Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- 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
Weekly analyst synopsis: Farnborough recap
July 20, 2016: Aerospace analysts had somewhat different takes on the commercial aviation portion of the Farnborough Air Show. This week’s analyst synopsis includes some of the analyst reports. Between now and the end of the month, earnings season begins reporting the second quarter results. Airbus reports July 27. So does Boeing. Bombardier and Embraer report after July.
Bernstein Research
Airbus, July 19, 2016 (Outperform)
Airbus: Q2 Preview- Slow Deliveries on New Programs in H1; Expect 2016 FY Targets Achievable
Airbus will report earnings for Q2 2016 on July 27, 2016.
Our target price remains €72.
A320neo and A350 deliveries were still slow in Q2. Engine delivery issues, which are improving, continued to impact A320neo deliveries in the period. Interior issues are still challenging A350. The company reiterated full year delivery targets for each, though.
Narrowbody demand remains strong, ramp concerns center on supply chain. A320 family orders were healthy at Farnborough. The backlog is nearly a decade worth of production, which supports the current ramp underway to 60/month in 2019. Widebody demand looks incrementally weaker. Few orders for A330 and none for A380 at Farnborough are concerning. Pricing pressures on A330 are starting to materialize. Airbus is not pursuing either the A350-2000 stretch or A380neo at this time.
Airbus announced A380 deliveries will go to 12/year in 2018 (from 27 in 2015), due to a lack of new orders. Considering the alternatives, we think this rate decision was the best choice, but may be a slight drag on 2018 earnings depending on ability to maintain breakeven. Other businesses. Weak end markets impact Helicopters, and we expect an A400M charge.
Investment Implications
Our Outperform rating reflects retirement of significant risk in the A350 ramp, earnings growth from higher production rates A320 and high growth in free cash flow from 2017. We have a positive outlook for the commercial aircraft cycle and rising production rates.
Buckingham Research
Weekly Insight, July 19, 2016
Speaking with investors at the Farnborough, most were not surprised by Airbus lowering A380 production rates to 1/mo. Investors also weren’t surprised by the lack of orders, or the overall negative tone of the show. Depending when Airbus actually lowers A380 production rates, we estimate the lower A380 rate for HXL could reduce our 2016E EPS by up to ~$0.02 to $2.53 from $2.55 and reduce our 2017E EPS by $0.04 to $2.90 from $2.94. We also think that HXL’s goal for $3B in sales by 2020 may be revisited on the 2Q16 call this Thursday. Although Spirit AeroSystems (SPR; NEUTRAL – Tgt $44) has some content on the A380, we don’t see the rate reduction having any impact on earnings considering its low shipset value at ~$1M.
Goldman Sachs
Farnborough recap, July 15, 2016
Slowest air show for orders since 2009
The 2016 Farnborough Air Show saw very slow new aircraft order activity, especially for Boeing. We think this is important given new aircraft supply today is at an all-time high, and about 20% of the average year’s orders come from the air show (relatively even percentage of the year for Farnborough compared to Paris over time). We continue to see reasons for new aircraft demand to keep slowing, and for Airbus to take share from Boeing.
Farnborough 2016 concluded with 182 total firm orders combined between Boeing and Airbus. Boeing had only 36 firm, and 16 of those were 747-8, which does not move EBIT. This was the lowest level of overall orders at an air show since 2009. Widebody was weak and particularly concerning. There were no 777 orders and only seven 787 units ordered – two aircraft types critical to Boeing cash flow, and where we have the most concern on forward production. Boeing was much weaker than Airbus, in total.
Boeing falling behind Airbus
Boeing reported 36 firm orders and 100 commitments, compared to 124 and 197 last year in Paris. Airbus reported 146 firm orders and 144 commitments (compared to 124 and 317 last year). Airbus continues to take share from Boeing. It has been especially successful with the A321neo, where it booked another 100 firm orders at the air show. The A321neo backlog is now over 1,200 units compared to Boeing’s 222 for the 737-MAX-9. We believe this overall product portfolio differential is a major factor driving Boeing to consider costly new aircraft development.
JP Morgan
Farnborough recap, July 14, 2016
Little support for sagging widebodies. The widebody market saw few orders, including no progress filling the 777 bridge, a steeper A380 cut than anticipated for 2018, and continued cautious commentary on widebodies from Boeing.
The impact of the A380 cut on U.S. suppliers should be modest, but the one we are watching most closely is BEAV, given the size of the aircraft’s premium cabin. For example, we believe BEAV provides 14 super first class seats for each Emirates A380. On 777, Boeing has taken 8 net orders YTD vs its target of 40- 50, and opportunities for later this year are likely focused on China, with a possible contribution of 15 777-300ERs from Iran, though rapid progress on closing Iranian orders is looking less likely.
No Boeing response to A321neo just yet. Management says it has time to decide and continues to consider a new middle-market aircraft and a 737 MAX 10. For most suppliers, it was too early to discuss a potential middle-market aircraft for 2025, though given the ~$70m price mentioned in the press, supplier profitability would likely be tight. Structures is an obvious focus within the supply chain as a middle-market aircraft would be Boeing’s first clean sheet plane since divesting Spirit in 2005. The good news for Spirit is that with 200- 270 seats, the middle-market aircraft discussed in the press is too big to fully replace the 737; however, content on a new aircraft gives Boeing leverage in price negotiations with Spirit for legacy products. It would be a key opportunity for Triumph as well, which has been starved for growth, and a new plane would also raise questions about insourcing at Boeing. Prospects for a race to the bottom on structures pricing are worth monitoring, but for what it’s worth, we believe companies are attuned to the risk.
Morgan Stanley
July 19, 2016
A “Middle of the Market” aircraft could work as long as it doesn’t disrupt the cash flow narrative. Following the Farnborough Air Show, there has been increased discussion around Boeing developing a new “Middle of the Market” plane. Simplistically, the current in-service fleet of passenger aircraft for 201-270 seats should broadly capture this market and we view it as a potential read on longer-term sales. A new product launch could support the backlog by generating launch customer orders, though our focus will be on disciplined development following the 777X, thus preventing an uptick in capex or R&D (unlike the 787) and supporting the above-average FCF narrative (~10% a year). While [Boeing] continues to study the market and talk to customers, our view is that the likelihood may be rising per the recent success of the A321 at the lower-end of the market.
Morgan Stanley: “A “Middle of the Market” aircraft could work as long as it doesn’t disrupt the cash flow narrative.”
I am afraid it will, because the NMA would come right after some big spending on the 777X, including lower revenues from the Classic. And it appears to be scheduled at a time when Boeing’s dominance in the narrowbody sector is starting to be seriously challenged. The huge 737 backlog entertains the elusion that this will continue for ever, but the sales numbers for the A321neo versus the 737 MAX 9 are already giving us an indication that the old 737 empire is about to crumble. What this means is that if Boeing were to launch the NMA in the near future it might soon afterwards find itself in the obligation to develop a NSA without further delays. Otherwise it might have to abandon the narrowbody sector altogether. And the 777X followed by a NMA, itself followed by a NSA, would certainly “disrupt the cash flow narrative.”
Ditto insourcing
Good point. The 777X wing is a big chunk that would have normally been “risk shared”. If Boeing had done the NSA early, which they didn’t because of the 787 fiasco, they could have used the opportunity to insource this smaller wing in order to gain some experience with this kind of composite structure, before tackling the gigantic 777X wing. I am of the opinion that it is better to start small an grow in scale as you gain experience. What I am trying to say here is that the 777X wing is a very risky undertaking and Boeing elected to not share this risk with its highly experienced Japanese partners. The experience gained by Boeing on the Dreamliner was on a totally different structure, the fuselage, which used a totally different technology. If there is one lesson that Boeing learned on the 787 it is that you can loose control if you outsource too much. This time around though they may learn that you can also loose control if you insource too much.
You have to love it, Cash Flow Narrative. a new low
Normand:
While I agree on starting out small, I also think Boeing knows what it is doing here.
Keep in mind that there was nothing tech wise that really failed on the 787, and that was one mother of all leaps.
I think they were insanely stupid to outsource the crown jewel of any aircraft mfg and that is its wing.
I think the schedule for the 777x reflects the wing, factory went up immediately, they have started mfg of test articles and I think they will do fine (and they can draw from Mitsubishi who they gave the crown jewels to)
Challenge yes, but I think they will do it fine.
Normand: I have to disagree on the single aisle. You have rolled the one area (A321 and very serious) into the whole lineup.
As it stands, dated, bad planning and all, the 737MAX lineup work well on the under A321 area. That does not change because of the A321 success.
I continue to argue that regardless of what Boeing says, the 737-900/9 is a successful adjunct to the 800/8, if you put it in that context you have a 3 aircraft successors lineup below the A321 that Airbus has problems matching (the 800/8 is equal to the A320 despite it better engine choices as it has more seats). The -7.5 also is a good move. Airbus has nothing to match the 900/9 (though I would rather be in their shoes with the A321 that is in a completely different category)
Its actually competing (not even close) with an A321 is where Boeing is getting badly hurt.
The statement we have time is simply foolishness.
A MAX10 gets them competitive in that segment and the RS comes in 2030. They do need to get their ass in gear.
Is Boeing stupid to have let themselves get boxed in there, yes they are.
But the sky is not completely falling either. Airbus has not had an answer for the 777 for a long time either.
Its an ebb and flow, right now Airbus is looking very good in the single aisle lineup. Boeing could have corrected, they can, and the sky will not fall tomorrow.
Widebody meltdown
All the excitement in the twin aisle sector with massive investment and long order books seems to have come to a grinding halt. To generate cash and profit both Boeing and Airbus should be focusing their real attention on the single aisle products. The order books are diverging more and more with MAX/ A320neo taking almost all the orders in the past year. The focus on production efficiency and aircraft capability in this sector underpins the health of both to a significant degree.
The clear message appears to be a very real concern on the Boeing single aisle lineup at present with few clear winners. The MoM is just a distraction to the fundamental problems of competing with Airbus across most sectors. We will see MAX 10 shortly as the lowest cost option to covering the A321 only to see some sort of A320.5 and A322 conjured from the parts bin that will do as good or better at substantially lower investment cost with significantly higher commonality across the range.
Frankly I don’t think Airbus is going to change anything right now in single aisle.
They are doing well and will continue to do so.
Those moves will come when Boeing finally does a real 737RS, and then it will be more than stretch, wings and a second NEO as well.
As for the wide bodies they are just returning to historic norms. There is good production back log (even 777 is good, artificially created production gap with the high and non sustainable high rate of almost 8 787 won’t go to 14 either.
Boeings mistake was not correcting the 737, but they are stuck with it and there are moves they can do. It won’t cut into the A321, it can allow them to keep their existing customers.
the fundamental question for me is, if this order slowdown is either
– the end of a cycle or
– just a postponement of replacement orders, as with low fuel prices it makes sense to fly around with old metal instead of spending money for new planes.
Answering this question would help us to better understand why new projects are launched or postponed:
A new MoM plane costs a lot to develop, but can you sell it at the price necessary to cover development costs, when an old 757, 767 or even 330-300 can do the job for a slightly higher fuel but much lower capital bill?
Same goes for 350-2000 vs 777-300er and even 777-8x vs 340-500.
detto 380neo vs just 15 year old 380s.
And as a real life example of how difficult this might get if the market is flooded with old metal capable of doing a similar mission: C-series vs 1000s of 319s and 737-400s -700s.
Yep, it is a balance and mistakes are made and as has been often said, its not the general that makes no mistakes, its the one that makes the fewest that wins.
Fog of war and all that.
Boeing made a major one in not replacing the 737
Airbus should have gone head to head with Boeing in the 777 area and not the A380.
Boeing should have given up on the 747, ego there.
So it goes and we find out after its all done (20/20 hindsight) as no one can forefast it for sure.
I remember the airlines were hollering for the A380-900 as soon as they started flying the 800. No freight capacity.
Now no one but Emirates wants it.
What changed? They found it can work for passengers but its a hard one to fill and a 900 would be harder still.
Is there any evidence (apart from Malaysian) that the A380-800 is hard to fill? My impression is to the contrary but may be wrong.
Lack of follow up orders.
It may be more it works well and certain routes and would fail miserably on others if put there.
BA has truncated their purchase at new, Quantas has deferred the last of their orders, FA has deferred, LH is taking no more and others have deferred.
Calls for the 900 have ceased (Emirates side) and no hue and cry arose that we want that when Airbus floated a shorter stretch.
Qantas deferral was part of crisis management caused by late delivery of 787s. They couldn’t afford to pay. EK ate the Qantas business plan while Qantas waited for the 787s to get delivered and they didn’t know what to do next. They also cancelled 35 pcs 789 at the same time. Ended with Qantas giving EK most of the routes the A380s would have been deployed on.
Given EK’s effective deployment of the A388, giving them even bigger metal might spell the end of a once great French ex-icon in which the French government still has shares, can they use their Airbus holding to make sure it never happens? I guess major EU carriers must be hoping so.
TransWorld: “… the 737MAX lineup work well on the under A321 area. That does not change because of the A321 success.”
Yes it does. It actually changes everything. Like John Leahy would put it, the 737 MAX 8 has effectively become an orphan, while Bombardier is busy building a family of its own. The A321neo has essentially destroyed the MAX 9 business case and the C Series has eaten the MAX 7’s lunch. This new situation makes the MAX 8 itself less attractive despite its own merits. For the MAX 8 now belongs to a dysfunctional family and its parents are divorced from reality.
Prospective buyers now have three different choices to make in the narrowbody sector. They can buy the 737, but if they do so they will have only one viable set of performances to choose from, those offered by a single model: the MAX 8. On the other hand if they choose the A320 family they now have access not only to a viable MAX 8 alternative, the A320neo, but also to the larger A321neo, which can be extremely lucrative for an airline that can handle this kind of capacity. Below this, Airbus has nothing interesting to offer, but above that they offer an unlimited choice of very nice aircraft, like the A330neo, the A350 and the A380. In addition to this extremely attractive “Airbus package” it is also possible for an airline to acquire an entire family of small narrowbody aircraft from Bombardier, which will soon comprise the CS100, CS300 and CS500. Of course there will still be some operators who would accommodate themselves with a single model like the MAX 8, but most of them will likely opt for the more attractive packages that are now offered by the competition. Besides, the entire Boeing lineup has dissimilar cockpits and technologies, whereas with Airbus you have one seamless set of models, all the way up to the A380. It’s like having one model with multiple variants. But the Boeing lineup is itself a dysfunctional family, with a set a very different aircraft like the 737, 787, 777 and 747. It’s like as if they were coming from different companies: the Old Boeing and the New Boeing.
Does all this mean Boeing is now out of the game? I don’t really know, but I am worried, like Boeing should also be. We have to keep in mind that the commercial aviation cycles are extremely long, wether they are market cycles or manufacturing cycles. And the problem with Boeing is that they are no longer in phase with these market cycles, or even with their own manufacturing cycles.
Noramnd: You are simply twisting things to suit your view.
Boeing has 3 aircraft in the single aisle area, all of which are viable.
7.5, 8 and 9. 7.5 will not sell in 8 numbers and 9 will not either.
While C series is a great aircraft, its not an 8 or a 9 (and encroaches on the 7.5).
Airbus does not have a model between the A320 and A321 either. Boeing has two, one very successful and one a nice adjunct.
Regardless of what Boeing spews out, the 900/9 never was and never will be an A321 competitor.
There Airbus resides alone. The A320 is good enough to fight it out on pretty close to equal terms with the -8 and -9. Still comes up a bit short.
Not sure how much that hurts in the middle area like that as the next step up is a pretty good one.
“While C series is a great aircraft, its not an 8 or a 9 (and encroaches on the 7.5).”
– You are right the C Series is not and 8 or a 9, it is actually far superior. Wait until you see the numbers for the CS500 and CS700.
“Airbus does not have a model between the A320 and A321 either.”
– True. But there is a reason for this. Airbus has refrained from doing the A320.5 because it would instantly obliterate the 737 business case and push Boeing into making an immediate commitment to the NSA. That is something Airbus doesn’t want to see happen too soon. They actually want to see it happen when it’s too late. But in my judgment this time is fast approaching.
“The A320 is good enough to fight it out on pretty close to equal terms with the -8 and -9. Still comes up a bit short.”
– I agree that the 737-8 has a slight edge over the A320 because it holds 12 more seats and has a slightly lighter fuselage. But any advantage the -8 had over the A320 vanishes with the A320neo equipped with GTF engines.
Normand: Right now the C Series is a 100 and 300. If you are going to comp[are wait until they do the 500 (given) I don’t believe you will see a 700.
Talking what is there, not conjectured.
By the time we see the 500, Boeing is going to be into the 737RS
(well they better be, conjecture on my part)
So you are telling me that Airbus is not coming out with aircraft because they are afraid they will obliterate Boeing?
Oh come on, if they thought they could do it they would do it in a heartbeat. It would take Boeing 15 years to recover if they ever could.
And no, the A320NEO does not beat the 737-8/9. So far it matches it.
Future, I think the GTF has more upside and will wear away on Boeing.
that said, take 737800/8 sales and 900/9 sales and compare to the A320 (their future competition) and they are ahead.
Boeing simply fouled up and has nothing to take on the A321 and is getting their butts whipped.
Quoting Leahy is like quoting Putin, really? A salesman? Lets get off the spin hyperbole and stick to reality.
No doubt we are in a down cycle, nothing new there, but there seems to me to be a lot of uncertainty as to what models will be in demand after. Customers have enough on order and aren’t risking placing bets that might be wrong.
As one example of the risks involved, Trump and Brexit are both the results of increasing gap between rich and poor, politicians on both sides of the Atlantic are waking up o the need to turn this around. Higher median wages might kill high density layouts like 200 seat 737-8s and 240 seat 321s.
China, everybody’s favourite market, is slowing, reducing small wide body demand, while India is rising, which is still domestically a narrow body only market.
Risky times to order new aircraft or do new WB designs.
“Pricing pressures on A330 are starting to materialize.”
I think the A330-800 NEO orders will tick over. It’s still early days and the Trent 1000 TEN hasn’t entered service, so it’s hard to gauge where the NEO and its Trent 7000’s will be. It’s a pity there’s only one engine option for it though.
oops *A330-900 I meant. The A330-800 will continue to be sluggish I expect.
I also think as time goes by the A330NEO orders will go up.
I don’t think it breaks North of 250 though.
The 800 is a Hawaiian only (pretty much) aircraft.
I would not be surprised if the 338 would go the 358 road – provided no more orders will appear.
Today there are 6 from Hawaian a 4 from Transasia and that is ALL.
I think Hawaiian might end up getting derated A339’s with one or more A339 HGW’s for Honolulu London for example.
I had not followed it that close, 10 is way to few.
HA was pretty ticked off being forced into the A350 though they could have gone Boeing.
Maybe Airbus will just them the 900s and call it good.
Speaking of single isle, looks like the Leap vs PP fight is now on:
https://airwaysmag.com/airlines/pegasus-first-cfm-a320neo/
I wonder how long before we hear some real world consumption comparisons?
A month or two.
@TransWorld
If you want to compare the 737 to the C Series you have to compare models that are in the same category; i.e., you want to compare the CS100 to the 737-600 (or A318), and you want to compare the CS300 to the 737-700 (or A319). Since you were using the 737-8/9 as a comparison, you left me no choice but to bring the CS500 and CS700 into the discussion, even if they have not been officially launched yet. I also believe that at this stage the CS500 can no longer be ignored.
Trans-World: “And no, the A320NEO does not beat the 737-8/9. So far it matches it.”
Can you quote me on this? No, you can’t, because that is not what I said. I never compare the A320neo to the 737-8/9. But I do compare the A320neo to the -8 and I leave the -9 aside because it belongs to a different category. And I will quote myself here: “But any advantage the -8 had over the A320 vanishes with the A320neo equipped with GTF engines.” In other words I don’t see at this point any appreciable difference as there was before when the 737-8 had the edge over the A320 because it held 12 more seats. As for the MAX 9, I always compare it specifically to the A321neo.
TransWorld: “So you are telling me that Airbus is not coming out with aircraft because they are afraid they will obliterate Boeing?”
No, Airbus is not about to obliterate Boeing. I find it regrettable that you interpreted what I said this way. The idea that I was trying to convey is this: Airbus could produce an A320.5 anytime if they wanted. And if they did so the MAX 8 would immediately loose it’s 12-seat advantage, and that would destroy the MAX 8 business case. Even if the A320neo is superior to the MAX 8 in other areas, there will always be this important difference in seat count. And the entire MAX 8 business case rests on this vital difference. But the A320.5 would eliminate this advantage, and as a consequence the MAX 8 business case would be nullified. But why would Airbus want to avoid doing this? Because the entire 737 programme would fall apart and Boeing would no longer be in a position to procrastinate and would have no other choice but to launch the NSA immediately in order to stay in the race. My reasoning is based on the assumption that Airbus doesn’t want to see the NSA happening too soon because the situation they find themselves in right now is very comfortable indeed. They are about to achieve dominance in the narrowbody market and they currently hold approximately 60% of this market. And the A321neo, which is their most lucrative model, outsells the MAX 9 by a ratio of 6 to 1. There is no contest here.
TransWorld: “Quoting Leahy is like quoting Putin, really? A salesman? Lets get off the spin hyperbole and stick to reality.”
I was not quoting Leahy. I was only using his vocabulary in a statement he made about the C Series, saying it was an orphan. That is what “Like John Leahy would put it” was referring to. I should have been more specific though, in order to avoid any confusion. But at no time did I say “As John Leahy said.” Because that would have been a quote. Now I have to explain why I was referring to this statement he made about the C Series. JL said recently that the C Series was an orphan. This is not true because there are already two models: CS100 and CS300. And since the CS500 is widely expected in the near future we can therefore refer to the C Series as a family of aircraft. But to be fair to John, he probably had in mind all the other Airbus models that belong to the larger family of Airbus products. That is where Airbus has a huge advantage over Bombardier. But if we take a close look at the smaller 737 family, it is quite obvious that the MAX 8 is about to become an orphan, because it is the only 737 variant that is still popular. And in my view this is not sustainable. Because most airlines want to acquire a family of aircraft and not be stuck in a single model scenario, with no viable upgrade from the same manufacturer. The advantage goes to Airbus here.