Sept. 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.
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.
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.
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.