April 6, 2020, © Leeham News: It’s going to be quite a while before there is a clear understanding how coronavirus will change commercial aviation.
LNA already touched on impacts to Airbus, Boeing and Embraer. None of it is good. For Boeing, burdened with the additional stress of the 737 MAX, is in the worst position. Even when the MAX is recertified, there won’t be many—or any—customers in a position to take delivery of the airplane.
Bearing in mind that what’s true today will change in a day, or even an hour, let’s take a rundown of where things seem to stand now.
What’s true in many respects is true for Boeing and Embraer.
Demand for the A-Series airplanes will tank across the board.
It’s unlikely airline service will recover until 2022 or 2023. Single-aisle service will recover more quickly than wide-body demand.
How quickly Airbus can bring down production rates to a supply-demand balance is a question. In ordinary times, rate breaks usually get 12 month notice for single-aisle airplanes and 18 months for twin-aisle.
Airbus suspended production in France and Spain for two weeks. (After restarting, the company again suspended production in Spain, which has a strict lockdown.) In announcing the suspension, CEO Guillaume Faury said it would be some time before the lines were operating “efficiently.” He did not provide a timeline not any production rate forecasts. These might come at the 1Q earnings call April 29 or the Annual General Meeting April 16.
Production rates across the board will have to come down. News reports suggest Airbus is prepared to cut rates by one half.
The biggest customer for the A330neo is Air Asia X. It can be argued this airline over-ordered well before the virus crisis hit. Airbus will be hard-pressed to retain production at 3.5/mo.
Airbus may well find itself producing airplanes that go straight into storage even at reduced rates.
The overarching outlook for Airbus applies equally to Boeing.
However, Boeing’s MAX crisis exacerbates the situation. Boeing hoped to recertify the MAX in June or July. It hoped to restart production in May. But Boeing announced Sunday afternoon that production in Puget Sound is further suspended indefinitely, citing health safety for its employees. Friday, Gov. Jay Inslee extended the stay-at-home order to May 4. Recertification activity is now also suspended.
Contractually, airline or leasing customers that are tendered any airplane that isn’t subject to a 12-month delay cancellation clause are obligated to accept. Boeing desperately needs the cash flow and the airlines desperately need to retain their cash. They have virtually no revenue coming in. But with production suspended indefinitely, Boeing’s “excusable delay” clause in contracts may kick in.
There are two choices: the airlines and lessors, if they have financing, can accept delivery and store the airplanes. Or they can seek a deferral from Boeing, negotiating commercial terms.
Based on a previous LNA analysis, by the end of June, about 200 stored MAXes will have hit the 12-month threshold allowing for cancellations. This number increases with each passing month.
None of the new production airplanes on the restarted MAX assembly line will have the 12-month overhang.
Market sources indicate that the few airlines that reached a compensation agreement in 2019—Turkish, Southwest and American are among them—may include a clause reaffirming delivery acceptance of scheduled 2020 airplanes. Neither Boeing nor customers typically will affirm contract provisions. If true, and there is no reason to believe otherwise, the scenario outlined under “two choices” applies.
The 777X program may be a casualty of the virus. There are only 285 orders by LNA’s count. (Boeing still lists 304, but this includes 25 for Etihad Airways, which publicly said it only will take six. It doesn’t even want these, following a fleet restructuring.)
Emirates Airline is the largest customer, for 115. President Tim Clark, who plans to retire in June, is understood to be sufficiently exasperated with delays that he may cancel at least some of the orders before he bows out.
Cathay Pacific Airways, squeezed by unrest in Hong Kong and now decimated by the virus, is said to have renewed leases for 12 777-300ERs for 10 years. The carrier has 21 Xs on order.
The Lufthansa Airlines CEO said the carrier will emerge from the virus much smaller. What this means for 20 X orders remains to be seen.
LNA was told before the virus reached a global disaster level that Boeing was already pondering dropping the 777 production rate from 5.5/mo to 3/mo. (The delivery rate is 3.5/mo.) This likely won’t be enough.
The aerospace analyst for Jefferies Co. last week issued a note in which Boeing is forecast to deliver an average of only four 787s a month this year. The production rate before the two-week virus-related suspension was 14/mo, going to 12/mo by year end and 10/mo next year.
Boeing hopes China will place an order for 787s and MAXes very soon.
Defense is outside the scope of LNA. However, the commercially-based KC-46A Pegasus tanker should have been named Albatross, for that’s what it is. (One could say the same thing about Airbus’ A400M Atlas.)
Years behind schedule and billions of dollars over budget, yet another problem was revealed last week: it leaks in the fueling system. This is another Category 1 (the highest level) of problems with the bird. It was also revealed last week that Boeing will have to foot the bill for a previous long-running Category 1 problem, the remote visual system used to mate the refueling boom with the trailing aircraft.
The NMA is dead. Long live the NMA.
So declared the CEO of one of the world’s largest leasing companies.
What’s the next Boeing airplane going to look like? An “NMA Lite”? A new single-aisle?
The same lessor CEO and an officer of Pratt & Whitney told LNA it will be a single-aisle. Others suggest an NMA Lite. No matter. The virus totally upended all strategy.
Boeing CEO David Calhoun said last week in a letter to employees, “One thing is already clear: It will take time for the aerospace industry to recover from the crisis. When the world emerges from the pandemic, the size of the commercial market and the types of products and services our customers want and need will likely be different. We will need to balance the supply and demand accordingly as the industry goes through the recovery process for years to come.”
LNA doesn’t see any movement on the NBA until 2022 at the earliest.
Boeing has about $15bn in liquidity (compared with $30bn for Airbus). It’s unclear whether it will eventually take any federal money in the CARE bailout. The stimulus package provided $17bn for defense contractors. Although not specified in the legislation, this is believed to be for Boeing.
Yet, despite asking for $60bn for itself and the supply chain, Calhoun recently told CNBC Boeing didn’t need the money if strings were attached. Boeing had plenty of other options, he said.
Then, the obvious question arises: if Boeing has plenty of options, why ask for federal money for itself in the first place?
Boeing and Embraer entered into an agreement to form a joint venture, Boeing Brasil-Commercial, for $4.5bn. Regulatory approval is stalled by the European Union. After several delays, a decision date of June 23 was announced. The virus may well set this back.
More to the point, all of Embraer now has a market value of around $1.5bn. How can Boeing justify to shareholders paying $4.5bn for only Embraer Commercial Aviation and a portion of its services unit? Given the mantra of “shareholder value,” this is a fair question.
Key officials at both companies say this is a long-term, strategic play that supports the negotiated purchase price despite the current depressed market value.
Nevertheless, Embraer Commercial, like Airbus and Boeing, faces disappearing demand. LNA is told EMB now expects to deliver less than a third of the E2s this year than planned. US carriers don’t want the E175-E1s that are in the delivery schedule this year, either.
The state-owned COMAC of China is so far behind schedule on the C919 that the virus probably will have little effect. Entry into service is currently planned for 2021, but 2022 was more likely before the virus. Regardless, when the C919 is ready for delivery, the government will force the airlines to accept it.
The same is true for Irkut and its MC-21. Also currently planned for a 2021 EIS, 2022 is more likely.
Mitsubishi Aircraft Corp (MITAC) isn’t supposed to deliver its first M90 SpaceJet to ANA and JAL until 2021 or 2022, so there’s time to see how the impact of the virus plays out. The M100 SpaceJet, designed for the US Scope Clause-restricted market, has a target of 2024 for EIS. One hopes that by then, the US carriers will be well on the way to recovery. But you never know.
The supply chain rises and falls on Airbus and Boeing. As they go, so goes everyone else.