July 6, 2017: The industrial portion of the Farnborough Air Show (#FIA16 on Twitter) officially begins Monday and runs through Thursday. There are also some special events Sunday. LNC will be reporting from the Show throughout the week.
Below are a few final previews from aerospace analysts, followed by other analyst reports for the last week. There will be no Weekly Analyst Synopsis next week because of the Show.
Farnborough Preview, July 1, 2016
|Farnborough Air Show: In recent years the Farnborough Airshow has paled somewhat in comparison to Paris, given its proximity to Q2 earnings and the rising popularity of competing airshows, such as Dubai. That said, the upcoming show, which begins on July 11th, still promises to generate news flow and interest, and we will be there, meeting with aircraft OEMs, suppliers and industry experts.
Orders expectations are very modest: As always, show orders will be a focus, but expectations are low given very full backlogs at Boeing and Airbus. However, some may interpret a quiet show as also reflective of a change in industry demand momentum, especially after April’s decelerating global traffic results. Still, some incremental orders would be helpful for niche aircraft such as Bombardier’s CSeries though there are none that we specifically anticipate at the show. Emirates is believed to be considering a 100-unit order for 787s or A350s, and there is some hope for a 10-unit purchase for 747-8s from a Russian airline. Other campaigns, such as Turkish Airlines (A350 or 787) and Ethiopian Airlines (15-20 A350 or 777X) also appear on the horizon, but may be further out.
How isolated is Southwest’s 737MAX deferral? While deferrals and cancelations have been running at historical lows, a recent deferral by Southwest of 67 737MAXs could stoke questions about further backlog erosion. Here, we expect OEMs, as they have done in the past, to cite the fluidity of the backlog and double-booking as tools to mitigate any potential impact from an increase in deferrals, while affirming confidence in their planned production rates.
Execution: Similar to Paris last year, we anticipate significant focus on execution given some well-publicized hiccups on the A320neo transition and the ramp on A350. Boeing also continues to work on its transition to the 737MAX, and the multiple rate breaks that will see 737 production increase to 57/mth by 2019 (from 42/mth today), 787 stabilize at 12/mth before rising to 14/mth by the end of the decade, 767 increase to 2.5/mth, and 777 reduce to 7/mth (from 8.3) in 2017 as Boeing transitions to 777X.
Farnborough Preview, June 30, 2016
|FAS will take place July 11-15th in the UK. Air shows tend to be dominated by Civil Aero (CA) news rather than Defence, and this preview is focused on CA only. In recent months we have been increasingly cautious on CA stocks. We expect a subdued FAS, with relatively low orders, discussion on recent softer news flow (air traffic, airlines, growing macro/political risks), and a big focus on short-term execution challenges. We can flag one positive: with sterling at c30 year lows vs the $, for US visitors the entry tickets and hot dogs will be a lot cheaper.
Increasingly soft news flow from airlines and on the global economy: As we have argued in recent notes, the CA cycle remains at a strong absolute level, with large backlogs, record airline profits, and above-average global air traffic growth. But, share prices tend to be driven by incremental data, and the direction of news flow has been much softer recently. (1) Airlines have flagged weaker yields and excess capacity. (2) Some airlines have deferred existing orders (Latam Airlines, Delta) or delayed plans to place new orders (Garuda Indonesia). (3) On June 2, IATA reduced its forecast for FY16 global traffic growth to 6.2% from 6.9%. (4) We believe the Brexit vote, and likely negative consequence for European GDP growth, brings downside risk to IATA’s recent traffic forecast, airline profits (we have already seen warnings from IAG and EasyJet), and potentially, civil aero aftermarket sales and aircraft deliveries. (Figure 1 shows recent airline sector performance across the globe.)
We don’t expect many orders at FAS: There are always some new orders at air shows. But the usual pre-show trade press speculation about possible orders has been noticeably lacking in recent months. In addition, neither Airbus nor Boeing appears to be planning to launch any new products, which usually stimulates new orders. Boeing is considering narrowbody options with some combination of MAX 7.5, MAX 10 and middle-of-the-market offering in the mix, but it is still early and we don’t expect announcements at FAS.
Execution risks will be center stage: Large jet OEMs and suppliers have their hands full with multiple late-stage development programmes (A330neo, 737 MAX, 787-10) and programmes in the early phase of a major production ramp (A320neo, A350). Whilst these products should be drivers of long-term growth and profits, staying on schedule and on cost is always a concern. Airbus seems to be facing the greatest short-term challenges (A320neo, A350, A400M).
Boeing (Neutral), July 5, 2016 (Weekly Insight)
|BA released more info on a potential Middle of the Market (or MOM) airplane – a 200-270 seat airplane with a $65-$75M sales price and 2025 EIS. BA sees a demand for 3000-5000 aircraft – we believe the installed base of 757/767s that a MOM airplane replaces is 1700 airplanes. The issue with a MOM airplane is the business case. We think that a MOM airplane unit cost could be comparable to a widebody, but that BA needs to sell it at narrowbody prices (a 737 is about $55-$65M).
BA may be discussing the 777-10X with Emirates – a 450 seat stretch of the 777-X. The 777-10X is meant to compete with the Airbus A380. The twin engine economics of the B777-10X should be superior to the four engine A380. To us, the market for the -10X doesn’t appear big enough (some put it at ~200 airplanes) and its still questionable if the airlines will buy into the concept.
Spirit Aerosystems (Downgraded to Market Perform), June 30, 2016
|Summary. We are downgrading our rating on Spirit AeroSystems from Outperform to Market Perform because we think a charge for the A350 could make multiple expansion more difficult. We believe SPR could be close to finishing a revised A350 pricing agreement that, when completed, could trigger a reach-forward loss accrual of around $200MM ($1.00 EPS). A charge means the cash generated over the 400-unit accounting block would be reduced by the amount of the loss. We recognize that many investors could look at such a charge as a one-time event that puts the A350 risk behind the company. We think it could repeat concerns from charges in prior periods, but this time occurs: (1) unexpectedly; (2) during a CEO transition; and (3) when a new Boeing pricing agreement remains unresolved. We think 2016 cash generation should not be affected and the company’s share buyback will continue, helping SPR’s long-term earning power. We see the risk of an unexpected A350 charge that can make multiple expansion difficult during a time when investors are worried about the longevity of the aerospace cycle and therefore, we think a Market Perform rating is more appropriate-not that it portends another leg down in the stock. We did lower our valuation range (to $50-55) for the recent group multiple compression.
A350 Risk. As of March 2016 SPR had booked a $113.7MM forward loss provision on the A350 wing due to inefficiencies from engineering changes, higher-than-expected test/transportation costs, and a 2013 change in the A350-1000 design/tooling work scope. From the 10-K: “There is a risk of additional forward loss if we do not successfully execute the design and engineering change process as projected.” In addition, the A350 block already “includes estimates of probable recoveries asserted against our customer for changes in specifications.”