Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Fuel prices rising, muted wide-body demand noted by analysts
Oil prices are rising and catching the attention of airline and aerospace analysts. Photo via Google images.
June 22, 2016: Our weekly synopsis of select analyst notes point to increasing fuel costs and weak wide-body demand, among other things, as issues to consider.
Highlights:
- A350 deliveries at risk due to Zodiac supplier issues. (Buckingham.)
- US airline stock is under pressure due to rising fuel prices. (Cowen & Co.)
- Stock for supplier Crane is rising due in part to rising oil prices. (CanaccordGenuity.)
- Global traffic growing at a slower rate than forecast. Wide-body demand muted. (JP Morgan.)
- Production rate increases at Boeing may be challenging. (Wells Fargo.)
Buckingham Research
Weekly Insight, June 20, 2016
| The volatility of Zodiac (ZC-PAR; NR) shares was likely due to recent press reports that Safran (SAF-PAR; NR) was making a bid for the company – shares gained ~27% at one point. SAF-PAR denied the rumors, however ZC-PAR shares still finished up ~12% on the day. In its 3Q16 sales call on Wed., ZC-PAR noted continued difficulties with A350 lavatories and reiterated its guide for seat production to get back on track in 18 months, implying further risk to Airbus’s delivery expectations for 50 A350s this year. In a further concern to investor ZC-PAR also noted lower revenue due to lower biz jet and helicopter sales. |
Press reports indicate BA will sell 100 aircraft to Iran. However, the deal isn’t quite done – Treasury approval still has to be granted and there is some in Congress who are raising concerns. The main issue to us will be how many widebodies Iran orders. Of BA’s 275 orders YTD only 25 are widebodies. If BA does not achieve significant widebody orders from Iran, Farnborough, or elsewhere, we see downside risk to 777 production rates and to the last 787 production ramp to 14/mo.
Canaccord Genuity
Crane, Hold, June 17, 2016
We recently spent two days with Crane (CR) in the Midwest. While the focus remains on the near-term outlook for the Fluid Handling (FH) segment, we believe the stock is incrementally more attractive due to the increased contribution from the Payment and Merchandising Technologies (PMT) and Aerospace & Electronics (A&E) segments, and the relatively strong market positions in each segment. However, we believe much of the recent strength in the stock is due to the rise in oil prices, and we would caution that the fundamental outlook for the FH segment has not materially changed. We are maintaining our HOLD rating and our $60 price target, as we see near-term risk around oil prices and the outlook for the core valve business, but we have greater confidence in the longer-term upside to margins based on conservative incremental expectations and superior execution.
Cowen & Co.
Weekly Insight, June 20, 2016
The stocks came under pressure again last week as estimates are being revised lower to account for higher jet fuel costs and lower 2Q unit revenue estimates. We believe shares are oversold and believe United and Southwest investor updates tomorrow and Thursday could act as a catalyst for the group.
Sentiment within the group continues to remain challenged as estimates are moving lower to reflect higher jet fuel and slightly worse than expected unit revenue for 2Q16. We lowered our estimates several weeks ago, and considered it fairly obvious that numbers needed to come down. Indeed, we believe the stocks are pricing in not only no y/y 2H16 unit revenue improvement but further pressure on pricing.
JP Morgan
Monthly Dispatch, June 21, 2016
We estimate global traffic growth was 4-5% in May, still solid, though the pace has slowed. We estimate that traffic growth is now 5%+ through five months, adjusting for the leap year. This is in line with the long term trend but below the 6-7% we saw through much of 2015 and as a result, IATA has revised its 2016 forecast down to 6.2% from 6.9%. In 2015, growth averaged 6.1% for 1H and 6.9% for 2H, with tougher comps suggesting another downward revision is possible. Recent deceleration has been most prominent in Europe, where we estimate only 1-2% for April and May. With vocal concerns about capacity growth and yield pressure plus the impact of the Brussels terror attacks, Europe could remain a drag. North America has slowed as well to an estimated 2-3% for March-May and with average growth of 5.4% in 2H15, the region could be a headwind for the rest of the year as well. Meanwhile, Asia/Pacific, which contributes more to traffic and traffic growth than any other region, is holding up, particularly China, which accounts for ~1/3 of Asia/Pac traffic. We estimate Chinese growth was 14% in May, roughly in line with the pace YTD.
Widebody demand remains muted. YTD, Boeing has combined net orders for 25 current generation 777s and 787s, behind the pace of 100+ per year for 2014-15, which yielded book-to-bill ratios of ~0.5x. Management has spoken openly about slowing widebody demand and responded by reducing 777 delivery expectations from 2016’s ~100 aircraft to ~66 in 2018. A larger 787 backlog underpins the recent production increase to 12/month but we won’t see a full 144 deliveries until 2018 due to the 787-10 ramp and plans for 14/month by decade-end remain unlikely to pan out, in our view. There could be widebody orders coming, though we do not expect a broader resurgence in demand. Carriers considering new widebodies, according to press reports, include Emirates, Oman, Saudia and Virgin Atlantic, and we would note the prevalence of airlines from the Middle East, where load factors are falling and yields face pressure. In addition, the 100 aircraft that Iran will order from Boeing will reportedly include some 777-300ERs and we could see more 777s and/or 787s from China as well.
Wells Fargo
Below the Radar, June 20, 2016
China’s three largest airlines–China Southern, China Eastern, and Air China–reported aggregate traffic growth of 9.9% y/y on capacity growth of 10.4% y/y for the month of May. These growth rates are about in line with the double-digit YTD 10.5% / 11.2% figures, respectively.
Wells Fargo
Spirit Aerosystems (Outperform), June 21, 2016
737 Programs Still The Most Important. In 2015 the 737 program (fuselage + nacelles + pylons + wings) accounted for 48% of Spirit’s sales and a larger portion of profits/cash flow. We remain confident there is sufficient demand to support Boeing’s 2017 planned 12% increase to 47/mo from the current 42/mo, and somewhat confident in 2018’s planned 11% increase to 52/mo. However, our recent analysis suggests that without an improving world GDP growth outlook and/or above-average rates of aircraft retirement, achieving 2019’s planned 57/mo appears to be challenging.
787: We estimate the 787 is SPR’s #2 platform representing ~20% of sales. Boeing moved to 12/mo from 10/mo, and until recently we expected another increase to 14/mo over the next few years. However, with Boeing’s firm May-end 787 backlog at its lowest level since 2007, coupled with a generally soft widebody market, we think an increase to 14 for SPR is several years away. We expect SPR’s discussions with Boeing on the 787-9/787-10 pricing and the profit margin on the next accounting block will continue to be focus areas for investors.
777: We estimate the 777 (fuselage + nacelles + pylons + wings) generates ~15% of Spirit’s sales. Through May, Boeing booked only 12 777 orders – below the pace needed to bridge the transition to the 777X without further rate reductions beyond the scheduled 8.3/mo-to-7/mo cut in 2017. SPR should see less of a revenue fall off as Boeing 777 deliveries decline to 5.5/mo in 2018 because SPR would continue to deliver at 7/mo as it delivers 777 and 777X parts.
A350. Investors may focus on Airbus’ recent comment that it will “struggle” to meet its 2016 delivery target of 50 A350s due to cabin supplier delays, but we do not believe the supply chain production rates have changed.
Maybe higher fuel leads to airlines parking older 737s, 757s, 767s, 747s 777s and older A300/320s/ A340s and replacing them with newer aircraft, earlier then foreseen with fuel was low, 4 months ago..
http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=120
Yes, Higher fuel prices with assist in rapidly phasing out old planes models such as B737, B777, B757, B747, A320, A330 and A340
Depends on how high they go. Report yesterday was the US Frackers have adjusted and are in a position to increase production rates with the rise in fuel prices. Given that and it stabilized below $60 a barrel it may be muted. Saudi did not drive them out of business, they simply made them get more efficient. Dumb move.
I did get a laugh on the possibly unintended pun
“and reiterated its guide for seat production to get back on track”
I hope they get it, back on track as in what they attach the seats to!
And considering how many aircraft have been sold and how far out the timelines are, its not surprising that sales are on hold
If there are cancellations then that begins to hurt.
I continue to think that you can’t plan more than 3 years out. General direction yes, but there is too fast a change to do more than that and even that is probably too far out.
I completely agree. Airlines can plan replacements a little further in advance, but growth plans 5+ years out are always tentative.
It’s a nice luxury to have a massive backlog, but I see it as virtually inevitable that the backlogs will shrink at Boeing and Airbus over the next few years, at least for widebodies. That’s only a problem if the global economy is in a slump in 2020. If GDP and air traffic are growing robustly, there should be plenty of airlines looking for new planes with early delivery dates.
Agreed, however makes ramping 787 production up over 10-12 per month risky a they will need to sell these aircraft in what is looking to be a pretty slow market.
I do think the 787 ramp up past 12 is now off the table.
They may whittle it back down as time goes on.
Lurking in the woods is a high number of various options involved and if those get exercised to whatever degree.
1- Canaccord: “We believe much of the recent strength in the stock [CR] is due to the rise in oil prices.”
2- Cowen: “The stocks came under pressure again last week as estimates are being revised lower to account for higher jet fuel costs. Sentiment within the group continues to remain challenged as estimates are moving lower to reflect higher jet fuel.”
– Did I miss something? Brent has been around $50, or lower, for months, and has not been fluctuating wildly. It is difficult to predict where oil prices will be at a given time, but I expect oil to remain more or less where it is for the foreseeable future, because supply and demand seem to have reached temporarily equilibrium. Right now prolonged low oil prices are good for airlines, but bad for aircraft manufacturers.
JP Morgan: “Global traffic growing at a slower rate than forecast.”
– This situation is not surprising at all. As the world economy is slowing down so is air travel. I don’t expect negative growth anytime soon, but air travel will certainly grow much slower in the coming years.
Buckingham: “If BA does not achieve significant widebody orders from Iran, Farnborough, or elsewhere, we see downside risk to 777 production rates and to the last 787 production ramp to 14/mo.”
– This is something to watch closely. Not only the number of new widebody orders, but also the price Boeing will have been able to obtain for them.
Buckingham: “[Zodiac] noted continued difficulties with A350 lavatories and reiterated its guide for seat production to get back on track in 18 months.”
– Ouch!
On point 2, a lot of the analyst estimates were probably last updated in mid-April during the last earnings cycle. Brent is up about $6-$7/bbl since then. Not a huge swing, but the big three use 90-100 million barrels of fuel annually, so it’s still a $500 million-plus annualized hit to earnings if there’s no offsetting revenue benefit.
The most recent reporting is that about half of the Boeing orders are widebodies, mainly 777s. But there are even some 747s sprinkled in there. (Thus decisively proving that there is no rational logic behind Iran’s aircraft orders!) http://finance.yahoo.com/news/boeings-iran-deal-covers-109-134705645.html
Of course, lining up governmental approvals and financing will be anything but straightforward. Hard to say how many of these planes will actually be delivered…
Or how soon
This was interesting from Flight Global. We can hope they are far more successful than they have been on the KC46 where they bragged they had all the iron labs so there would be no issues!
https://www.flightglobal.com/news/articles/farnborough-boeing-preparing-737-max-to-avoid-teeth-426059/
Of significant interest (to me and techs) is the archaic way they have gone about program work in the past and now just changing it.
One thing I learned early on, they are systems, if you don’t understand that, then you are lost. Each individual part may work, but if it does not work as a whole then its useless (or very troubled)
So they prove the engine works but ignore the fault code issues until it goes into service?
That’s something they should be dealing with at the same time, all you need is a process, it does not interrupt the engine testing. Engines works fine but we can’t take off because of a bogus fault code?
30 years ago I asked a Uninterruptable Power System instructor how good the new system fault codes are. He said we have it up to about 80%. Not bad. they knew bad fault codes were a killer distractor and needed to be right. They had that figured out 30 years ago.
And I had to laugh, even the C Series has a health monitoring system. I would shocked if it did not, not that it does for crying out loud.
The article is about aircraft “teething pains” when introducing a new type into service and the steps Boeing is taking during 737 MAX flight test to eliminate a major source of teething pains, nuisance maintenance messages. In what way does this have anything to do with the KC-46A as none have been delivered yet? It is still in the middle of flight test.
If you followed the KC46, Boeing made a big deal about how they did all sorts of advanced planning including a large number of what they called “labs”, ie test centers to make sure it was all good.
Also a big deal on how we would do the mfg differently and all those issues would not occur and it would be on time and do what it was specified to do.
We saw how the execution on that went.
Same organization , I think its a fully justified question. Talk is cheap, doing is hard.
Name one manufacturer that doesn’t make a big deal out of it’s capabilities and plans. It seems like your complaints about the KC-46A program are more about your perceptions than anything else.
Hmmm, one screw up after another is not a perceptions, its a fact.
When you make statements like that and do not back them up with results that is a fact.
Spin it how you want, its a program that has been seriously troubled despite claims and resources (supposedly) that have been poured in.
If you can’t do something relatively simple as a tanker, then where are you?
that tells me you are short on talent and you have mucked with your organization so severely it can no longer produce.
Its a good thing they did not get the B-21.
Tell me TransWorld, what military aircraft development program hasn’t been seriously troubled? The KC-30, or A400M? Not. How about the KC-767, F-35, or F-22? Don’t think so. A 5 month delay on the KC-46A deliveries seems pretty mild to me.
“If you can’t do something relatively simple as a tanker”.
Anyone who has ever worked on a billion plus dollar R&D program, especially one funded by the DOD, and even more especially an aircraft program, will never use the word “simple” in the description.
The last US program that was not seriously troubled would have to be the Super Hornet I suppose.
Seems to have been an ever increasing problem since the a380. Increased monitoring=increased false alarms. How much of this is due to sensor tech and production in cheaper locations? I blame a lot of it on QA but as you point out integration is everything. I am still not happy with the b787 battery fix as I am not confident the cause, whatever it is, wont be affecting other componants over time.
Its the system itself.
I was reading that one hospital in desperation went thorugh all the alarm setting on their machines as the staff was going nuts tyring to anseer all the alarms.
What they found was that 95% of the alarms were not alarms, it was the threahsolds settihngs that were mucked up.
I work in a similar world and they make it far worse and more complex all the time.
Find the one item in the alarms that really alerts you to an actually problem, set the parameters around it right and the rest delete.
Aircraft are suffering the same teething fate until the tech kill the alarms, but after not before.
You obviously need to sort that out before you deliver not after.
While there are a lot of examples two to me stand out.
Singapore A380 that lost an engine and bazillion alarms going off and the crew spend 1.5 hours or more soring through them when the aircraft should have landed.
AF447 with all its alarms and ignored as the one that needed to be there was both background and came and went (stall).
And those were emergencies when you need the require informed and no more, dispatch issue is just a nuisance though an expensive one
SW deferring 67 MAXs by about 4 years each.
Sort of says it all.
http://www.bloomberg.com/news/articles/2016-06-23/southwest-delays-1-9-billion-in-spending-on-new-boeing-planes
18 months ago this might not have been bad news as Boeing might have been able to re-sell the slots at a better prices.
A closer reading of the article yields an assertion from SW that Boeing was able to fully rework its production schedule with other Max customers to fill the opened slots. Further, the rescheduling was primarily driven by a specific surge in SW non-aircraft capex, per SW executive management.
“primarily driven by a specific surge in SW non-aircraft capex”
Lets not mystify bad news.
“We went to the used markets so now we don’t need all those Boeing deliveries,” Southwest Chief Executive Officer Gary Kelly told investors. “That’s what’s going on there.”
So there are a lot of good current 737s available, we don’t see fuel going sky high again and we can defer.
There are indications that slots are available as needed on the 737.
So you move one bunch and then someone else defers and you run out of people who will take them and then you have gaps.
There is very little real clarity in the statement including we are taking MAX delivery but not putting it into service until 2018 (they just sit there?) Publicity flights?
My reading of this article is that they filled the slots but I doubt if margin will be great. Or margin on near future sales