March 4, 2019, © Leeham News: Another week, another NMA story.
For an airplane that doesn’t exist, the prospective Boeing NMA continues to dominate much of the aerospace news.
Last week’s announcement by Rolls-Royce that it withdrew—in December, as it turns out—from the competition to power the NMA prompted a flurry of stories in aerospace media, including LNA.
Some stories suggested RR’s withdrawal meant Boeing was getting closer to launching the airplane.
Boeing, in January, said Authority to Offer might come this year and program launch had moved from 2019 to 2020.
Two prominent consultants predicted at the Pacific Northwest Aerospace Alliance conference last month the odds were 60-40 or 65-35 Boeing would proceed.
Maybe, but I have to tell you that conversations I had last week in the wake of the Rolls announcement are not encouraging.
We and many others have written many times about the doubts about the market demand for the NMA.
We’ve talked about the doubts expressed by the CEO of GE Aviation and United Technologies, parent of Pratt & Whitney. We’ve reported for years the Airbus view that there is no market for a new, Middle of the Market airplane. Though Airbus’ view is anything but unbiased or without motives, this doesn’t mean it doesn’t believe what it says in this case.
But here’s what’s new.
One of the UK-based aerospace analysts I talked with last week has, in the last month, met with Dennis Muilenburg, CEO of Boeing, Greg Hayes, CEO of United Technologies and officials at Safran, a 50% partner (with GE) in CFM International. With the Rolls withdrawal, CFM and PW are the remaining bidders for the NMA contract.
CFM and PW want sole-source awards. Neither sees a business case for a dual-sourced engine selection. CFM is viewed as the front runner, given its long commercial history with Boeing.
This analyst, who remains unidentified so he can speak freely, says he came away from his meeting with Hayes with the latter’s usual expressed skepticism. Nothing new about this.
But he said he came away from his meeting with Muilenburg with the feeling of doubts and uncertainty the program will proceed.
Muilenburg, in his public role as CEO on earnings calls, investor conferences and interviews, always is cagey about the NMA program. He says the business case has yet to be closed, there is still customer input being received, etc.
Privately, I’ve heard for months that Muilenburg wants to do the program and it is Greg Smith, CFO of The Boeing Co. and EVP of Enterprise Performance & Strategy, who remains skeptical of the business case.
Last December, Muilenburg and Smith told Seth Seifman of JP Morgan the NMA must stand on its own business case and not be dependent upon aftermarket contracts with Boeing Global Services.
If the aerospace analyst read Muilenburg correctly, and if the previous reports were correct, this represents a shift in his thinking.
Pricing, driven by costs, remains an issue.
Market intelligence says Boeing can’t get the price down to the $65m-$75m customers say they want (figures I always considered to be ridiculously low, by the way). Boeing, according to my information, sees the value-price proposition at around $100m. This doesn’t mean Boeing is hard-and-fast at this level, but going lower makes the business case tougher.
Good luck with that. The 787-8 sells for $115m. While the range is far greater, at 7,250nm, that the 4,500nm-5,000nm of the NMA, for $15m the airlines get a far more flexible aircraft.
With the margin Boeing wants to get (25%), $100m means the cost is $75m. This remains way too much, obviously, to sell a plane for $65m-$75m.
One industry observer thinks the NMA may be priced between the Airbus A321LR and 787-8 at around $81m. A 25% margin means the cost would be just under $61m. This is an aggressive target.
Boeing has been talking about the 757 replacement, which evolved into the NMA, since 2012. If there was a good business case, many believe the airplane would have been launched long ago.
Even within Boeing, I hear doubts about the market demand and whether the program will be launched. One pessimist who recently left Boeing calls the launch a 50-50 proposition.
The investment community emphatically doesn’t want Boeing to do the program. Concerned only with stock price, shareholder buybacks and dividends, the community sees money being spent that otherwise goes into their pockets.
I’m told this is simplistic on my part, but I stand by it.
LNA understands the strategic reasons for launching the program. But for a company obsessed with shareholder value, the longer the business case isn’t closed, the less likely the program will be launched.