Leeham News and Analysis
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Leeham News and Analysis
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Pontifications: Shooting yourself in your feet
By Scott Hamilton
April 16, 2018, © Leeham News: Airbus’ new top sales chief, Eric Schulz, was candid about losing American and Hawaiian airlines wide-body orders, according to a report from Flightglobal from the Airbus annual meeting.
In reference to Hawaiian’s switch of an A330-800 order to the 787-9, he admits: “Maybe we did not see the danger coming…we may have made the conclusion a bit too early that the best solution was to stick with us – which I think it was,” Flightglobal wrote.
American’s loss, Schulz told Flightglobal, was for a different reason: American was “already very heavily engaged” with the 787, adding: “I knew exactly where our competitors had to go in terms of pricing. I’m certain American did a good deal.”
I thought American and Hawaiian were predictable outcomes. But Airbus’ problem went beyond not seeing the “danger.”
Dissing your own product
Airbus shot itself in its own feet with the A330-800 and before that, the A350-800.
You never see Boeing doing this. Even when the market is clear it doesn’t want the airplanes (737-7, 737-9, 747-8), Boeing’s disciplined messaging nevertheless touts these as the best thing since sliced bread.
When you diss your own product and cast doubts on whether you’re going to build it, of course why would anyone buy it?
Airbus launched the A330-800 and then proceeded to tell the market it wasn’t sure it wanted to build the airplane after all.
The market question might have been inevitable. Sales of the predecessor A330-200 had dried up in favor of the larger A330-300. The A330-200’s long range wasn’t needed by most customers and the A330-300 could carry about 50 more passengers for roughly the same operating cost. Sales of the A330-300 were very good.
The A330-900 has more than 200 sales—not great, but low fuel prices and a push to sell more A330ceos to fill the production bridge hurt. Even the A330-200 won some deals.
At one point, the market understood that Airbus wasn’t going to proceed with the A330-800. Airbus officials even told me that they preferred selling the more profitable (higher margin) A330-900.
About nine months later, officials reversed themselves and said they wanted to proceed with the A330-800 after all. The messaging changed to say the A330-800 covered the top of the Middle of the Market, an argument that doesn’t really resonate with airlines because the airplane has far more range and is much heavier than a MOM airplane needs to be.
The damage had been done. With only one order, from Hawaiian, for the A330-800, there was no way this carrier was going to be the only customer for a mere six airplanes.
A350-800
For Hawaiian, it had been down this road before.
The carrier ordered the A350-800. It was the right size, 250-270 passengers. It had the right range, more than 8,000nm to allow service to Europe. It was the plane it wanted; the A350-900 carried too many passengers, hence the choice for the -800.
But Airbus decided it didn’t want to build the -800 even though it had, at its peak, 162 orders for the plane.
Why?
Same excuse as later given for the A330-800/900 push: we’d rather sell the higher-margin -900/1000.
One customer that ordered the -800/900 said Airbus wanted to re-risk the A350 program by eliminating the -800. At the time, the A350 was running late and over budget, the A380 was still at a loss, the A400M was a disaster and the A320neo was in development.
Like the A330-200/300, the A350-900 carried about 50 more passengers for roughly the same operating cost as the smaller A350-800. Unlike the A330-200, the A350-800 didn’t offer significantly more range than the larger -900.
But for some thin routes, it was the airplane of choice. That’s why Hawaiian ordered it. When Airbus dropped the A350-800, Hawaiian was persuaded to switch to the A330-800.
The Airbus’ ambivalence happened all over again.
No wonder Hawaiian switched to Boeing.
American’s choice
American’s switch to Boeing also was predictable.
Although Airbus offered a combination of A330-800s and -900s in lieu of American’s desire to cancel the A350-900 order it had, this was an uphill battle from the start.
The A350 order, for 22 airplanes, was a legacy US Airways deal. US Airways also brought 22 A330-200s/300s into the American merger.
Legacy American ordered 42 787s and by the time the decision to abandon the A350 deal was made had taken delivery of 35 of them.
It made little sense for American to order the A330neo with 35 787s already in the fleet and seven more to go. Build on the 787s and eliminate the Boeing 767 and A330s from the fleet in the next decade.
American expressed its own doubts about the A330-800. Noting the sole Hawaiian order (prior to its cancellation), American had little appetite for ordering an “orphan” airplane.
Airbus’ ambivalence toward the -800 once again came back to bite it.
Aggressive actions
To be sure, Boeing took aggressive actions at Hawaiian and American to kill Airbus’ offers at each carrier.
But it was, in my view, less that Airbus failed to recognize the “danger” than it was Airbus’ own statements and actions years earlier that cast doubts over the future of the A350-800 and the A330-800.
If you don’t have faith in your own product it is hardly surprising if the market rejects it. This shows a lack of commercialism at the senior ranks in Airbus. They are not there to be the arbiters or the received wisdom, they have to extol the virtue of their product. As suggested any Boeing manager would push any Boeing product, there would not be public equivocation
What I remember it was predominantly the Boeinginista injecting rumors about Airbus not doing the A330-800 in heavy rotation in all the visible places.
Obviously Airbus fault to not immediate counter with some counter rumor dissing Boeing.
But saying that the A338 will be build is not enough.
See how the drug like rush Dreamliner worked its poison.
I always stated that Airbus should’ve built the A350-800, but far “smarter” folks said I was stupid and the A330-800 was a better idea.
Look who’s “smart” now……
Even thought the A350-800 was carrying around weight it didn’t need, it certainly seemed primed for updates during its service life. But, as Leeham said, Airbus finds itself on the back foot not so much due to Boeing but it’s own doing.
Airbus should not despair because of these two loses, on the other hand they should listen to their clients, exactly what they mean when they say something and not what Airbus execs want to hear.
There is the reality of two airplane families, an optimised design and its stretch, which does not leave room for a profitable 3rd member of smaller proportions and similar costs.
Takeaways: One, AB’s already clearly missing the airliner manufacturer aviation’s “King of Blarney and Bluster”: Leahy. Two, “Never tell the truth when a lie will do better”! Three, fifth paragraph from the end: “ Build on the 787s and eliminate the Boeing 787 and A330s from the fleet in the next decade.” Whaa?
Typo: Should be 767, no?
Ah, thanks! (Not enough coffee yet for me earlier this morning to figure it out!)
“eliminate the Boeing 787 and A330s from the fleet in the next decade.”
Caught tat as well, should be eliminate 767 (all those 7 numbers run together!
Much of this stuff went on while Leahy was on board. I’m pretty sure he was the one who said that he’d rather sell the higher-margin -900 than the -800. (It was part of his bluster — a way to explain away the fact that the -800 was selling very poorly.)
Obviously, Leahy’s record speaks for itself. He was a great salesman. But he wasn’t perfect — I doubt his presence would have made a difference to either of these orders.
A330 or A350 800?
He certainly wasn’t in the mix on these recent Hawaiian and American competitions and decisions.
Will the next test for Airbus in the US be whether it can keep previously all 737 Alaska Airlines from canceling the A320 orders that it inherited when it bought out all A32X Virgin America?
Alaska’s current fleet according to Wikipedia:
152 737’s plus 49 on order,
69 A319’s, A320’s and A321’s plus 34 on order.
Brad Tilden has even fairly recently confirmed he’s a “Boeing man”. And I’m pretty sure the AB fleet can be sold at a pretty penny. The orders can be turned back to AB, or taken and sold on to other airlines and/or lessors. The real question is can he get replacement Maxes fast enough for the ex VA fleet switchover. I wouldn’t expect this would fully come into view till at least the fall of this year, given the need for some further merger “dust settling”.
To me the question is the A321NEO. The A320s will go. The 737-8 is a tad better (few more seats) and in the fleet.
LEAP engines on the A321, early deal and a good one and capability Boeing can’t match.
The A320 NEO outsells the 737-8.
@keesje:
“The A320 NEO outsells the 737-8.”
1. 320Neo was available for sale earlier than the Max8.
2. Many firm orders for Max are recorded as variant undeclared /TBC….unlike firm orders recorded for 320Neo family.
Could go with Max 10–“Fleet commonality” generally rules—if the price is right!
Keesje: For all real purposes the two are even.
Airbus beats Boeing to death with the A321.
737-8 2300 some and a lot unknown (1500 or so
A320NEO 4071
@MontanaOsprey:
“Could go with Max 10…”
I foresee this is a question of when rather than if re AS ordering Max10.
Everyone who is a leehamnews.com reader already knew 321Neo(HGW version a.k.a. 321LR) does hv significant edge in payload/range performance over Max10. Lesser known to those unfamiliar with AS is that AS current(and likely also their future….I just don’t see AS expanding to Europe within nex 10~15yrs when LHR->SEA block time is upto 9h55m so still out of reach even for a ‘soup-up’/enhanced 321Neo) network is 99.9% within N.America+t0/fm Hawaii. For such a route structure, 321Neo’s edge over Max10 is almost useless for AS…..Max10 already hv sufficient range to reach pretty much any point in N.America/Hawaii fm SEA hub.
Most importantly for AS, 321Neo will continue to command a significant pricing premium over Max10 in the global mkt….
The Airbus communication was not excellent, indeed.
However, the 330 line is not booked out and the 338 is the smallest long range plane available, especially since Boeing stated that they prefer to sell 787-9s and -10s instead of -8s. Additionally, there must be some replacement market for all the 767s and 332s flying around. So, there is a market for the 338, not a big one but it is there.
Clearly, they could have been more determined, once it became clear that the 330 line will not closed down after the introduction of the 350.
Your argument is undercut by the 22 787-8s ordered part of American’s very recent, overall 787 order. I suspect, if you order 10 or more 787-8s, BA will get out its “sharp pencil” on pricing, and book your order!
@Chris: LNC has a piece coming on 787-8 tomorrow (Ap 17)
Cool, saw the move to common aft section and have been wondering with more orders from American.
Ok, thanks! Good article. Revealing indeed. That means they will stabilise their production at 140 per year, try to sell as many -9 and -10 with profit and fill the rest with 787-8 to make Airbus’ life difficult. We had that already with the 320, 321, 319s 15 years ago.
That means, Airbus should try to strike back with the 339 towards the 787-9 and think about a short range 330-1000.
A pity that there are no reliable numbers how much it really costs to build a 787-9, 339 and 359 to compare….
With an 10-15% smaller and lighter wing an 350-“800” and 359-900X could be real competition to the 789/10. If you add updated XWB (76-84KlB) engines to the formula could see a reversal of the current situation.
If an 350-“800” and 359X could share similar levels of commonalty as the 359 and 35K Airbus could have a long term winning combination.
you won t get the prices paid in short and medium range that justify a new wing. If you change the wing, you have to change the wingbox … and the fuselage, and as you say, the engine. That makes a new plane = 10bn minimum bill.
Agree its a “new” aircraft that will require a new centre section, no idea about costs but could be done in relatively short time. The 359 to 35K took ~4 years.
But if you look at the long term AB wil have an “4” aircraft A350 family with seating from 275 to 375 that will give airlines a variety of options and stop the migration to the 789/10. The family could look like this;
1) 350-“500” (previous -800), 275 pax, 7500Nm, Wing-2,
2) 350-“700” (previous-900X), 325 pax, 6500Nm, Wing 2,
3) 350-900, 325 pax, 8000+Nm, Wing 1A,
4) 350-1000, 365 pax, 7500+ Nm, Wing 1B,
5) 350-1000+, ????
I haven’t been paying attention to which individuals or departments at Airbus have been negative. Have you noticed Scott whether it was C level, finance, sales, specific sales teams…?
I won’t name names on this one, @Woody
Fair enough 😉
Ofcourse there will be a market for the A330-800. It will be a niche plane, but someone will be able to make money with it. There will be many long thin routes that can be opened and there are many A330-200 to be replaced.
It’s more likely than not, that AB has buyers lined up. I doubt they built it just for Hawaiian.
They probably know something we don’t.
Interestingly, Etihad flew to Perth successfully for years with an A330-200. They switched to the larger 787-9 and now will cut out the route completely. They are also cutting out Dallas 787-9 route. Perhaps, these are the kind of routes where the a330-800 will have the advantage. Or perhaps routes like non-stop flights between texas and India. Especially with the sleeping quads being available in 2020, these A330’s will offer something completely different.
The problem with the A330-200 replacement market is that for the same kind of missions, the A330-900 is the natural replacement, not the A330-800. I reckon most airlines would rather up-gauge a little to further improve CASM rather then go for an aircraft that is optimised for an ultra-longhaul capability that they do not need. The popularity of the A330-200 already started decline after the A330-300 got a higher MTOW and in consequence increase range. The A330-900 combines the strengths of the -300 with the versatility and range of the -200.
On very short sectors, I could even see the A330-200 come very close to the A330-800 in terms of trip cost. The -800 has too much wing and is too heavy to seriously compete at the top of the MoM.
I agree that most customers will select the A330-900 unless the A330-800 finds its unique applications. It can be long thin routes as the A330 2+4+2 cabin is popular and as a A330F.
It is presently a bit too Heavy for MoM routes but can loose weight and with the A330ceo engines +nacelles as an option be a durable and cost effective option, especially if RR, PWA and GE certify a new iteration of their Engines.
The question is how big of a market. Most likely will RR and PWA bid if they loose out on the 797 Engine selection. Always good with Engine competition and Airbus might tell PWA they owe Airbus an improved PW4172 for the A330neoceo because of the A320neo issues and keep Commercial widebody production going in E. Hartford when the GP7200 goes to sleep unless Tim Clark is the “Engine Prince” giving it a kiss of Life. RR can put some TXWB Technology into another iteration of the T700. It all comes down to payload/range/price/availability.
Maybe what Airbus needs is an ~270 seat clean sheet aircraft (2-4-2) with CAT-D wing, ~60Klb (ultra-fans?), ~6000Nm range to recover lost ground in the <300 seat twin aisle sector?
With same wing and engines you can make modest stretch and shrink models with 240 seats/7000Nm range and 300 seats/5000Nm range.
New is always best but costs money, time and resources. You often have to balance what you got, what the cusomter actually will pay for and you have to deliver. Airbus should have resources in design engineering and systems design now but production is tight right now.
So putting another derivative of the A330 on the market might be profitable and give you happy customers. The A330neo wing and structures might be a good start and as you don’t need the T7000 thrust the quickest and cheapest way is to put the ceo engines with some new developments onto the neo wing and limit MTOW. The CF6-80E does deserve an infusion of GE9X technology.
I think most of those Ethiad routes were always unprofitable no matter the plane flying it, especially Dallas (a long thin route that all ME3 serve). The cuts are because Ethiad’s bad investments are coming home to roost and the airline/government is in panic mode trying to right the unprofitable ship.
I don’t think AB has A338 customers right up their sleeve waiting for announcement. They built the plane because HA still had it on order (if Airbus didn’t met the required milestones and HA kept their order then Airbus was now breaching their contract and owed HA money) and it is their future freighter and MRTT platform do certification will eventually be necessary.
I don’t see the A338’s range being it’s savor- the plane even before the 251t version had more range than the 788 and that didn’t help it. The airlines want less range and less weight (actual weight, not paper derates) in this segment, not more.
The 330NEO could possibly have been more successful if Airbus launched it as a single model (330-“850”) with ~275 seats, 250T MTOW and 7500-7800Nm range? Don’t know how much market research went into the 330NEO’s.
Airlines that want to up gauge from the 333 could go 359 and from 332 to 330-“850”.
Under the current circumstances believe that the 251T 338 has a place in the market, AB just needs to crack a “biggish” sale somewhere. On the other side an LGW 339 (230T?) with de-rated engines and 5500-6000Nm range could have attracted more interest considering that the 359 is there for longer range.
I don’t think a lot. A lot of clamoring, but per Boeing with the Sonic Cruiser, when they asked airlines will you buy it, the answer was not.
Really? What will you buy? Hence the 787 came to be.
Hazy has spoken of more than a 1000 x A330NEO, better order a lot more then!
Oh yeah, that’s right. His prediction at the time seemed wildly optimistic; even more so now.
The key problem for Airbus might be the lack of a model to oppose to the Boeing 787-10. It seems that this part of the market will develop notably and Boeing starts to sell many planes, beyond its domestic market.
Could Airbus develop an A330-1000 with extra-capacity and less range at a minimal cost? This would address the needs of many passenger airlines (particularly in Asia) but also cargo ones. It could save money by not developing further the A330-800 which will never be a solid competitor to the 797.
I have been thinking along similar lines many a time but if you think long term is probably better to develop something around the 359 as platform?
Crawlone:
Boeing sells a whole lot of everything beyond its so called domestic market.
JAL, ANA, Air Canada (before the pilots tiff) were all in line for 787s first.
NZ took the first 787-9. It was a fair while before a US operator got theirs.
To put it succinctly, there have been 1318 787 orders through March (so not including the latest AA order) and 93 of those have been to US airlines (42 AA, 51 UA), or only 7%. Boeing started to sell many 787s beyond it’s domestic market over 10 years ago.
Two “deals” that’s sometimes forgotten are Turkish and Malaysian (MOU) orders for 789’s, two “big” 330 operators. Those are bigger “issues” for AB in my eyes than the AA 789 order?
I think MA is going to go back to A330NEO but that is a guess.
Ummm if my memory serves me right Boeing did this “yes we’ll build it, no we won’t” with the 787? Sold some then cancelled it. Scott what was that model called? Didn’t do them any harm
The 787-3 was the exact same size as the 787-8 (and technically really had no direct Airbus competitor in terms of specs). The two customers switched the orders to the 788 instead of deflecting to Airbus. Boeing also never built one.
Ebbuk: Good memory, but different circumstance. Boeing didn’t diss its own airplane; the model was canceled because the 787 program was so screwed up at the time and already billions over cost. This is also why Boeing didn’t build a new wing for the 787-10, resulting in lower range vs the 787-9.
Thanks Scott. Memory files refreshed and the point you made is now clear to me.
It does appear that Airbus is still, at it’s very core, stuck as to what type of company it is. Today it seems one part wants profit margin at cost of market share, the other wants market share which will impact profit margin. To be fair not sure it’s any different in any other company only that at Airbus the fight is spilling out into the market place with these mixed messages. Not a pretty sight. A330NEO just reminds me of 767-400. Too late, too late, too late.
Anyhoo 2 US Airlines doth not the entire aviation market make. There’ll be other battles. I hope for Airbus’s sake
Oh yea, the battle rages across the planet.
Airbus did a nice dig in China with the A330 Regional.
@Ebbuk:
“Anyhoo 2 US Airlines doth not the entire aviation market make..”
Of course not. However, neither “the entire aviation market” would actually invest in nex-gen small widebodies like 330Neo or 787. Even fewer would specifically consider 338 or 788 in their fleets.
HA and AA are among those few…..and hv made their choice recently.
So, is perhaps a new wing in the cards down the line for the 787-10 to up its capability? That would be interesting….
The A330 NEO was just more of the same.
Possibly AB worked the A330 numbers and saw a gap between the B787 hype and the reality and made a low investment play.
No matter the drivers behind the NEO is shows up a lack of vision and belief in a post A380 AB executive level.
Going after the B787 “Hype-liner” with more MTOW seems to be a very tired view of the world and where progress can be made.
The basic point about the B787 is that behind the hype we are looking at a 120T plus OEW TA lard bucket that is all trendy vicar on the fuselage front but relies on Mr GE and Mr RR to improve the economics.
The much talked about CFRP fuselage barrels seem to have made a play on pressurisation standards but next to nothing on structural efficiency.
If AB had wanted to really go after BA and disrupt the market they would have looked at what 90T OEW will put in the air with current technology.
A300 MK4 — same fuselage cross section but not a HD heavyweight like the A330. Look at the very distinctive saddle to be found on the A330 which is required to integrate the 250T MTOW wingbox to the existing A300 fuselage profile.
A300 heritage @ 90T OEW = 60M fuselage / enough real estate for 360 18”x 32” pitch seats / 6K NM nominal range with 300 onboard.
Optimised AL fuselage to make use of existing knowledge.
New wingbox and much smaller saddle.
New 190T wing with a lot of CFD testing.
Limited investment to lower weights — ALM and CFRP where the returns are high.
My plug number would be £2bill programme
Medium duty alternative to the current 125T plus HD TA lardbuckets.
Better to offer something new than hope price will keep you in the game.
Engines — WCS just use derated B787 units for a time on the wing bonus. Either that or go quad and raid the A320 roster.
Brochureware but brochureware with some history.
A360X?
A350 front/aft fuselage + 764-sized, high aspect ratio wing — i.e. wing-area of 300m2*; folding wingtips allowing the aircraft to operate in airport taxiway and apron/gate system as a Code D aircraft with wingtips folded — new centre wingbox; smaller lighter MLG; new and smaller Horizontal Tail Plane (HTP).
Outfitteded with 50,000 lbs of thrust RR UltraFan engines having the same diameter as the current TXWB engines (i.e. fanblade diameter of 118 inches), you’d have a pretty formidable aircraft family, IMO:
A360-800X; Roughly the same length as the A300
A360-900X: Same length as the 787-8
A360-1000X: Same length as the 787-9
*Wing area:
764: 291 m2
A360X: 300m2
A333: 361m2
787: 370 m2
A359: 442 m2
Overweight on of lard.
Now that is a stake to the heart, I am sure Boeing will cry all night.
Well and the 1300 orders? Probably 2000-2500 lifetime?
Money rolling in (finally) shoot they may even break even on it.
Better would be over cost program. The lard was all management (though more where their brains were than mid body)
Overweight?
For starters, wing weight would be roughly 2/3 of A350 wing weight (i.e. about 40 metric tonnes for A350 wing). MTOW would be around 180 metric tonnes vs. 280 metric tonnes for the A359. In fact, MTOW would be only some 25 tonnes lower than the initial MTOW estimates for the 7E7-8. Add UltraFan engines that would be upwards of 15 percent more efficient than the current 787 engines — and you might have quite a few sleepless people in Seattle in the not too distant future.
NB: This would not be a MOM-type aircraft
given RR’s track record of hitting fuel burn, getting 15% over the current 787 engines (which in RR’s case are just now hitting the target they were supposed to hit 10 years ago) seems like a bit of a stretch.
the winner would be GE’s HP core tech combined with P&Ws LP/GTF
@bilbo
RR seems to have hit the the fuel burn targets on the Trent XWB and Trent 7000.
The 787 was originally launched on an abbreviated development schedule that forced the engine OEMs to prematurely freeze their designs — leading to a whole lot of problems down the road. In contrast to the Trent-1000, the Trent XWB was developed on far more sound schedule thanks to the more time realistic development of the A350.
RR is moving to a new engine core architecture. The Advance3 prototype combines the new core architecture with a lightweight, low-pressure (LP) system, composite fan, and lean burn combustion etc. The UltraFan pushes the Advance3 core overall pressure ratio to more than 70:1 for a typical large engine application. UltraFan also features a new geared architecture to ensure that the fan, compressors and turbines all continue to run at their optimum speed.
You have got to hand it to BA — when it comes to hype they win it out of the park.
How many of their customers are now sitting there holding a HD TA — and 30T of OEW — they don’t need?
We have the perfect trans Pacific plane doing the aviation equivalent of the school run all around the world.
AB didn’t man up — they went after it’s big brother and put up its old school uncle wearing a Superdry T shirt as it’s main challenger.
And still it didn’t clean up …
A360 would stop it stone dead.
BA know they have got lucky and that luck won’t hold — the 10 was all about real estate not brawn.
The global aviation industry has gorged itself on the B787 — now for the indigestion.
125T of OEW is no magic number.
IMJ, Airbus was at no liberty to “over discount” an A330neo order from AA due to Boeing’s home market advantage. Boeing has proven, as of lately, that they’re hell-bent on pushing competitors out of the American market, by any means necessary (e.g. case in point; trade complaint against Bombardier). It’s likely, therefore, that Boeing could have asked the Trump Administration to slap anti-dumping duties on a low-ball A330neo bid by Airbus to AA — an option not available for Boeing outside of America.
I would not be surprised, though, if the mere presence of the A330neo in the competiton consequently led to a low-ball 787 offer.
Now, it’s going to be interesting to see how Boeing’s apparent low pricing on the 787 will square with the need for Boeing to recover some $35 million of deferred costs per 787 remaining to be built in the current accounting block of 1400 units.
Since Boeing IMJ is obviously not going to recover $35 million per 700-plus 787s remaining in the accounting block, the question is; for how long can Boeing continue to extend the accounting block — to 2000 … 2500 units? It would be interesting to see what the U.S. Securities and Exchange Commission would have to say about that. With the current fire sales tactics, I’d not be surprised if the final accounting block number would exceed 3000 units.
exactly
Well all sour grapes aside did we not hear how the A330CEO was going to beat Boeing on price?
I guess someone did not ask Boeing if they thought that was true.
And while I think the accounting system is illegal, the reality is that we are seeing a build of 2000 easily and maybe even as high as 3500 before all is said and done.
Bring the -8 up to commonality with the -9 and -10 (I do like how Boeing does the Variants now) and away we go again.
OV-099: your Boeing explanation seems to conveniently exclude the fact that Delta and United have orders for Airbus widebodies, and they haven’t been hell-bent on pushing those out.
Well, Delta apparently doesn’t like Boeing. 😉
Also, Delta and United originally ordered the A339/A359 and A359, respectively, long before Boeing’s latest aggressive sales tactics got underway with the appointment of Ihssane Mounir as vice president of Commercial Sales & Marketing for The Boeing Company, and long before the MAGA campaign of Mr. Trump.
United’s A359 order for 25 frames in 2010 was converted to 35 A350-1000s in 2013, and re-converted to 45 A359s last year. It would appear, therefore, that United had already too much vested in the A350, by the time of Mr. Mounir’s appointment in 2016 and Mr. Trump’s accession to power on Jan 20, 2017. MAGA can only go so far…
The 787 is likely cheaper to produce than the “almost as good” A339. Tough to win with a pricier, inferior product. With even the 788 selling again, and the production rate increase opening delivery slots Boeing seems set to dominate this space mid term.
“Likely cheaper”; is that idea based on a mere hunch of yours or on facts and/or real insight?
Fact: The basic 330 platform R&D investment has been fully amortized for more than a decade, while Boeing needs to recover some $35 million of deferred costs per 787 remaining to be built in the current accounting block of 1400 units. Only through US programme accounting rules is Boeing able to report profits on the programme. Under US accounting rules, if GAAP accounting were taken rather than programme accounting, Boeing would be reporting losses on the 787 for many years to come. Also, the 787 R&D costs of some $15 to $20 billion is not included in the deferred production costs calculation.
So, the fact of the matter is that with a soon to be realised production output of 14 787s per month, Boeing will start running out of backlog in 2022.
The big elephant in the room is what appears to be a company that is in desperate need of garnering as many 787 orders that can be mustered, in order to avoid a cut in production so as to prevent the SEC further questioning the deferred costs. Worst case scenario: Boeing would not be allowed to just extend the accounting block indefinitely.
In short, Boeing appears to be trying to avoid the inevitable massive deferred costs write down on the 787, by seemingly deluding themselves into believing that they somehow can kill the A330neo, and thereafter be able to raise prices on the 787 in order to prevent the inevitable.
First of all, I come to believe the SEC inquiry is seriously either dead, or way, way on the back shelf. (They’ve had way more than ample time to “come to the table” on this matter, if they were looking to “hammer” on this.) Continued sales like Hawaiian and American may be the final “nails in the coffin” on the matter. Second, with the share price hovering at $330/share, BA could easily in my mind just “chunk charge” a $10B to $12B chargedown in these deferred costs. Mr. Market is much more concerned with: 1) future cash flows, especially free cash flows; and 2) future programs. I don’t necessarily think they’ll do a chargedown anytime soon, but they could—without going below $300/share. In the meantime, the full deferred costs are a valid, useful cudgel in pricing discussions with its customers.
Well, if Boeing used the same accounting system as that of Airbus, reporting losses on new aircraft programs as they accrue, the $22.1 billion in Boeing’s Commercial Aircraft earnings that was booked between 2012 and 2016, would according to the WSJ be an $1.85 billion loss instead.
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
Under GAAP accounting rules, therefore, I’d be surprised if investing in Boeing stocks would rank very high among the best short term investment options.
Same happened all those years back when Northrop called it quits on the last of the F-5 program with its self funded F-20.
The loss announced was $1.2 Bill ( 1986 dollars), which everyone assumed was for that version alone. Hardly! , a few prototypes which had only a new rear fuselage. That $1.2 bill was deferred costs over the whole
F-5 program since the 1960s.
Hate to think how much costs Boeing is sitting for the 747 and 767 which have carried on all these years.
I’d guess that any deferred costs Boeing may be “sitting on”, with respect to the 747 and 767, would at least be an order of magnitude less than what Boeing has to deal with for the 787 financial imbroglio.
Addendum/Correction:
787 deferred costs: $25 billion — not $35 billion as I wrote.
Hmm, it appears as if I mixed up millions with billions when I reread what I wrote — no correction needed. 😉
It’s a matter of choosing your battles.
The A330-800 isn’t a key product Airbus is dying to sell.
Hawaiian avoiding an Orphan fleet A338 seems logical, but.. they bought bigger 787-9’s to replace them, not 787-8s. Airbus apparently failed to upgrade them to A330-900s. That seems more painful.
On the AA deal, I think few people expected AA to introduce A330NEo next to a large fleet of 787s already in service. Now at once celebrating it as a big victory in a hot competition is feel good material / PR more than anything else.
The battle for the A350 isn’t gone at all. No doubt they are pitching for the upcoming 772ER fleet replacement. Almost all are getting 20 yrs now. Replacing them after 25 yrs / 4-5% annual growth with smaller / less cargo capable, smaller 787-9/-10s lacks network realism IMO.
And AA is pushing out Boeing for new NB’s. They have 300 A321s today, are deferring 737MAX deliveries for years.
Boeing just had the best / most logical offering for AA with their 787-9’s and maybe -10 later on as 767/A330 replacements. But this isn’t over yet for the 777/A350..
AB have AA’s deposit, probably 400 mil? They are sure going to take something else from AB, and if it is single aisle, given that AB are pushed to fill their orders, it will probably have to be worth a lot more than 22 A350s.
Hello keesje,
Regarding: “The battle for the A350 isn’t gone at all. No doubt they are pitching for the upcoming 772ER fleet replacement. Almost all are getting 20 yrs now.”
According to the following excerpt from the American Airlines press release at the link after the excerpt, the 787-9 portion of American’s 787 order will serve to replace both American’s A330-300’s and some of American’s older 777-200ER’s. According to Wikipedia, American has nine A330-200’s, and the only 777-200 model in American’s fleet is the 777-200ER, of which they have 47. How likely is it that American, which states that it is trying to reduce the number of different aircraft types that it operates, will introduce a new A330 or A350 sub-fleet to replace whatever portion of the 777-200ER fleet that is not replaced by its present 787-9 order? With 25 787-9’s on order, and nine A330-300’s to replace, that would leave 16 of the newly ordered 787-9’s to replace older 777-200ER’s, leaving only 31 777-200ER’s in American’s fleet to be replaced with some future order.
“FORT WORTH, Texas – American Airlines today announced an order for 47 new Boeing 787 widebody aircraft consisting of 22 787-8s scheduled to begin arriving in 2020 and 25 787-9s scheduled to begin arriving in 2023. The 787-8s will replace American’s Boeing 767-300s, while later 787-9 deliveries will replace Airbus A330-300s and older 777-200 widebody aircraft. The entire order of new 787s will be powered with General Electric’s GEnx-1B engines.”
http://news.aa.com/news/news-details/2018/American-Airlines-Expands-Boeing-787-Fleet/default.aspx
When the 772ER’s are withdrawn from service AA will have a sub-fleet of 20 B773ER’s?
Keeje:
AA is making a selective move and the 40 737s were not cancelled they were deferred. They have not been replaced with A320.
The 800s (and CEO Airbus) will get their cabins updated to match the current MAX and NEO respectively.
AA might go with all A320 series but as right now that is purely wishful thinking with no facts or reality to back it up
@TransWorld
Keesje is talking about the B777-300ER not the B737.
Hello again keesje,
Regarding: “And AA is pushing out Boeing for new NB’s. They have 300 A321s today, are deferring 737MAX deliveries for years. ”
According to the same American Airlines press release that I provided a link to above, American deferred 40 of it remaining 93 737-8’s on order (7 of its order of 100 are already in service according to Wikipedia) to better match planned narrowbody retirements.
“As part of today’s order, American has also reached an agreement with Boeing to defer the delivery of 40 737 MAX aircraft previously scheduled to arrive between 2020 and 2022. The revised delivery schedule will better align with planned retirements of other narrowbody aircraft. ”
In the financial press American has been criticized for accumulating too much debt to replace older aircraft that did not yet need to be replaced. It is financial types, and not the people who post here, who can provide billions to finance large aircraft orders for airlines, like American, who either can’t or choose not to pay cash. It is thus not surprising to me, that American, when placing a expensive wide body order, decided to slow down narrowbody retirements and new narrowbody deliveries. When you can’t pay cash, you need to keep the the bank and or loan sharks happy. See for instance the excerpt from a 3-12-18 Yahoo Finance article at the link after the excerpt, by Adam Levine-Weinberg (someone with the same name sometimes posts here), which observes/complains that American was planning to run up debt to replace 737-800’s that still had 5 to 10 years of useful life left. Has American deferred these retirements to keep from being slapped with high interest rates for its new 787 order? Note that the title of the article is “American Airlines is Still Wasting Investors Money”.
“While rivals such as Delta Air Lines (NYSE: DAL) have worked hard to balance capital spending discipline with the need to update their fleets, top U.S. airline American Airlines (NASDAQ: AAL) has spent freely on new aircraft in recent years. Between 2014 and 2017, American’s capex totaled a whopping $23.1 billion, nearly as much as its current market cap. The vast majority of that spending went toward new planes.
As a result, American Airlines has the youngest fleet among major airlines — but also by far the most debt. Management shows no sign of becoming more frugal in the future. Instead, the carrier recently confirmed that it will replace 45 of its older Boeing (NYSE: BA) 737-800s by the end of 2020, even though these planes should have at least five to 10 years of life left in them.”
https://finance.yahoo.com/news/american-airlines-still-wasting-investors-010500477.html
American’s current MAX and NEO orders according to Wikipedia.
A321 neo: 100 ordered, 0 delivered.
737-8: 100 ordered, 7 delivered.
American’s current 737 and A32X fleet according to Wikipedia.
A319-100: 125
A320-200: 48
A321-200:219
737-800: 304
737-8: 7
In my crystal ball, this looks like a fleet that is evolving toward three types: Small = A319, Medium = 737-800 and 737-8, Large = A321.
Won’t be surprized if AA could be in the market for 50-100 CS100/300’s in the long term?
According to the following excerpt from the 11-29-17 FlightGlobal story at the link after the excerpt, American Airlines plans to retire its A320 fleet of 48 aircraft in “the early 2020’s”. According to the Wikipedia American Airlines fleet page, the only A32X NEO model that American has on order is the A321 NEO, of which it has 100 on order, of which zero have so far been delivered.
“While the 737-8 may displace A319s and 757s at Miami, the carrier will also use 737-8s to replace other aircraft, including A320s and Boeing MD-80s, as part of a broader fleet renewal.
American plans to retire its 48 A320s in the early 2020s and 46 MD-80s by the end of 2019. It anticipates to have 26 MD-80s by the end of next year.
The airline has previously replaced A320s and MD-80s with A321s and 737-800s, however, deliveries of both classic models are coming to an end. American took delivery of its last A321 earlier in 2017 and will take its last 737-800 by the end of the year, its latest fleet plan shows.”
https://www.flightglobal.com/news/articles/analysis-american-launches-next-fleet-renewal-phase-443746/
Correct & incomplete info. Purposely I suppose, try somne March / April updates.
https://onemileatatime.boardingarea.com/2018/03/09/american-737-retirement/
https://aviationnews.online/2018/04/07/american-airlines-orders-47-787s-defers-40-737s/
The original AA Airbus order is much larger than the “split” that was widely communicated at the time. It was in nobody’s interest to rub it in. “625 orders & commitments” while Boeing was forcefully dragged into the 737 re-engining could have caused too much fall-out.
“In discussions that lasted long into Tuesday night, American decided to buy 200 planes from Boeing’s 737 family of workhorse single-aisle planes, with deliveries starting in 2013. Half are expected to be equipped with updated, more fuel-efficient engines. The airline said it will take options for another 100 737s.
American -also- will buy 260 planes from Airbus’s A320 series with deliveries starting in 2013, and take options and purchase rights for 365 more. ”
“also”..
http://www.nbcnews.com/id/43822888/ns/business-us_business/t/american-places-massive-billion-jet-order/#.WtU9RYhuaUk
Hello keesje,
Regarding: “Purposely I suppose”
Could you elaborate on why you suppose that? Is it because everyone who doesn’t agree with your always pro-Airbus opinions must be part of some evil Boeing conspiracy? Some other reason?
I mostly try to avoid opinions in my posts, I almost always provide an excerpt from an article or source that I thought was pertinent and then provide a link to the full source so that people can read it and judge for themselves. Is this not what what I did in the post you are criticizing? Exactly which part of the FlightGlobal article that I provided a link to do you feel is incomplete or misleading? Do you feel that the information that American’s firm MAX and NEO orders, as of today, are 100 737-8’s (about 7 delivered) and 100 A321 NEO’s (zero delivered) is incorrect, or that American’s fleet plan no longer calls for replacing its A320’s with 737-8’s? What are your sources?
By my reading, the one pertinent piece of information that I can see that is in the articles that you linked to, that is not in the FlightGlobal article that I linked to, is that American will be retiring some older 737-800’s at the same time it is receiving new 737-8’s. Is there something else that you would add to this?
According to the excerpts below from a 4-12-18 MRO Network article, which may be found at the link after the excerpts, American Airlines is undertaking a massive interior upgrade project for approximately 250 of its 737-800’s and 200 of its A321 CEO’s. Zero A320’s are receiving interior upgrades, could this be because they will only be around for a few more years. or some other reason? According to the excerpt, about 3 dozen 737-800’s were recently ADDED to the upgrade list as a result of American’s decision to defer 40 737-8 deliveries from 2020-22 to 2025-26 in conjunction with its 787 order that was announced on 4-6-18. Could American not afford both the 737-8’s and the 787’s at the same time, or might it be waiting to see if 797’s are available for 2025-26 delivery? Any other theories? I invite opinions and thoughts from all, provided that they are presented with civility.
“American’s program, dubbed Project Oasis internally, will outfit new cabins on about 250 737-800s and 200 Airbus A321s.”
“American has added “about three dozen” 737-800s to its original Oasis overhaul list as a result of its recent decision to defer 40 737-8 deliveries, Barton said. The aircraft, originally slated for delivery in 2020-22, will now arrive in 2025-26. The airline has committed to 100 total, and has taken delivery of eight.
The 737-8 deferrals came in connection with the carrier’s order for 47 787-family aircraft announced April 6.”
http://www.mro-network.com/airlines/american-track-start-narrowbody-retrofits-fall
Can’t see AA going for 320NEO’s except if they have very special application on certain routes for its LD3-45 containers replacing 319/320C’s.
Deliveries of the 321NEO’s starts next year it seems, on the other end AA needs something with <150 seats, the CS300's could be a good fit but being "all American" they could go 737-7 or throw in a couple of "Boeing" 190/195E2's?
Airbus doesn’t do a much better job with the A319. It seems they have they same “problem” and the market is responding with an absence of orders.
@OV-099,
The costs for Boeing 787’s “screw-ups” have been discussed before. Cost’s have already been “sunk” and either already amortized or are in the process of being amortized.
Like the A380, the most important question for Boeing is “will we make a profit (on a unit basis) selling this particular model?”
Its been discussed previously that Boeing has worked very hard on decreasing production costs for the B787. Maybe now its at the point where its cheaper to build a B787 than an A330NEO.
Last I recall, profit margins at Boeing (commercial division) are very good, in fact, even better than Airbus. Boeing’s stock price shows that most investors really don’t care anymore about the “screw-ups” regarding the B787, and there are a lot of smart an savvy investors invested in Boeing shares.
Kind Regards.
@jacobin777
For sure, the R&D costs are sunk, but the $25 billion in deferred production costs for the 787 is obviously not amortised. Again, under US accounting rules, if GAAP accounting were taken rather than programme accounting, Boeing would be reporting losses on the 787 for many years to come. Hence, Boeing’s current profit margins and free cash flow is not indicative of Boeing’s future results. In fact, the deferred costs must be repaid from future profits. Furthermore, it’s important to note that booking future profits now is typical for a company like Boeing, which is operating in an environment where the goal is to achieve profitability as soon as possible — never mind the long-term viability of the company.
As for 787 production costs, please do note that it took nearly 500 airframes to get the production cost on a single frame below the sales price. As the learning curve started to flatten out long before before Boeing had delivered 500 units, there really is not a lot more to go with respect to additional savings in production costs.
The competitive factors underlying the aerospace industry are performance, cost and reliability. A trade-off is required between these factors in order to produce the optimum solution to meet customer requirements. Decisions on the design of a product influences its unit cost. Hence, the method of manufacture of the design will affect manufacturing costs; the type of material selected and design that determines the material cost and weight. To drive down costs, aerospace OEMs must find efficiencies in how they conceptualise, design, manufacture, test, certify and support new aircraft. This requires significant process improvements that transform their ability to deliver on schedule, on cost, and on specification. Therefore, it is important to control cost throughout the design phase, in particular, at the early stages of design where there are greater opportunities for cost reduction. It would appear, therefore, that it’s too late in the game — 14 years after the 787 programme was launched and 7.5 years after EIS — that significant further cost savings can be achieved.
Finally, it’s well known in the aerospace industry that the doubling of output reduces unit costs by as much as 20 percent. Therefore, the increase in 787 production from 12 to 14 units per month; or a 17 percent increase in production, at this stage in the game, would only lead to a reduction in unit costs by a maximum 3.5 percent. If the production costs are, say, $100 million per airframe at 12 per month, then we’re talking about a maximum of $3.5 million of additional savings per airframe at 14 per month. How does that relatively pitiful cost saving square with the need for Boeing to recover some $35 million of deferred costs per 787 remaining to be built in the accounting Block — while at the same time it appears as if Boeing’s current 787 sales practice is that of low-ball bidding.
Rgds
The 339NEO’s for just being there is putting pressure on the 787’s profit margins neutralizing the effect of lower production cost due to increase in production rate.
If Boeing develops an FSA where will the big cash cow be, AB just needs to build the 320+ to strangle the 737-8 and force Boeing to up the prices for the 787’s?
An 321+(Super) will also put pressure on the 797-6X prices that will impact on the 797’s profit margins.
True, Boeing seems to be desperate trying to get the A330neo out of the way. It’s clearly putting downward price pressure on the 787.
In fact, Boeing has been trying to “kill” the A330 for the the last 21 years, or so — i.e. since the launch of the 767-400.
https://leehamnews.com/2012/03/19/odds-and-ends-787-ramp-up-istat/
An 4m stretch of the 359 (“359+”, 359 wing/engines) with ~275T MTOW and ~7000Nm range could throw a spanner in the works for the 787-10 and hence 787 program and could be done at relatively low cost and short time?
@Anton
Well, a freighter version of a stretched A339 may be on the table. If that were to happen, a passenger version would be in the cards as well. MTOW of 251 metric tonnes is all that is needed — i.e. no need to further increase MTOW into A343 territory
https://www.bizjournals.com/seattle/news/2018/03/20/amazon-pressures-boeing-in-airbus-freighter-talks.html
Read that they are pressuring Boeing, not necessarily going to buy Airbus.
The KC46 is only a handful a year, they can crank up the line again for any other orders.
Once its made its sent to Boeing field to get converted. Out of factory out of mind. Lots of used 767-PAX s as well to convert
Lot shorter than an all new A330. They could even make the 767-400 again (might work for overnight carriers with bulk)
@TransWorld
You seem to ignore the fact that cargo operators would want competitive RFPs. When you are in a sole-source situation, it does not matter how nicely the OEM treat cargo airlines; economically, they are going to be disadvantaged since there will only be a first round with respect to bidding — no second, third or fourth rounds where the OEMs are battling it out.
dedicated Cargo versions are usually the shorter length fuselage.
See 777F is the -200 version, the A330F is the -200 version.
The reasons for that is the floor beams are reinforced as the light loading for passengers and seats wont carry the required heavy weight pallets.
As for range, the long range thought of in passenger versions is only for pax and their baggage, no cargo at all. Make that ALL cargo and the range is significantly down. ( see the max weight load curves) This isnt so much of a problem as the cargo companies are happy to have a re-fueling stop to trade cargo for fuel as well.
Conversions of pass jets to cargo normally dont do the floor beam strengthening so can do lower density pallets.
@dukeofurl
Typically, a cargo aircraft will “cube out” before it maxes out on weight — i.e. the volume of space available for carriage of cargo is filled before the weight of cargo loaded reaches the maximum that can be uplifted. This hold especially true for package freighters — the type of cargo aircraft that express package carriers, such as UPS and Amazon, are apparently looking for.
IMJ, therefore, a stretched 251 metric tonnes MTOW A330-900 (e.g. A330-1000F) would seemingly better fit the requirements of express package carriers, whereas an A330-900F would better fit the requirements of general cargo airlines. The MTOW of an A330-900F would be 18 metric tonnes higher than the MTOW of the current A330-200F, and it should be capable of carrying some 75 metric tonnes of cargo over 4000 nm; or 80 metric tonnes over 3000nm. In contrast, the 233 metric tonnes MTOW A330-200F is capable of carrying 65 metric tonnes over 4000nm.
Addendum/Correction:
787 deferred costs: $25 billion — not $35 billion as I wrote.
Hmm, it appears as if I mixed up millions with billions when I reread what I wrote — no correction needed. 😉
Bloomberg seems to say that BA undercut AB to get the AA ordee:
https://www.bloomberg.com/news/articles/2018-03-23/airbus-a330-neo-dropped-from-american-airlines-wide-body-contest
Leeham have reported that BA feel they need to kill the A330 before their NMA arrives on the market, this article seems to indicate that they are desparate, why? It’s a heavy, long range aircraft.
Presumably Boeing can see a development path which makes the A330 a competitor to the 797, but how?
Downward folding wingtips to turn structural weight into aerodynamic gain? 50-60 klb engines a la 797, but with bigger fan for better efficiency? Lower deck toilets or galley to turn freight into 30 more pax?
Whatever, but can somebody who knows more than I do explain this please?
More on topic it seems to me that Airbus (comercial aircraft)/EADS/Airbus group messaging/decision making has been pretty indecisive under Enders. Maybe it will change once he leaves? Same problem with the A380 as with the A338, EK had to push AB to the wall to get clarity prior to their last A380 order.
Why does anyone worry about the deferred production cost? It’s not impacting Boeing’s pricing or cost to produce the actual aircraft, let alone cash flow from what seems to be a very profitable program now.
The 787 costs per frame should be lower now at the higher rate and with the mature cfrp systems. Engines and everything like BFE/avionics is about the same.
I’d worry about the deferred production costs if Boeing is selling the 787 too low; only being able to recover a fraction of some of the $35 million of deferred costs per 787 remaining to be built in the current accounting block of 1400 units.
Also, cash flow is not the same as profits. Boeing’s current profit margins and free cash flow is not indicative of Boeing’s future results. In fact, the deferred costs must be repaid from future profits. The absence of profits in the future would eventually have a declining effect on the cash flow.
https://www.investopedia.com/ask/answers/111714/whats-more-important-cash-flow-or-profits.asp
Well as Texl1649 said, it does not seem to be bothering Boeing right now.
Is there concern for Boeing or just upset that they beat Airbus on a couple of deals? Who by their own PR should be able to easily undersell Boeing but clearly did not?
The risk of mortgaging the future may not be Boeing’s primary concern right now as the company’s top management seems to be much more focused on pleasing their shareholders.
As for the recent 787 sales, it’s interesting to note that quite a few B-boys seem to ignore that the LCA business is not based on short-term performance, but rather on long-term astute business planning — and the A330neo has not yet entered into service. Time will tell how well the A330neo will do in the market. They should be able to match the key numbers existing A330ceo customers need in terms of payload and range, while offering lower capital costs and near equivalent operating costs.
Don’t know what makes the 787’s such magic aircraft other than Boeing’s marketing. The 338/9 seat mile cost could proof to be close to that of the 788/9.
One thing airlines CFO’s must remember is that the 330’s are significantly more comfortable and quieter than the 787’s and preferred by passengers. If you don’t fill those seats you don’t make money.
Maybe Airbus couldn’t offer much lower prices without risking the same lawsuit for dumping into Boeing’s home market as Bombardier was facing with the Delta deal?
A sadly realistic scenario.
Don’t do as we do because w’ll pull in Mr “America First”.
Again, with a $330 or so price per share, they can take a $10B to $12B hit on these deferred costs relatively easily anytime they want to. Note Mr. Market gets to “vote” on BA every day the NYSE is open. The votes “in”, and its a (positive) landslide in the past year. The McNerney/787 debacle is now actually ancient history, thank goodness. BA seems to have have really learned from this debacle. Composite wings built in house going forward? Check. Very active sales campaigns to build 787 and Max volumes? Check. Incremental build on 777X (“No more moonshots”)? Check. Slow deliberative process on really gathering customer info and production costs on 797? Check. Major areas to work on: KC46, space rocket competitiveness, and building more 777X backlog.
LOL!
Are all those “Checks” of yours straight from the horse’s mouth at Boeing HQ?
Nice. Anything substantive to contribute on these points besides “snark”?
How’s the weather in Chicago?
Your “checks”sounded like a checklist and a to-do list of that of a high-ranking Boeing manager — you know, the top-level executive management type of individual who tends to care more about the stock price, due to very favourable stock options granted, than the long-term health of the company where he/she works.
Deferred production costs are definitely difficult to get your head around. In addition Boeing is not as forethecoming as an investor would like about real profits and losses when costs are spread over multiple years. I understand the negatives of a giant black hole to fill but the positives to take home are:
1) 3rd qtr. 2017, Boeing extended the accounting block from 1300 to 1400 units. If it zeroes out that balance by the 1400 delivery it will by definition make a profit. Granted that’s a big if and it’s Boeing’s own projection. You can make it complicated but the fact is the 787 is a good product
and has been selling well. The stock is up over 100% in 2 years. ( past performance is not indicative of future earnings). I like their chances.
And profit per unit should improve when:
2) Boeing has made obvious strides to reduce production costs with supplier cost reductions and future rate increase.
3) The 787-10 is projected to cost roughly the same as a 787-9 to produce and sells for more.
See AirAsia-X says the 10 A359’s they have on order are too expensive, is Boeing busy here?
Time for Airbus to sharpen their pencils and get smarter? The 338’s will have 789/359 type range, sell them for “really cheap”.
http://c.newsnow.co.uk/A/933626652?-303:3665
@OV-099
Thanks for the very lenghty debate and response. Its nice to have a good debate without getting into name-calling, “koolaiding”, etc.
Regarding our discussion:
1)We can discuss the deferred costs (and the way its handled under US law) but at the end of the day, Boeing will have paid it off either via the 1,300th frame, 1600th frame (according to Mr. Hamilton) or have it written off as a “one-time charge” (again, as according to Mr. Hamilton).
2)Fortunately for Boeing, their revenues and balance sheet looks good enough to be able to “widthstand” the financial drain the B787 has caused. Also, given their current credit ratings (look at their various bonds), and the (still) current low interest rates, Boeing would have no problems at all going to the capital markets to raise money.
3)They are paying down the deferred costs now (from 4th quarter 2015) so they are heading in the right direction. Remember, it took almost 10 years to get to that point!!!
4)Ostensibly, it seems Boeing is just now “optimizing”/”streamlining” their production of the B787 so I will disagree with a large part of your thesis. There is no way they can be consistenly and continously be paring down their “sunken costs” if they are selling the B787 “too cheaply”, its simply not possible. Also, we haven’t seen in quite some time Boeing increase the frames of B787’s needed to be sold to recoup their costs. Again, this leads me to believe Boeing is achieving good profit margins on the B787.
5)Regarding your commment of “it’s well known in the aerospace industry that the doubling of output reduces unit costs by as much as 20 percent”, while that is a general number, you can’t say with any confidence that Boeing has reduced unit costs by 3.5 percent. IMHO its more. Rest of your comment is based on that very potentially flawed argument.
Kind Regards
@jacobin777
5) Reduction of unit costs of a maximum 3.5 percent is with respect to unit output increase from 12 to 14 per month. I’ve not said or indicated that this is the only cost saving that’s achievable for Boeing, going forward. As I indicated, though, the 787 programme was launched 14 years ago and the entry into service for the first 787-8 occurred six and a half years ago. Hence, it’s totally unrealistic IMJ to hope seeing more than marginal improvements in 787 manufacturing and supply-chain efficiences for what can now be considered being a mature programme. The cumulative effect of further marginal improvements in the production costs for the 787 — from here on out — will IMJ, at best, only account for savings in the high single-digit million. It’s interesting to note, though, that quite a few of the “design improvements” that Boeing is trying to achieve with their current cost-cutting drive appear to be prior art — manufacturing methods and technologies already in use by Airbus on the A350 and other Airbus programmes (i.e. titanium 3D-printed parts etc.).
4) It’s not the sunken R&D costs that is the problem. They are all sunk and accounted for. The problem is the $25 billion in deferred costs that are not yet accounted for and the need for Boeing to recover some $35 million of deferred costs per 787 remaining to be built in the accounting block. AFAIK, they’re only managing to recover less than half that amount at the moment. If Boeing is only able to recover less than half of what’s required, going forward — caused in part by the downward price pressure from the A330neo — then the accounting block would have to extended from the current 1400 units to more than 2200 units.
3) Heading too slowly in the right direction sounds more correct. 😉
The inconvenient truth, though, is that the deferred balance must be repaid from future profits.
2) I’d be more worried about the condition of Boeing’s financials in the longer term than with what the market thinks of the company right now (EPS growth etc.) Future Boeing aircraft programmes will have to be paid for by current aircraft in production. For example, in the single aisle market, Boeing has lost parity with Airbus (i.e. 50/50 to 58/42). Based on the enormous backlog alone, Airbus could IMJ increase A32Xneo production to 1000-plus units per year (i.e. 90 per month), achieving at the same time a 20 percent reduction in unit costs over that of the current costs of the manufacturing of an A32Xneo. The problem for Boeing is that if Airbus would go ahead with such a dramatic increase in production, they likely won’t have enough volume to follow suit. Airbus would then be able to put further pressure on 737 MAX pricing, thereby eroding profits from the MAX that is essential for the help with the funding of new aircraft programmes. Furthermore, since the 787 deferred production costs must be repaid from future 787 profits. a significant amount of future profits from the 787 will likewise not be available for a new aircraft programme — and lowball bids in order to try to stop the largely amortised A330neo dead in its tracks, will further add to the cunundrum of future financing of all new Boeing aircraft. As for the 777X, it’s also questionable if that programme will be able to contribute much to the funding of a new aircraft programme.
1) IMO, Boeing will do everything it can to avoid taking a one-time financial charge. The company’s stocks would soon be in the tank with a financial charge of that magnitude. IMJ, it would also lead to a significant decline in Boeing’s prestige.
Late to the party but great discussion.
My thoughts:
High $ to the € hurts BA — Things are getting better but they had 30 month’s of real pain. However the exchange rate has helped AB in the long run.
For me this one of the reasons for the A320 primacy in the SA market — when push comes to shove AB can use price to win business.
Observation based on hunch and limited evidence — area where AB seems to have been first to the punch is new start ups.
The more extreme the business, the more likely the start up is to use A320s.
B787 deferred costs — all about timing.
Turnover = Vanity.
Profit = Sanity.
Cash = Reality.
Watch for the changing of the guard at the top of BA.
Until then the current plan will be in place — reducing the deferred construction costs as quickly as the current productions sorts will allow.
As noted this points to an accounting block well into the high 2000’s.
However I think a one time charge will be pushed out to close the books when a new guy takes over — usual kitchen sink job to get out all the bad news early in the new regime.
Boeing credited the tax cut as growing 2017 earnings per share by 1.74, so maybe they did call in trump. operating cash flow is over 13 billion. The deferred production costs are just being used to minimize taxes at this point. They don’t matter at all.
I’m not sure if A350-800 could have stand a chance against a B789.
Also, A359 and A339neo are close already, so why offer 2 products for a almost same niche?
A358 would have had the same length and 9abreast as B789 wich features a smaller fuselage and thus better economics.
Actually, I do like Airbus strategy with the twins: The A350 looks like a well placed bullet to the B777. Look at it’s size. A 67m, 74m and close to 80m airplane give a nice 3member family. The issue here is, they could not get the engine for another stretch. The GE Boeing exclusive for the GE90 engine size is a huge blow.
If Airbus had offered Emirates a A350-1100 with 79m 400seats, do yout hink they would ahve canceled the order?
For the lower end, Airbus offers 59m and 64m planes, but here’s the issue.
The A333 always had the better economics, and Airbus propably got – analog to A380 – it’s market analysis wrong.
The A338 shoudl have been a smaller, lighter plane, so less wing, a 260 pax 5-10h mission aircraft.
It would have been the real B767-300 replacement.
Maybe Airbus could have given the A332 fuselage a wing that could be used for another A321 stretch (as a A338 d), and taken the wing that was planed for the A358 to A339.
The A330neo would have been a 2 member family:
A 260pax lighter and smaller range aircraft ppl with a high density config.
And a 290pax plane for all but ultra long range.
If Airlines would have needed the range, Airbus could have always offered the A350
Emirates (Tim Clark) seems to like 4 engines. Maybe an A350-1000+ in 10 years with 4×50-60Klb Ultrafans?