Weekly Analyst Synopsis: Rolls, Boeing and leasing companies

Boeing LogoSept. 28, 2016: This week’s aerospace analyst research synopsis looks at Rolls-Royce. aircraft leasing companies and the implications to supply-and-demand, and the Iran Air order clearance by the US for Boeing.

Bernstein Research

Rolls-Royce (Underperform)

Sept. 25, 2016

Rolls-Royce CEO Warren East participated in the Bernstein European Strategic Decisions Conference last week in London.

CEO Warren East defines the three phases of transforming business: stabilization, improving profitability, and positioning for new growth. The immediate focus is on stabilizing the business in the wake of several profit warnings, which he expects to accomplish in the next 12 months.

East views delivering the restructuring concurrently with doubling the rate of Trent production as a complementary exercise, rather than conflicting challenges. His believes restructuring will yield operational performance improvements necessary to achieve the delivery ramp required by Airbus and Boeing in the coming years.

Recent headcount reductions are on track to deliver roughly half of the ~£200m recurring cost savings previously announced.

Goldman Sachs

Weekly synopsis, Sept. 26, 2016

Recent aircraft leasing data offers more evidence of OE oversupply

Leasing data concerning for Aerospace OE
We continue to see several reasons to believe that new large commercial aircraft supply is outpacing demand. Supply is at an all time high, while demand is slowing. Market values, new transaction pricing, and rental rates are good indicators of supply and demand balance in any market. In the large commercial aircraft market, that data has all deteriorated YTD. While the deterioration has varied by sub-segment, it has occurred nearly across the board, and even in some surprising places. There is also a sizable supply of new and used lessor capacity available, competing with new orders. And lessor orders have slowed sharply. We think this all has negative implications for future production rates and pricing.

Narrow and wide-body lease rates and values are under pressure
Lease rates and values are down materially yoy, for almost every Boeing and Airbus model, and the trend is deteriorating. This includes the next-gen A320neo, A350, and 787, reflecting the lower premium airlines are willing to pay for fuel savings at a lower fuel price. Average lease rates are down 2% yoy for narrow-body aircraft and down 10% for wide-body. This is a reversal from 2014-2015, which saw narrow-body rates rise, and wide-body fall low single digits.

Lessors are no longer ordering
Lessors ordered a quarter of all aircraft from 2011-2015, averaging 500 units a year. 2016 year-to-date, lessors have ordered less than 100 aircraft, and are burning down their backlog. Historically, peaks in the overall lessor backlog have nearly always coincided with aircraft delivery downturns.

Speculative orders and lease expiries make supply worse
Speculative lessor orders, lessor expiries, and unplaced lessor aircraft add an additional component to the oversupply picture that we believe is overlooked. Over 1,400 narrow-body and 400 wide-body leases expire through 2020, and more than 60% of each will be 15 years old or less.

Morgan Stanley

Airlines and Aerospace Weekly note, Sept. 25, 2016

Media reports note that Boeing has received approval for a sale of ~80 airplanes to Iran. We believe any such approval is supportive of BA as orders have moderated post Farnborough and particularly for wide-bodies. The order is apparently for ~80 aircraft, with the split being 4 747s, 46 737s (including 6 MAXs), 15 777s, and 15 777Xs. The sale of these aircraft is positive from a book-to-bill and wide-body perspective, but not enough to address the 777 bridge. Prior to this, we estimate that 15-20 / 25-30 / 55-65 aircraft are needed in 2017 / 2018 / 2019 to fill that bridge. The exact timing of deliveries is unknown, but the sooner the aircraft can get delivered the better, in our view, though financing remains a key unresolved issue and politic headwinds may reemerge.

 

 

16 Comments on “Weekly Analyst Synopsis: Rolls, Boeing and leasing companies

  1. Be interesting for a possible Boeing sale to Iran, who will supply the financing guarantee? Cant see the Senate hold on ExIm board appointments being lifted so that Iran gets new planes.
    On the slow down in orders, that might mean the pricing of new planes is too high to deliver the revenue/profit that airlines expect with low fuel prices continuing for some time. The result of that must be that passengers will start to see serious savings they havent been getting up till now.

    • Even if ExIm reopens for business, it wouldn’t be allowed to finance any deals with Iran. It’s going to have to be private sector funding. If the interest rate is high enough and the risk is spread widely enough, some banks will probably bite.

      • It becomes hard for US to block Airbus sales with this, will export credits be re-started before ImEx appointments?

        • I thought that the reason given for the existence of Exim was to support projects that would be hard to finance through the private sector.The argument falls down a bit here.
          As the analyst suggests Rolls Royce ramping up production at the same time you are sacking people seems totally illogical, they had better know what they are doing or else there could be big trouble ahead. Sometimes the consequences of desicions like this don’t become apparent until far into the future.

          • “Rolls Royce ramping up production at the same time you are sacking people seems totally illogical.”

            When companies act “illogically” like this it signifies they are in dire straits. RR may be in a similar situation than Bombardier because both struggle today and both have a promising future because they have great products in the pipeline. On the one hand RR are trying to lower their costs, hence the lay-offs, and on the other they are trying to increase the cash flow, hence the ramp-up. In order to resolve this apparent paradox RR will obviously need to improve productivity.; i.e., build more engines with less people.

          • The logic Rolls-Royce is using is the labour intensive design phases of the Trent 1000, 7000 and XWB are now complete. The production phase requires less engineering resource than design, so less people. With no major engine development programmes in the near term, there is less work for them to transition to.

            Whether they are doing it in a way to retain the knowledge and experience in the company would be an interesting debate.

            A lot of the cuts are also at management grades, so one could argue the expertise is kept but the management has been thinned out.

        • Thats the issue , without the numbers on the ExIm board approvals over a certain amount cant be done. As I see it thats the only impediment to large airliner credit guarantees.

          The side issue is that the future orders bubble bursts and leaves a large glut of unsellable used planes will mean the credit guarantee will be called up and ExIm be exposed as another ‘too big to fail’ absurdity where the US taxpayers bail it out- as has happened before. The worry is it will be so much bigger than before.

          The political interference is the outcome as canny Senators see a possible disaster coming and position themselves as ‘trying to stop it’
          The deals that are going through are mostly smaller construction equipment, locomotives and such things, its only the expensive per item sales such as airliners that are blocked from approval.

  2. Goldman Sachs:

    1. There is also a sizable supply of new and used lessor capacity available, competing with new orders. And lessor orders have slowed sharply. We think this all has negative implications for future production rates and pricing.

    2. Historically, peaks in the overall lessor backlog have nearly always coincided with aircraft delivery downturns.

    3. Speculative lessor orders, lessor expiries, and unplaced lessor aircraft add an additional component to the oversupply picture that we believe is overlooked.

    THE WRITING IS ON THE WALL. Or at least in this thread.

  3. I see a lot of ANA 767s coming through.

    All those new airplanes making a lot of used aircraft, and those from ANA, JAL, SA etc are pristine condtion.

    I expect its going to get a bit bloody as the bubble bursts.

    The thing I have seen about bubbles in my all too many years (I look a lot like Scott poor guy) is that they take so long to burst, you think they are not going to and something has changed.

    Then they burst and its, well they always burst.

    What was it Greenburg said, Excessive Exuberance?

    • “I expect its going to get a bit bloody as the bubble bursts.”

      My definition of a bubble is this: Inflated expectations, based on unrealistic assumptions. I am not convinced that this corresponds to what has been going on for more than a decade now. Rather, I would like to suggest that what we are witnessing today is a correction, big or small. Commercial aviation is not about to collapse, let alone burst, like the Dot-Com industry did at the turn of the new millenium. We are simply entering an economic downturn accompanied by a concomitant market readjustment that could have occurred independently but happen to coincide and therefore have a compounding effect. When we will emerge from this slowdown the situation will not have changed dramatically and we will still have the same duopoly. However, the Big Two may come to regret having purchased back shares that will now be worth less than what they paid for.

    • “Then they burst and its, well they always burst. ”

      bubbles are driven by local resource competition that ignores some of the wider environment.

      To the end of bubble growth you can not do a controlled but a timed bursting of the bubble. Seed a rumor the rest is done by herd instinct of the crowds involved.

  4. One thing I do see is the thing about, well that doesn’t help much (when an order comes in)

    But enough orders and its at least better.

    Saudi has made a significant one and the Iran one could be (not holding my breath yet). All helps, may not be complete gap filler but it all also helps.

    If I was Iran I would wait and snag new stuff cheap.

    • Airbus tends to pump a relatively high percentage of its production through the leasing channel so it has a lot to lose.

      • I think you bring an important point to the discussion. I would like to know what those percentages might be for both OEMs. It would be even better if these were broken down into narrowbody and widebody. Better still, for aircraft that are on order versus those that are presently in service; this way we could detect any new trend and it would give us an historical perspective.

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