Farnborough Preview #3: Analysts weigh in

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.

Highlights below:

  • Expectations for orders modest-to-slow. (Credit Suisse, JP Morgan).
  • Southwest MAX deferral (Credit Suisse).
  • Airlines face softer environment. (JP Morgan.)
  • MOM Aircraft and 777X. (Buckingham Research.)
  • Spirit Aerosystems looks to A350 charge.

Credit Suisse

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.

JP Morgan

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).

Buckingham Research

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.

Wells Fargo

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.”

 

10 Comments on “Farnborough Preview #3: Analysts weigh in

  1. My reading of the 777-10X question is:

    How many of Qatar and particularly Emirates 777-9x orders would be cannibalised / converted to 777-10x orders, hence nullifying the short-to-medium term economic advantages to Boeing in building it.

    Could Boeing lure orders away from the A380 and over to a 777-10x given that demand for the A380 has already softened and Emirates is already committed to the A380.

    I still feel it would take strong reasons not to build this mega twin. The thrust is surely there with those enormous power plants (I wouldn’t be surprised to see some form of 777-9x HGW in the future either). Although, the super jumbo market is matured, it is still a big market, and obviously a lucrative one – a long-term plan to replace all current 747’s (all), A340’s, and A380’s with one single product must be extremely appealing to both Boeing and the airlines. I can’t see rotation being a big problem, and the extra thrust is available. It wouldn’t need too much of a stretch, 5-6 rows?

    • pegasusboots, I echo your observations. A -10X could be a strech of about 3 rows/3m however, because of the old 80×80 everyone stays within so far.

      Thrust is no issue. The GE90-115 produced more then the foreseen GE-x, although I see that creeping up over the years, as always..

      Comparing it to a A380 takes some flexibility I guess. It’s that deck on top with extra 200-250 seats, that makes a huge difference from an airline perspective. Even without A380 going 11 abreast.

      • 777-10-X with same wing in hot Dubai conditions. Has anybody modelled/figured out how it will perform in 45 degrees? Given the thrust creep in the 9X to meet ME conditions I am a bit curious about the viability of this one, unless there are some major engineering changes. It would want to be a bigger market. Looks a bit like an attempt to keep customers away from the A350-extra stretch. (as nobody seems to want to name it)

        • Lowest density A380 Emirates with 3 class is 489 seats, with one 3 class version 517 seats.
          And thats supposed to be replaced by a 450 seat 777-10?.
          Then there is customer appeal of the A380, thats not going to be replaced by a generic twin.

          • I think that appeal has faded since EIS. People don’t look outside the window at the gate area to see what aircraft they will be on.

  2. @ pegasusboots

    There is no single replacement product for all A340, 747, and A380. Answer is A350, 777-X and A380NEO.

    The 747-400 is already on the way to be replaced by the A380-800, 747-8I, 777-300ER, A350-1000 and 777-9.

    The A340 will be replaced by 787-9, 787-10, A330-900, A350-900 and A350-1000.

    Top contender for A380 replacement is, according to EK, the A380NEO. May some 777-9.

    I cannot see a 777-10 (EIS 2024) being competitive v A380NEO with RR UltraFan (EIS 2026) in the long run.

    If you look at the current problems to bring the 777-9X up to the promised performance specifications, the A350-1000/A380NEO combo is too strong for a potential 777-10 in the next two decades.

    I agree with Buckingham Research to some extend that the potential for the 777-10 is not there.

    • The 777-x is not well-positioned to compete with the A350 family, especially the -8X. Remember that the A350-1000 has not debuted yet and will certainly have increased performance compared to what the original predictions were. Look at the -900 which has hgw/ increased range versions already.

      Also remember, the idea of a stretched -1000 is being thrown around as is the A380 Neo. Last time I checked, the A380 sold more units ( or close) to 777-X. Airbus can attack the 777X with both the A35O-1000 and A380 iterations.

    • @aircraft
      A lot of it depends on slots I guess.
      I beleive the A380 NEO and possibly a potential 900 will be adqnce engined and not ultrafan if they do even go ahead with that. Its just speculation at this point.

  3. Nice write-up on the current status of the 787 by Flight Global

    https://www.flightglobal.com/news/articles/farnborough-boeing-bids-to-redeem-in-service-record-426399/

    It would be interesting to see an analyses of LATAM ops as to why they are not getting the 20% improvement. JAL and or ANA I believe reported over 20% as well.

    Brake problems at this late date by one supplier seems to be odd. Either they should have corrected or just shifted to the other one and let the non complaint go out of business.

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