bearish on Boeing stock.

Although cash flow currently is decreasing as research and development funding declines, we believe Boeing will have no choice but to launch a new airplane to replace the slow-selling 737-9 and meet the increasing demand for a 757 replacement. The Airbus A321neo outsells the 737-9 by about 3:1 and field performance of the 737-9 is inferior to the A321neo, further inhibiting sales. We expect additional PIPs (Performance Improvement Packages) to the A321neo that will increase its desirability over the 737-9.

With a near-dead 737-7 MAX (only 55 sales to two airlines), and the recently launched 737 MAX 200 (which wags are already calling the MAX 197) that will be a high niche airplane, Boeing faces a MAX airplane that will largely become a 1.5-airplane family. Thus, not only will R&D spending have to increase for a replacement for the 757 and 739, a replacement for the 737-8 and MAX 200 will be required on its heels. We see Boeing completely abandoning the 100-149 seat sector (more about this soon).

  • Richard Aboulafia gives his take on the Boeing rate hike here.

How Chicago ATC event unfolded: Bloomberg news has a good piece about how the fire at the Chicago Aurora Air Traffic Control Center unfolded and the minute-by-minute impact on air traffic.

New PW Chief: A new CEO of Pratt & Whitney’s commercial engines has been named, reports Reuters.


27 Comments on “Odds and Ends: 737 rate hike on cash flow; How the Chicago ATC fire impact unfolded; New PW engine chief

  1. Boeing should concentrate on the economic sweet spot of the future, a 33 row x 6 =198 seat aircraft. By the time the MAX 8 needs replaced it will be too small and 200 seats will be the mode. Probably a 44m CFRP wing which will require airports to restructure for the future.

  2. Right, Boeing needs a new small airplane . I have been expecting the first of a new Boeing family for 2025– at about 200-250 passengers, maybe 2 aisles.

    What could make Boeing’s life very difficult would be an Airbus 240 passenger A321 SR neo 2 for say 2024 initial service, production ramped up by 2026 — with a new more efficient/ smaller/ lighter composite wing, new smaller higher bypass ratio engines, 2200 -2500 nm short range and a weight reduction program– e.g., lighter landing gear etc. — for great seat mile costs serving hundreds of high density city pairs worldwide. A nice complement to the A320 neo product line.

    • The graph makes the case that 80% of aircraft only need 1000nm range. Does the graph show that engines and structure are oversized? With the quest for efficiency in winglets and tailcones, I’m surprised there isn’t a percentage point to be gained in building a light optimized 1500nm range aircraft, instead of the heavy 3000nm MAX and NEO, where there appears to be no shading on the graph.

    • I think this is an excellent case of selective use of data to reinforce a pre-estabilished position. The whole presentation: <>. One thing to note – listen to his parting words: … “Is there a market for a very large, short range aircraft”.
      If we look at the same presentation at the 2011 slide (not 2008) with both single and twin aisles (I don’t know how to load it so perhaps some help here) you see a couple things:
      1) There is a steady trend where the median pax count is rising over time, and from 2008 it has risen from something like 145 pax to 180 pax in 2011(based on YouTube and a straightedge). This directly follows the trends Scott has pointed out where the shift is to the larger (A321, B787-800/900).
      2) The somewhat normal distribution across shorter range SA an TA is right around 200 pax. However there is a big gap right at 200 pax that shows up as those planes (A300, 757, 767) have been retiring. The data isn’t truly an independant variable – the chart can only show pax counts where airplanes actually exist.
      There is a clear market between 180-300 pax with ranges less than 2500 miles, perhaps not as big as 125-175, but more than big enough for a good program, especially if there isn’t a direct competitor. So do you want to be one of several players in a big market or the sole player in a medium sized market? A plane optimized for shorter flights needs less cruise speed optimization and better performance in climb and descent at speeds closer to 250 Knots than .85 mach.

    • The bottle you live in forms you.

      the frames available on the market have distinct sizes.
      Your graphic thus might just reflect the aircraft sizes available thus showing less of the real demand as filtered by what airframers think fits.

      Now how could we find out what is optimal to support apparent demand.
      i.e. how do I evaluate multiple flights between the same route into an optimised combo of capacity per flight / number of flights ?
      IMU the extreme example is 757 utilisation. (US)-airlines have these frames so they use them in a low capacity per flight, high frequency mode.
      Others have different (bigger) gear showing a different pattern.

      • I think the point you make in your first paragraph is correct – a “valley” appears right near the middle of the distribution from 2008 to 2011, the time that those size airplanes were going out of service. But you can see the underlying distribution.
        Your second point I think is totally off (I’m guessing you don’t fly often in the US). The airlines use their 757’s (and A321’s) domestically on routes they can fill them such as larger city-hub pairs (Like DL ATL-SEA, ATL-DFW) and they are packed, even on red-eyes. The thinner routes are served by 737’s, A320 and MD-80’s/90’s.

        • I was thinking of choking LHR with 757 from the US. ( a route that sees a (wide) range of capacities per flight offered.

      • Oh so true.

        I really don’t understand why people keep mentioning this imaginary “market sweet spot” BS. Airlines can only choose from certain distinct aircraft. If they can have a 737Max 200 instead of a regular 737Max 8 or more seats in their A320s, both for a small surcharge, only mildly affecting performance but yielding considerable revenue opportunities, they will of course take the latter aircraft. It all depends on the available frames.

        There is no such thing as a market sweet spot. If aircraft were available for any incremental seat count and any incremental mission range, each exhibiting optimum fuel burn for their design specifics, there would most certainly be a normal distribution of characteristics between aircraft sales (maybe except for accumulations just below seat counts where one more cabin crew becomes necessary).

    • The market sweetspot in the next 20-30 is totally relevant if you have to specify a new NB aircraft. Something Boeing cannot postpone for too long any more.

      If, as some suggested, Boeing would optimize the design around 180-250 people, Airbus will come 3 years later with something optimized for 160-230 people, 10% lighter and cheaper to operate & take the bulk of the market. Like the A350 will take the bulk of the 300-400 seat long haul market if Boeing keeps believing in their current product line up.

      Those are NB scenarios that go around in the bright minds in Chicago and Seattle.

  3. Well we can guess program execution at P&W was the factor.

    When you know your job is in jeopardy you start looking for another one!

    Hopefully the new guy does a better job.

    Military side is probably next, not happy relations with the F-35 engine debacle (both the failure and the sole source price foot dragging)

    C17 Side Note: Flight Global reports Australia will be taking 2 for sure and possibly 4 of the white tails.
    Hate to see that airplane go out of production, nothing else like it and getting it back probably impossible le (or the world situation so bad to need to that I don’t want to think about it)

    • I’ve always felt the the RAF could probably do with a few more C17s as the existing ones are doing far more work than was planned. Probably won’t happen though, maybe some of the load will be reduced when the A400M comes into service.

  4. I agree with you on a 737-9 replacement. I beleive it will be launched in the 2018 time frame.The launch of the new narrow-body ensures Boeing will be back in the state legislature for more taxpayer largess, and that the IAM’s 2016-2024 contract extension will never see expiration without another major alteration to Boeing’s benefit. The threats could begin as soon a negotiations with SPEEA over their 2016 contract commence. It’s not to early for Boeing to make the threat and allow a long period of agony. I predict that the State will, once again, offer Boeing whatever it wants. The IAM international will simply impose a contract on it’s members with, or without the non-binding formality of an actual vote. SPEEA seems beaten already.

    But with the decline of 777, the nascent nature of the 777x, the departure of 747, and current profligate spending, Boeing’s cash position will be weak, and it will have to fund a new aircraft largely with loans and bonds if it is to be done.

    As part of the current defense move, I also predict that the portion of the P-8A work done on East Marginal way, that is, mission equipment install, will be moved out of Seattle. Less likely, but still possible, would be for the same work done on the KC-46 to be moved out also, leaving Washington with only the basic airframes and systems work.

    This assumes Washington will even be in the running for a new narrow-body.. Continues issues in Charleston would mean yes. If that act is substantially cleaned up, the Washington may fall off the radar completely.

    The current consist if the Board of directors indicates that even if McNerney leaves, they will select as close to a clone of him as possible, so don’t look for any changes in philosophy there.

    As to 737 rates, nobody should be comfortable. What rises also falls. So will the economic benefits. The governor and the PNAA put far to much stock in the benefits, and have no plan whatsoever should production rates tumble as we have seen time and time again. The laws of gravity, and the business and the aerospace cycles are manipulable, but only to an extent. And that spring is wound pretty tight against the global economy and world events right now.

  5. You have to have courage to launch a new aircraft in the face of the issues, BM (Boeing Managment of couerse!) has none. When you start loosing money wiht that kind of regime you eat your planting seed.

    The board should be asking themselves what got them into this position in the first place?

    Lack of a balanced company plan is the answer, McNerney being the worst expression of that.

    And as often happens, when you set yourself up for it the perfect storm hits.

    Stay tuned, they are in for a rough ride, like Ford, they need a complete shakeup but that only happens when the house is about to slide over the edge of the cliff. Note how well Ford is doing!

    there is only one current bright spot, the 787 is finally doing well, but also its going to be a drag for 10 years due to the BOF (burdon of failure) management hung on it.

    Note that the tech failures are relatively few if dramatic, production failures are all attributed to management shenanigans (in pursuit of a cheap production operation) not the production in and of itself (bits and pieces scattered all over the globe and the fastener debacle are all management caused issues)

    If Boeing gets into deep trouble can you see the union doing an all hands on deck like the FAA personal are doing at Chicago?

  6. Interesting time line on the Chicago Center fire. Thank God no one, except Howard, got hurt. Great move by the TRACONs for helping to pick up the work load after the Center went silent.

  7. I am impressed by the recovery and the employees getting behind and maybe ahead of the curve in shifting around.

    Well done Chicago and all the centers working to patch it all together and keep the airplanes moving.

    Longer term there is the design issues of separating out the facility(ies) into more separation and segmentation so that no single incident or act can take out the entire operation. Smaller facilities should be split in half both and large physical separation (as well as split backup power and communication system)

    Larger facilities should be segmented into quarters and same large physical separation and backup.

    Completely separate buildings would not be out of line for the half or quarter all on a campus with spacing. Sabotage , direct attack and or hurricanes and earthquakes are some of the things that should be considered.

    Security is an issue though after the White House and other incidents that’s obviously not something anyone really pays more than lip service to. The more lip service seen the more holes can be poked through.

    • Look beyond the ratings and see what is being written. BofA Merrill Lynch lowered its rating before BRG (to Neutral), Wells Fargo began talking about rate reductions way back in May, UBS predicts rate 4 on 777 (worse than Buckingham) and others also are sounding increasingly bearish.

    • Boeing is looking at 777 rate reductions. Ergo the cash cow becomes much less so

      At the same time they are ramping up expenses (starting now actually) for the 777X

      Throw in the shaky idea of producing your way through that with 737 rate increase (which may well cause the opposite effect, i.e. cause a price crash)

      While the 787 finally seems to have gotten its feet pretty much under it (still travel issues), its not going to actually earn any money for a long time . So its a successful drag for a long time to come.

      And the issue on twin aisle overproduction with 787, A330NEO and the A350 all involved and headed to something around 30 a month combined.

      And you still have the 737 to replace. As the size needs shift up to the A321 size, that leaves the 737-8 behind, the 737-9 at some reduced disadvantage and no really product to compete in the A321 size.

      That means a management move and you have to question the commitment as we saw before the 787 came out. Massive labor turmoil if they go about it the same way as the 777X production (at least under current BM) .

      Defense is loosing the C17, F18 (likely) and the F15. You would want a sharp manager in the leadership not what you have in the eat your seed corn approach. Yet to see if the P8 can actually prosecute a submarine as good as a P-3 (that of course is in the future even though supposedly it’s a P-3 replacement aircraft)

      If I can see rough waters then the financial community can.

  8. Look at it in some perspective. In 2014, Boeing is producing 750 aircraft a year. It is in the middle of developing the tanker and starting the 777-x derivative plus finishing the 787-10 and 737-MAX derivatives. It is making a profit.

    In 2018, Boeing will have a production rate of 14 787s and 52 737s a month. It will produce 4-8 777s a month. It will have 1-1.5 747s a month (I/F). It will be producing 767s at 3-4 a month for the tanker program. Worst case 12 x 74 is roughly 888 aircraft a year up to 12 x 80 (roughly 960 aircraft a year).

    The 787 is supposed to go cash flow positive per plane in 2015. Certainly the 737 and 777 are cash flow positive. You would think by 2018 there is enough profit from these aircraft to run the company and provide research and development for a derivative (777-x) that is nearing completion in 2019 and still have resources for starting a new NSA effort aimed for 2025. Profit margins in a duopoly are still good enough that neither company is losing money, even though some programs are relatively poor performers (747-8, 380). Both depend on cash cows (320/330)(737/777). Ideally, the 350 and 787 will replace the 330/777 as they fade and are replaced either with a neo or a rewing/reengine replacement.

    Not sure why the sky is falling (on either manufacturer)…

    • Mike you are correct but analysts do not evaluate in this way. Their concern is that the production value of the corporation will drop significantly compared with the present – most notably with Defence (tankers alas do not make the profit a fighter does), but also with the research versus income trends in the Commercial.

      The 777 programme goes cash negative as research costs mount for the -x and sales dwindle, the 787 may be positive per delivery in 2015 but nowhere near for programme. The big question is the 737 – yet if the concern is company wide income balance and therefore stock price Boeing management may well delay the replacement programme until far too late.

      • I would like to contest that.

        Boeing is “showing” profit due to programme accounting. Currently they don’t make real profit. Have a look at their alternate bookkeeping numbers. As I wrote earlier prog. acc. is a habit forming drug 😉
        If the published significantly increased rebates that had to be given for 737 and 777 to achieve sales are realistic then the cash cows will give a lot less “milk” in the future.
        Add reduced production numbers for the 777-300ER “endtime”.

        ” .. 787 may be positive per delivery in 2015 …”

        Would be interesting if Boeing achieves that on real numbers or by further deferring some cost into the future. I expect that the accounting block will grow beyond 2000 for the 787 to show overall profitability.

        • In a duopoly, both will make money enough to generate cash flow. Realistically, the 737 and 320 are very close and sell pretty well. Presumably margins are solid and increasing production rate generates some lower production cost benefits. They are now effectively a commodity product designed to make entry into the market for newcomers difficult.
          As the 787 reaches break even and the 380 reaches break even (2015) they both will provide cash flow positive (albeit to me there is more likelihood that the 787 will generate more cash flow as there is more demand for 787s then 380s at the moment). The 330neo and the 777-300 lines will produce cash flow as the lines are paid for (presuming 330neos sell well and 777-300s carry forward until 2018).

          It’s all about cash flow…the 737 and 787 and declining 777-300 will carry Boeing until 2020 when 777xwill take over. The 320 and 350 and 330neo will carry Airbus until it decides to go after an NSA (maybe), 330 replacement (maybe), 350-1100 (maybe), or 380-900 (maybe but doubtful to me IMHO)

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