April 12, 2016: Prices for Boeing and Airbus planes are set through the remaining decade, meaning any cost-cutting being pursued by Boeing will flow straight to the bottom line, a new note issued yesterday from Bernstein Research concludes.
“Pricing on more than 80% of deliveries is already set through the decade,” the note says. “Despite the competitive pressures, however, the reality is that most of the competitive situations are about deliveries in the next decade. This creates a situation in which most of every dollar of cost savings will flow to margin during this decade because most of the planed deliveries are already priced. The same is true for Airbus.
“This has not been the case in prior cycles because backlogs then tended to be only about three years of production, rather than the eight years that we see today. In those cycles, Airbus and Boeing would cut costs, but then compete away the value. That price competition will now be happening primarily on deals for delivery after 2020,” Bernstein says.
Bernstein’s new note is an update following several developments in Boeing news: lower 2016 guidance, a particularly low-price (but one-off) deal for 737-700s with United Airlines and a planned workforce reduction of 8,000 this year at Boeing Commercial Airplanes.
Bernstein views some over-reaction to these and the note attempts to put some context to the developments.
“787 manufacturing continues to focus on cost reduction,” Bernstein writes. “For example, new drilling equipment has been installed in final assembly in Everett, which takes drilling time down by 50%. Two-thirds of the 787s in production are now -9s, which have easier wing-body and section joins than do the -8s (in addition to -9s being higher priced), as well as simplified interior designs.
“777 production will ramp down to 7/month (from 8.3/month) in 2017. We expect lower pricing on new 777 orders, which are supposed to be offset by lower costs that come from implementing 777X changes early. Such changes appear to be underway, with 777-300ERs already being delivered with fuselages from the new automated 777X line,” the research firm says. “We continue to model 777 deliveries falling to 5/month in 2018.”
Bernstein also tamps down prospects of a new Middle of the Market airplane any time soon, an important consideration when it comes to use of free cash flow and research and development expenditures.
“Expect no new ‘middle of the market’ airplane to materially reduce cash flows or increase risk during the next five years,” Bernstein says. “Boeing is actively looking at different options that could serve as a 757 replacement, but these are studies intended to inform a long-term product strategy (post-2025 EIS). This work involves looking at a family of aircraft between today’s 737 and 787, rather than an approach to address competitive issues with the A321neo.
“If Boeing concludes that there is a significant issue with the 737MAX-9 versus the A321neo, a shorter-term approach would be needed. This could be a further stretch of the MAX-9, although that is not particularly attractive, as it would require a new landing gear. So far, such a move does not appear to be an imperative, since the narrowbody market is split 50/50 through 2020 and the A321neo is not the dominant variant choice so far.”