Analysts opine on Airbus, Boeing, Iran and Brexit

Analyst Synopsis

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June 24, 2016: Brexit continues to creep into US analyst reports for the potential impact of companies doing business in the United Kingdom.

But there are other issues as well. Highlights this week:

  • Spirit Aerosystem is a supplier to Airbus and Boeing. Deliveries to Airbus for the A350 continue despite program delays. Negotiations continue with Boeing over new contract terms. (Buckingham.)
  • Don’t freak out over the Southwest Airlines deferral of Boeing 737 MAX. (Credit Suisse.)
  • The Iran deal isn’t a big deal yet for Boeing. (Goldman Sachs.)
  • Brexit may benefit B/E Aerospace. (JP Morgan.)
  • US trans-Atlantic airlines likely will be hurt by Brexit but purely US domestic carriers are fine. (Morgan Stanley.)

Buckingham Research

Spirit Aerosystem (Neutral)

June 23, 2016

SPR noted that recently, BA is stepping up its efforts to finalize a new pricing agreement. However, in our view, SPR does not appear to be in any rush to come to a new pricing agreement with BA. We think SPR appears content with the terms in the current interim agreement and we think it’s possible the negotiations could extend beyond the end of the current 787 contract accounting block in September. There has been considerable speculation that Lawson’s departure is related to a lack of progress on a pricing agreement with BA. If so, we saw no evidence of that. CFO Sanjay Kapoor has been leading the discussions with BA and although we expect Tom Gentile to be involved, we’re not expecting the CEO transition to have much of an impact on the discussions.

SPR notes no changes to the A350 delivery schedule despite Airbus’s lingering issues with the program. Despite SPR’s assurances, our concern is that the build up of traveled work could cause Airbus to ramp up the A350 slower than expected. We also continue to see risk to expectations for 50 A350 deliveries this year. SPR didn’t provide incremental color on A350 cost improvement and we’re still expecting a near $500M charge on the program

Credit Suisse

June 25, 2016

  • Southwest delays 67 Boeing 737’s: LUV will push back its $1.9B investment in 67 Max 8’s as it shifts delivery from 2019-2022 to 2023-2025 (see new & old delivery skyline in Exhibit 1 & 2). This will not change LUV’s position as the first Max 8 operator next year. (Bloomberg, 23-Jun-2016)

CS: The move resulted from an April decision to accelerate retirements of the 737 Classic fleet, which was originally scheduled to occur between 2019-2022 but has now been pulled forward to Sep. 2017. LUV did not want to subset its pilot groups to accommodate flying all three derivatives, and also cited maintenance, efficiency and product benefits. In order to backfill the lift, LUV has pulled forward 737-800 deliveries and is adding 41 used 737-700s between 2016-2018. The MAX deliveries, which were deferred to 2023-2025, will eventually replace these used -700s, though LUV retains some flexibility to take the MAX earlier if desired. This allows LUV to stick to its plan of no more than 2% growth in its fleet count thru 2018, and we see this as evidence of capacity and capital discipline. (Credit Suisse US Airlines Analyst Julie Yates Stewart)

Goldman Sachs

Boeing (Sell), June 25, 2016

Boeing has reportedly reached a deal to sell 80 aircraft to Iran. However, (1) there are many hurdles to this actually turning into deliveries, including sanctions and financing; and (2) if it does occur, the unit numbers are all small relative to the current status of each corresponding aircraft program. A firm order has not been placed as it requires U.S. government approval due to sanctions. The Wall Street Journal reports (6/23) the order would consist of 4 747, 6 737NG, 40 737MAX, 15 777, and 15 777X for delivery through 2025.

Analysis
There are currently 168 delivery positions open in the 777 skyline for 2016- 2020, relative to delivering at 7/month (according to Ascend data). There are 5 and 4 777-300ER positions sold in 2019 and 2020, respectively (according to Ascend). 15 unit deliveries to Iran, were they to occur, would be less than 10% of that bridge to 777X. Once to the 777X, the 777 volume challenge is not solved, because not nearly enough 777Xs have sold to support a 7/month production rate on that aircraft, even if Iran were to take 15 of them as well. There is an average of 37 777X positions sold per year 2020-2025. We also remain concerned with 787 demand relative to high production, and [there are] no 787 orders in the Iran MoU. There are also significant risks (as noted above) that this order does not actually occur, and that financing will be difficult to obtain if it does. Lawmakers have voiced opposition to a deal and put forth bills that if passed could complicate any transaction.

JP Morgan

June 25, 2016

It is not yet clear how Brexit will ultimately impact US aerospace and defense stocks but preliminary thoughts are below.

The chief risk is slower global growth. Commercial aircraft demand is largely a function of global growth and so the key Brexit risk is that financial contagion from the vote slows growth in the real economy. We are not experts on this topic but clearly, there is now more reason for concern. Business jets are vulnerable too, though bizjet OEMs with the most US exposure (i.e. Textron) may be relatively insulated. The aftermarket impact will depend largely on traffic growth, which had been especially robust (~7%) but is settling in at a more normal level (~5%). Europe accounts for ~25% of global traffic and is expected to grow 5% this year.

B/E Aerospace may benefit. Facilities in the UK generated ~$750 mn of sales for BEAV last year but these are mainly denominated in dollars and so the weaker pound benefits earnings, all else equal, because a portion of the cost base—mainly labor—is denominated in local currency. BEAV does, however, have a small amount of euro-denominated sales and so a weaker euro could offset a portion of the benefit of the weaker pound.

Spirit Aerosystems faces modest translation risk. For Spirit, 9% of 2015 sales were in the UK and a portion of these, principally for A320, are denominated in pounds along with their associated costs. This exposes Spirit to some translation risk as a result of the weaker pound, though we would note that Spirit’s A350 contract is denominated in dollars.

Morgan Stanley

Reaction to Brexit, June 27, 2016

US Airlines: A dim international outlook, particularly on the Transatlantic, weighs on the Legacies (AAL / DAL / UAL – all OW), but the domestically focused, higher quality carriers should demonstrate relative demand resilience. We view ALK (OW) and LUV (EW) as fitting these characteristics.

Aerospace: Significant Europe exposure negatively impacts several in the group (such as a BEAV – EW) as well as those levered to broader economic growth (TXT – UW). We believe the resilient Defense exposure at COL (EW) and proprietary, non-discretionary Aftermarket business at TDG (EW) create buffers in a downside scenario.

Aircraft Lessors: Outsized European exposures at 30-45% (and international more broadly) leave this group vulnerable to regional concerns. While this risk is indirect as aircraft trading and lease payments are USD-denominated, the magnitude of the exposures create a potentially tough risk-reward going forward, in our view.

 

32 Comments on “Analysts opine on Airbus, Boeing, Iran and Brexit

  1. For clarification is the charge discussed on the A350 programme relating to Spirit or to Airbus? Presumably the former. Is there any detail regarding that charge? It seems that too many OEMs and first and second tier suppliers are consistently over optimistic/ unrealistic in their original cost estimates. Are they blaming it on the slower than expected ramp?

    Do I gather Spirit ‘has partnered enough’ on the B787 programme. This negotiation sounds like it is getting to the bare knuckle stage. I am guessing there are substantial deferred costs to both parties and they are locked in an unholy monopoly supplier/customer position. Neither can afford to give on the price!

    • there is no good reason for Spirit to take one on the chin because Boeing screwed up. Spirit has been the one supplier that has not made the news for damaging the 787 program and have a fantastic track record on the 737. without them, Boeing would be even further in the hole.

      Spirit should call their bluff, because Boeing really has no near term alternative and in the long term in-housing doesn’t fit with Boeing’s desired business model and expecting to find another company to jump in to fill Spirit’s shoes is laughable.

      • Spirit got the A350 section iso Alenia for a good part because they “survived” the 787.

        • Yea Spirts comment though proably a lot like P&W pullin Als beard was “We have Partnered enough”.

          They have a new CEO (note to self, if I ever get to be CEO wathc my public mouith)

          So now they are in negoation and Spirit is willing to let it take as long as it needs to (interim agreement with Boeing based on past where Partners were mostly unsuccessful but they maybe get good returns in the long run)

          So Spirit delivered, others did not and Boeing of course wants to hack a shack them. Good luck.

          Spirit also took a huge hit as they not only delivered but had planned and invested in advance for a ramp up that took forever. Ergo, they got hurt and badly with that despite having no control.

          I do think Spirit had some issue with A350 work early on but seems to have settled out. New factory not what you want while trying to get up to speed.

  2. And in news, US stock market and others bouncing back.

    Keeping in mind US Dow Jones had a false spike when the analysts (same ones here?) mucked it up and it went up 200+ points.

    So the drop was not as much as it was, 200 + off the top because that was wrong, over reaction, now its settling down.

    Squabbling will go on of course and who knows where that falls out, but its not the end of the world as predicted by many the sky is falling types.

    Having seen them in action I think they deserve each other. All about ego and not about people they are supposed to serve.

    • “All about ego and not about people they are supposed to serve.”

      He.
      It has been repeatedly pointed out here by select posters that life and everything is “about profits”.
      No other purpose in life and definitely nothing about “serving people” 🙂

    • Brexit has not begun yet, so little use in discussing anything, unless the stock markets are your guidance for all to come.

      EC countries are discussing anything inbetween kicking the UK out & take back business the hard way. Or giving them more time and wait for some sense / second thoughts. One could trigger the other.

      • Yep, it will play out differently that anyone knows right now.

        Well planned operation from what I understand.

        Oh, yelling fire in a theatre is a bad idea? who knew.

        Regardless there is the continued disconnect between a fairy tale EU and reality.

        To quote one of our most profound if not the most profound citizens.

        A House Divided Against Itself, Cannot Stand.

        • 800,000 automotive industry workers, A360 wings (ha ha), various bank headquarters, Vodafone, and maybe a lot of Easyjet´s business. I get the feeling some European leaders are wondering they can´t peel some of this off for themselves. Some of them are sure in a hurry to get the UK out. Uncertainty is a part of it but I am left wondering how much.

          It also makes one suspect the deal between UK and EU isn´t going to be sweet for the UK.

          • What are you talking about ? There is no A360. Airbus parts are made in many places outside the EU. Korea, China, USA, having them made in UK will be no change to supply chain. Nor will there be problems will Bombardiers wing factory in N Ireland. Thats the way the aircraft industry works, Worldwide.
            UK is the largest market for German cars, so its not in Germanys interest to block UK made cars.

          • I am just wondering why some European leaders are in such a hurry to get rid of the UK. I can´t help wondering what the advantages are for them.

            By A360 I mean future Airbus wing designs, whatever they get called.

          • Keep Greece but get rid of the UK!

            They don’t like to have to deal with equals.

            And of course chomping at the bit (or Euro) to slice off what they can.

  3. Will combined 737 and A320 deliveries pass 1,000 in 2016? The Southwest deferral is at least an indicator that delivery growth will be moderate. 1,200 in 2020 may even be optimistic.

    • makes you think that Southwest had ‘planned’ to run all 3 derivatives of 737 and then ‘unplanned’ it.
      Whichever way, its clear more of the big airlines that normally only bought new planes , see the advantages of limited numbers of used- helped by fuel prices of course.

  4. I know we can’t but I would early love to see the analysis of the SW deal up above.

    Its a profound change, and I continue to know that Classis is the original (or legacy) call the 300-500 something else, NG whatever for the current and MAX distinguishes the lattest fine.

    • 4 extra rows will knockout the A380. ? Only in Seattle la la land.

      Thats was supposed to be 747-8 job, so I suppose it means the 777-10 is a 747 replacement – who would have guessed.

      • @Geo: The only thing that will knock out the A380 is the A380NEO, with RR Ultrafan engines, additional CFRP parts (maybe wings?) and some extra length maybe.
        The continued lower price of oil keep passenger numbers growing and slots in many busy airports will get more and more restricted.
        I believe that the next decades the A380 will become as dominant at the main hubs as the 747-400 once was.

  5. This has more detail, I think we can intreptie that as the 737-10 is a go to hold the line and offer an option in that lower segment.

    https://www.flightglobal.com/news/articles/analysis-middle-of-the-market-is-when-not-if-a-426627/

    Meantime the MOM goes and picks off the top of that market as well as markets that they seem to think are not served.

    Interesting on engine choice or not so far. P&W would seem to have the inside track as no one in the future is predication a non GTF solution.

    You would think two choices with P&W one and RR or GE the other with GE inside track but RR coming up on the outside with their own GTF.

  6. “As bypass ratios grow larger, the fan diameter of the engines must also grow larger. That requires a step-change in the sophistication of the integration of the engine with the encapsulating nacelle and its mounting on the wing.

    “When you get to a certain fan diameter you have to understand how to wrap it with the right nacelle because you can easily lose whatever fan diameter gain you had with a poor design of the nacelle,” Delaney says. “So we’re investing in those technologies.”

    I think Boeing/ Delaney is saying “customers prefer something bigger then our optimized, just right 69 inch LEAP fan and we understand the PW1100 is the only option with 6-7 years.”

    They are not eating crow, but taking advantage of the latest technological developments to maximize customer value.

    https://media.licdn.com/mpr/mpr/shrinknp_800_800/AAEAAQAAAAAAAAUzAAAAJGZkOGEzMzg0LTc1YTAtNGJjNS1iZjE0LTQxZjY5ODMwMzBhNw.jpg

    • Fore eons Cat always knocked (that’s a diesel pun) the Unit injectors that Cummins and Detroit Diesel used (smaller engines, i.e. not EMDs)

      I had to go tune one up one time, danged if they had not moved to unit injectors for that generation engine. Hmmmm

      In this case the Cat calling the other diesel mfgs black (more puns)

      Navistar decided they could make diesel emissions work without Urea, ooops. So it goes.

      I do know that all the studies done by NASA all had to have GTF to get a simian fuel increase improvement.

    • “I think Boeing/ Delaney is saying “customers prefer something bigger then our optimized, just right 69 inch LEAP fan and we understand the PW1100 is the only option with 6-7 years.” ”

      This is not what Delaney is saying, unless you’re misunderstanding the meaning of “optimize” in this context.

      As far as eating crow goes, I wouldn’t expect anyone at Boeing to eat crow any more readily than you would.

      • IMHO it is less a question of liking your food or not but of taking your prescribed dietary feed offering.
        ( for a shiny fur and all that jazz … )

        i.e.
        “.. prefer something bigger then our optimized, just right 69 inch LEAP fan ..”
        was and still is just so much baloney.

        To note:
        This seems to be the first time that a Boeing exec deliberates on existing _deviating_ customer demand.

  7. He was from Cumbria if you would like to know. Many countries have horrible pasts and Ireland is no different. Get with the with present would be my advice.
    On the other hand on brexit way the delay will contiune i suppose. i check the data for sir oliver w. and d.benjamin berra . i dont know why there are in brexit.

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