Wells Fargo sees reasonable, risky production rates

June 7, 2016: Single-aisle production rates of 57/mo at Boeing and 60/mo at Airbus are reasonable when achieved in the near term but more problematic in 2019. Wide-body production rate hikes are risky.

This is the conclusion of a short research note issued June 1 by Wells Fargo Securities.

“Higher Rates Sustainable,” WFS writes.Aircraft deliveries have historically been cyclical, yet Boeing and Airbus have had flat-to-rising deliveries for 12 years–and both forecast higher near-term deliveries. The bottom line is that the OEMs’ forecasts can be reasonable in our view, assuming aircraft retirement levels and/or traffic growth are above historical rates. Therefore, we expect higher deliveries over the next several years, but think it is unlikely that the full 35-40% A320/737 production increase currently envisioned by the OEMs will be achieved by 2020.”


Boeing’s 737 factory in Renton (WA) is gearing up for 57 airplanes a month. It has the capacity to go to 63/mo. Boeing rendering.

“Based on near-term traffic growth estimates and the historical 3.6% annual removal rate, 2016-17 delivery projections are clearly supported,” WFS writes. “In theory, to bring deliveries into balance would require aircraft removal rates of only 2.4% this year and 3.4% in 2017. While the monthly delivery rate increases over the next several years, it does not quite reach the OEM-forecasted 117 per month (57 for Boeing + 60 for Airbus).”


“Wide-body delivery estimates appear to be at greater risk than narrow-bodies. If annual removal rates stayed at the 5%+ level as in 2015, it could bring the requirements closer to the production rate announcement, but it would require a sustainable retirement rate well above the historical 3.6% level. We think wide-body concerns are broadly recognized,” WFS says.

Wells Fargo writes that Gross Domestic Product and traffic growth, long the staples used by the OEMs for projections, continue to be crucial factors going forward. But fleet retirements are a major variable.–and “highly sensitive.” Writes WFS:

For historical data we queried Ascend for annual deliveries and year-end in-service fleet totals; from this we imputed annual aircraft “removals.” These removals consist mostly of aircraft retirements, but would also include passenger aircraft that were converted to freighters; planes that transitioned between “stored” and “in service” (net); parked airplanes; and other events such as incidents that cause the plane to be removed from service.

For both narrow-bodies and wide-bodies, we found that over the past 25 years the average annual removal rate was 3.6% of the fleet. This seems reasonable based on a typical useful asset life of around 25 years. We believe that near-term delivery forecasts by Boeing and Airbus suggest a slightly lower narrow-body removal rate (2.5%-3.0%) but a somewhat higher removal rate for wide-bodies (5%). Given some of the anecdotal evidence we have witnessed (example: AerCap recently sold a 2006-vintage A340 widebody for part-out), we believe the assumption to continue 2015 trends falls within historical ranges. Longer term, our baseline model calls for a 3.5% retirement rate for narrow-bodies and ~4% for wide-bodies.

Now having estimates for fleet growth (Section 2) and removals, we can back into new delivery estimates.

The key insight – albeit not a new one – is that new delivery forecasts are highly sensitive to the removal-rate assumption. We note the wide historical range for the annual removal rate: between 1% and 9% for both narrow-bodies and wide-bodies. With an in-service narrow-body fleet of about 14,000 aircraft, a mere 0.5% change in this assumption represents 70 airplanes – or over 7% of our 2016 737/A320 forecast.

11 Comments on “Wells Fargo sees reasonable, risky production rates

  1. Removal rate assumption. This analysis needs to be a bit more complicated. Obviously with planes being run on, it will be lower. Equally obviously, they will eventually run out of life,causing the rate to increase. Oil price spike predicted for 2020,owing to very low current investment will cause an increase in removal rate. Basically not particularly helpful without more information. Only four years to hang on, Vald.This could be the cause of a bit of an upset.

  2. The same simplified linear Wall Street thinking as always.

    Over a period of 20 years some aircraft for sure reach their expected and maximum cycles.

    Due to oil prices I expect this year just a few wide body retirements. Maybe a zero point something retirement rate. Iran will suck up several old aircraft before delivery of new ones starts.

    The real retirement rate for 2016? What about some real work and ask the airlines or look at their official plans? To much work for lazy Wall Street journalism?

    • What would you base the assumption on that Iran wants to buy more old aircraft?

      All indicators are they want to get rid of the old fleet as soon as they can, not pick up more older aircraft that you build a supply and training system for and then get rid of.

      They are talking 300+ (not realistic short term but over a 10 year term possible)

      • Iran still has issues getting approvals to buy new, even Airbus with non US engines contains some US equipment, so paperwork for approvals would be long and ardous.
        The idea of 300 aircraft doesnt match their current needs and traffic growth will be constrained by tough competition from the nearby ME3

    • Iran has to order Boeing before Airbus can deliver, OFAC takes care. How unglorious 😀

  3. Why the bashing? If the intended audience is unfamiliar with the importance or retirement rates the note will improve their awareness/understanding. Whether they are or are not unfamiliar with it the statement “we believe the assumption to continue 2015 trends falls within historical ranges”, while imprecise, assists stock (as opposed to company) investors in deciding what % of stocks to hold in aerospace. Not hugely insightful but useful for some of the targeted/intended audience nonetheless.

    • Short research note. Perhaps I didn’t understand something, maybe half of it is missing, maybe it could have been further shortened to “I don’t really know”

      • It seems to be a realistic assessment, maybe a bit too much allowance in single aisles.

        I think wide body build rates are not going to hit the peaks called for.

        Boeing is being coy about the move to rate 14 for the 787.

        • I agree that 14 787s mo looks suspicious,Airbus can do 10 (11 months pa) a330s a lot cheaper. I think 10 mo 787s will be a hard enough sell in the long run unless freight picks up a lot, no sign of it.

          • There are over 700 767s still flying, and deliveries for last 10 years are mostly freighters. Age of existing fleet means they have to be replaced in next 10 years.

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