Leeham News and Analysis
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Leeham News and Analysis
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- A350-1000 or 777-9? Part 3 April 25, 2024
- Boeing CEO promises company is turning around…again April 24, 2024
- Solid start for stand-alone GE Aerospace despite cuts to LEAP output April 23, 2024
- SPEEA, Boeing at impasse over safety program, union says April 23, 2024
Boeing remarketing stored 737s ordered by China
By Scott Hamilton
David Calhoun
Sept. 15, 2022, © Leeham News: The indefinite delay in China authorizing Boeing to deliver 737 MAXes to airlines led Boeing to slowly remarket more than that are 100 stored.
CEO David Calhoun said today that Boeing can no longer wait for China’s OK with the large inventory of aircraft that went into storage when the MAX was grounded in March 2019. Boeing continued building the MAX on the assumption that the grounding would be a short one. When by the end of 2019, there was no end in sight for recertification, production was halted with 450 MAXes built but stored. About 140 of these were destined for Chinese airlines and lessors. Lessors have been allowed to accept some deliveries as long as the airplanes were delivered to customers outside China, LNA previously reported.
Remarketing Chinese-ordered aircraft
Speaking on the sidelines of today’s conference organized by the US Chamber of Commerce, Calhoun said “We are not delivering airplanes to China. We certainly wish we could. We are remarketing a small portion of them. We continue to defer production of any Chinese airplanes. We don’t really carry any risk. Then depending on what we read, we will just keep remarketing more.”
Calhoun said he is not worried about the market for MAXes, outside of China. “I know we can move them, especially with the supply chain issues that both manufacturers are having.”
Calhoun said he has to be pessimistic about a break though in trade relations between China and the US. “I’ve predicted more progress than I’ve succeeded in getting,” he said. “It is what it is. The geopolitical situation is rough. It is tough. The good news for me is that there was a moment when there was a giant risk for the company. I don’t feel that anymore. We’ve got to them back if we want to be world leaders.”
Trade relations
Earlier this week, LNA spoke with a consultant with a global consulting firm who leads the company’s trade relations section. He had a downcast view of any near-term change in the current US-China trade relations. Calhoun said today that improvement may be a year or two away.
The dour outlook contrasts with that of Robert Martin, the CEO of BOC Aviation, who told LNA last month he saw improved relations occurring by year end.
This confirms the data on Planespotters for the past few weeks: there haven’t been any new-build MAXs for Chinese carriers for months, and ex-Chinese whitetails are being re-purposed for other customers — including US carriers, who are probably getting mouthwatering discounts to take them.
Perhaps BA feels that it’s not going to be able to satisfy CAAC condition #3 for MAX re-cert in China. Condition #1 related to MCAS upgrades, but condition #3 specified addressing all issues identified by investigations into the 2 MAX crashes — which therefore includes EICAS non-compliance.
One way or another, at least the penny has (finally) dropped.
How to fake FCF at y.e. 101:
* remarket the jets
* book the sales proceed
* refund customers’ PDP after y.e.
Win! Win!!
You seem to have a very anti Boeing bias. It’s all about politics, since ARJ-21 is Chinese certified yet MAX isn’t. If one customer isn’t accepting orders, you give the benefit of quick builds to another that wants them. No different from the QR A350 frames, it’s the carriers loss. I think it speaks more to passenger volumes in China, if the airlines needed these I bet certification would be coming a lot sooner. That’s the more worrying element of this, namely that passenger travel must be extremely low in China right now
“It’s all about politics, since ARJ-21 is Chinese certified yet MAX isn’t.”
Let’s reverse that and look at the US, where the MAX is certified but the ARJ-21 isn’t. Is that also “politics”? Or is it just that the ARJ-21 doesn’t meet US certification standards?
Guess what: China also has its own standards, and the MAX doesn’t satisfy them. In that regard, I’d remind you that MAX re-cert in the EU is also just provisional, pending upgrades not required in the US.
In July, Air traffic in China was at 70% of pre-pandemic levels — more than enough to allow airlines to take on new aircraft. After all, those same airlines are currently accepting Airbus narrowbodies, aren’t they?
CFO West has largely confirmed BoA analyst’s forecast: target of the MAX delivery “at risk” of falling below 400.
Desperate times call for desperate measures!
BA also has $5.1B of short-term debt that needs to be repaid within 10 months — so it’s urgently in need of income. Its cash at the end of Q2 ($10.5B) was barely enough to cover accounts payable ($9.3B) at that point in time.
The ARJ-21 nor the C919 meets any aviation standards outside of China CAC.
The MAX is certified in all AHJ in the world, including China.
Fact is no MAX is flying in China, one of the biggest market. The extra profits came from China.
@ TW
Incorrect.
In the EU, the MAX is only provisionally certified, with a review due 2 years after re-cert. The appendix on page 9 of the relevant EASA AD indicates that that review will concern a third AOA input AND the CAS.
The MAX is not certified in China (a continuing fantasy of yours) or in Russia.
Hey genius..
Tell me what other country has certified the ARJ-21… is
Is that politics too??
Brilliant analysis Bryce!!
“Is that politics too??”
Still having reading difficulties?
@Zoom is the one who’s making the link to politics — not me.
Address your question to him/her.
Not low enough to stop them taking deliveries of Airbuses. Or ordering more by the hundreds.
China Eastern taking delivery of AB NB and also retiring BA NB (737NG).
GL to BA trying to remarket the jets, those for the Big3 in China are in ultra-low density. Costly (and time-consuming) tear up the interior and, wait, where are the seats/lav (new??) coming from?? 🤔
We all know from contractors to BA, they all run short of “skilĺed” labor!
I like the obscuring neologism “remarketing”, myself.
Re: “— ex-Chinese whitetails are being re-purposed for other customers — including US carriers, who are probably getting mouthwatering discounts to take them.”
Alternatively, maybe they are being auctioned off to the highest bidder among airlines that are rapidly recovering from COVID and who find themselves short of aircraft, are eager to take delivery of new aircraft, and would have to otherwise wait years to take delivery of large new narrowbody orders aircraft from Boeing (2025?), and an even larger number of years (2027?) to take delivery of large new narrowbody orders from Airbus. There are some regions of the world where profitable airlines have recovered more rapidly than they expected from COVID, and are eager to take delivery of new aircraft so that they can add flights and make more profit, rather than delaying delivery of aircraft due to COVID policies that continue to suppress airline traffic, or in order to satisfy their government’s wish to make some political statement.
Another market for MAX whitetails has been startup airlines who would prefer to start service with a common fleet of made (re-equipped) to order new aircraft, rather than with a hodge podge of new and/or used leased aircraft. Recent startups Bonza, Flair, and Akasa are taking delivery of MAX whitetails now from orders placed fairly recently, and would have to had to wait years for delivery of new narrowbody aircraft if not for the availability of 737 MAX whitetails.
Certainly a possibility.
But inconsistent with the bumper 65% discount offered to Southwest (and others) in their recent orders of “regular” frames.
Also bear in mind that the whitetails are not new: many are 3 years old…and you don’t pay full price for a 3-year-old plane.
Yes, I’m wondering what the highest bidder in AP’s
scenario will be paying for those (presumed) aircraft.
Then there’s the necessary refurbishing..
The recent 787 story has been an interesting one,
with “delivery” having acquired a novel meaning.
When words acquire new meanings, I tend to look closer.
Glad to have you back on this blog. Tempus Fugit as well as the Max’s.
that don’t fly.
“When words acquire new meanings, I tend to look closer.”
…like when the word “vaccine” was recently redefined?
Like AP said.
The sad reality is, Boeing still has hundreds of undelivered MAX on its books that are proving difficult to shift.
Looking at the 787 Dreamliner production list on Planespotters, there are several frames “on order” for Chinese carriers. It will be interesting to see if any of these get delivered any time soon…
China buys Airbus aircraft and Boeing sells aircraft to airlines elsewhere.
win-win..
Airbus sells even more aircraft to airlines elsewhere.
Lose – double win.
Then why was Boeing so butt-hurt when China ordered hundreds of new Airbuses earlier this year?
Oops. 😀
They are sore losers and can only move on by winning
“The good news for me is that there was a moment when there was a giant risk for the company. I don’t feel that anymore. We’ve got to them back if we want to be world leaders.”
Begs the questions:
When did you feel there was a giant risk to BA? Why don’t you feel it anymore? Is BA not considering Chinese airlines as a source of revenue, anymore – therefore there’s no risk because it’s not a market (and thus competition) for Boeing?
Side note:
“We’ve got to them back if we want to be world leaders.”
Is this what he really said? Typo? Is it just me, or is this some word salad?
I believe that Calhoun’s statements should be analyzed with extreme caution, as he does not speak to aviation analysts, but to financial analysts and seeks results in the stock market.
I was wondering about that odd sentence attributed to Mr. Calhoun, as well. Who are “them” and who are “we”, in this instance?
Also: weren’t we recently told that Boeing deliveries to China would likely be resuming soon?
Clearly loosing the Chineese market hurts. Right now, not so much as from all reports air traffic is down in a major way.
Other markets are up (right now) and Boeing can take advantage of that for the MAX to fill other orders. Sans some real data, what they are getting for the MAX is pure speculation.
Long term, if China boycotts the MAX, then Airbus gets a leg up.
But long term the US can kill supplying the C919 with systems as well (engines, electronics etc as much of those systems are Western).
Then its at least another 5 years (or more) before China can replace that stuff and The C919 flat lines in the meantime and any ramp up is delayed even longer.
Two can play the game.
Can BA wait for another five years before it launches any new jet program?? 🙄
The Chinese can “Sinofy” the C919 by purging it of western systems, just as the Russians have “Russified” the MC-21. They’re probably already in the process of doing it
Chinese traffic is apparently not sufficiently down to stop Chinese airlines taking delivery of every Airbus they can lay their hands on and ordering 300 more!
For example China Eastern plans to take over 20 AB NB this year and also retire 5 B737. Next year will have 13 new AB NB and get rid of 12 B737.
Forgive me, I see zero, zero chance BA would able to move any MAX from the Big3. At best, it’s tinkering at the margin. Hey remember what I said before? It’s now in the “show” business, it’s all about the Potemkin village.
“Calhoun said he is not worried about the market for MAXes, outside of China. “I know we can move them, especially with the supply chain issues that both manufacturers are having.””
Well, that’s worked well up to now, hasn’t it?
Almost 2 years since re-cert, and still (recently) 300+ MAX whitetails sitting in the parking lot.
It seems that Indian startup Akasa was offered a 60.5% discount on its whitetails (relative to list price) and ended up paying $48M per frame. JP Morgan has previously estimated that they cost $36M per frame to manufacture (probably much more now). That nominally leaves a $12M margin for BA — but much/most (or all) of that will have been burned on storage, de-storage and re-fitting costs, and compensation.
So, a lot depends on the meaning of the text “move them”.
https://infra.economictimes.indiatimes.com/news/aviation/akasa-air-boeing-aircraft-deal-estimated-at-3-46-billion-says-aircraft-valuation-expert/88260032
Currently the A320neo can command a $2m premium over the 737 MAX 8.
@Bryce
I’m not sure just how much I’d trust those figures. Here’s why;
Let’s go back to my favorite starting point – the 2018 fiscal year, before the Max grounding and pandemic, when BA was at it’s zenith.
https://s2.q4cdn.com/661678649/files/doc_financials/quarterly/2018/q4/4Q18-Earnings-Release.pdf
EOY earnings release. Commercial Aircraft Delivered 806 aircraft, had $60,715 in revenues, $7,879 in Earnings from Operations, giving a margin of 13%. The best year and margin they ever had…
A margin of $12 million on a sale of $48 million, is 25%. Unless they haven’t allocated any fixed or General and administrative expense to that figure, it’s very high. R&D and Interest Expense, as well.
Also:
The margin on a WB is substantially more than on a NB. If 13% was the average, then I would guess they are making less than 10% on a NB and more like 15-20% on a WB.
@ Frank
Indeed.
As I said, the JPmorgan estimate of $36M is probably too low.
On the other hand, perhaps it’s just the “naked” manufacturing price, which doesn’t take broader costs into account — such as rent, insurance, depreciation, R&D, administration, etc.
One way or another, the Akasa deal isn’t putting much butter on BA’s bread.
Interesting snippet of supply chain information here.
One of BA’s suppliers was acquired by a private equity fund, which then proceeded to jack up prices by more than 300%.
The matter is currently being fought out in court.
https://www.law360.com/articles/1530723
So, it’s not just engine makers that are causing delivery snags.
Everybody sees Boeing is playing second fiddle with their bread & butter 737 MAX, even the most naive market analysts. Generating cash flow ASAP from the 737 and 787 programs is key to Boeings longer term survival. Pressuring congress and FAA to be more cooperative, business driven proved an outright Waterloo during the last decade. Badly damaging the Boeing brand and US civil aerospace supply chain.
Calhoun is trying to normalize business, but knows communicating everything is just fine, has become unacceptable for the stock and stake holders.
Selling aircraft at serious discounts because your competitor is sold out for years and supply chains are limiting output is not a sustainable business model.
Launch of a new NB, a new cash cow is required. 150-200 seats, AKH capable, LEAP GTF MK II, modular, assembled in Asia too. 10% More efficient than NEO. Denying publicly is ok, but get engineering, financing, keycustomers and government (yes) lined up.
As regards your last paragraph: BA can’t fund such a venture.
It needs every dollar it can get just to keep the wolf from the door: per quarter, it has to pay $550M in loan interest, and revenue continues to be (very) sub-par. Analysts are now expecting yet another loss for Q3/Q4.
Moreover, it has to deal with the effects of a brain drain.
That all makes sense, but if a plane is “assembled in Asia”,
what is the role of Boeing? BINO? I want Boeing to remain
an American company- and not just a financialized shell of one.
I think @keesje meant for the future design to be assembled in China like the A320 currently is.
90% of Apple’s products are made in China.
Similarly, companies like Nike have most products manufactured in Asia.
Lower costs = more profit…that should certainly appeal to BA 😏
Asia also has a reputation for good manufacturing quality — compare that to Charleston, for example.
What’s good for a very large corporation is not necessarily good for a country and its citizenry.
Yes, lots of stuff is now made in China that used to be made at home- and the people who used to make those things in the US now “work”as greeters at Walmart, and such.
“Learn to Code!” /s
Absolutely.
But onshoring will mean much higher production costs, with attendant loss of customers.
“..Under today’s neoliberal system, the government allows employers to pay wages that are too low to survive on, and then the government uses taxpayer money to bail out the underpaid workers, with programs like the Earned Income Tax Credit (EITC)—a subsidy to poverty-wage workers—and in-kind benefits like food stamps and housing vouchers. The Labor Center at Berkeley has calculated that welfare for low-wage American workers costs taxpayers $150 billion each year. As Teresa Ghilarducci and Aida Farmand noted in The American Prospect in 2019, “The heavy reliance on the EITC, rather than the minimum wage and the strength of trade unions, is one major reason why the U.S. leads the OECD in the share of jobs that pay poverty wages—a full 25.3 percent of jobs are poverty jobs, compared to 3 percent of jobs in Norway.”..”
https://www.tabletmag.com/sections/news/articles/neoliberal-twee-cass-sunstein-sludge-michael-lind
I want the average Joe and Jill to do much better, after forty-plus years of their immiseration for the sake of the rich’s ever-increasing gains.
Shipping jobs to low cost countries benefits no one in the long run. Short term it pads the bank account of “great” visionaries like Jack Welsh, but 40 years of trickle down economics have only trickled up.
@Bryce
Charleston’s quality problems are rooted to the poor lack of leadership at all levels, but I’ll counter it’s the same here in a Puget Sound.
I’ve been getting reports from a contact I have at the delivery center in Seattle just how bad the morale and lack of skills many of the new hires have, including first level managers.
We don’t hear or see this from Airbus in Mobile.
Interesting — and not really surprising — with regard to Puget Sound.
Regarding Mobile: Scott has previously told us that there are some quality issues there on the A220 line, but those appear to be teething effects. The A321 line in Mobile appears to be okay. Motivation there is probably a lot better than in Charleston.
@Airdoc
@Bryce
So I’ve got a guy, who has been to Mobile. Worked there.
The build quality isn’t as good as he’d like it to be. People don’t seem to care, is his summation. Not very motivated…
@ Frank
That’a a bummer regarding Mobile.
What the hell has happened to the US industrial manufacturing sector?
“The A321 line in Mobile appears to be okay. Motivation there is probably a lot better than in Charleston.”
Intensive training for Mobile newhires happened in XFW afaik.
Look at US vehicle manufacturing operated by non-US entities. They all do their own worker qualification.
More MAX misery for BA — this time in the form of a damning new (Dominic Gates) documentary on Amazon Prime.
Also embarassing for the FAA.
“Boeing documentary shows a company and system primed for disaster”
https://www.seattletimes.com/business/boeing-documentary-shows-a-company-and-system-primed-for-disaster/
The stories about the lack of moral leadership at the companies mentioned in this story are almost endless. But I can’t help to think in this soundbite culture, that the World has tragically moved on. It’s in the DNA of the MBA to write off losses and discount human lives. If those two Max crashes had been airplanes delivered to United, Southwest or American, the court of public opinion would have called for the CEOs to be jailed. You know, like the Peanut Butter CEO who sold contaminated product. But here these “great men” will continue to serve on boards, lecture in business schools and enjoy life like the King of England.
What’s this? Boeing won’t be delivering mad max’s to China, how can this be? Scott, just last month made the prediction that China will start taking mad max’s very soon. Nope, won’t ask you to eat crow 😉
This commenter stated it won’t happen. I don’t think the CAAC trusts the mad max fixes.
Now the Boeing pendulum swings the opposite with using a ‘remarketing’ term. I like how Calhoun tries to settle Wall Street with comments like “there’s no risk”.
This remarketing will cost millions, airplane reconfigurations, repaints, maintenance program and maintenance manual changes for the new customers.
In the end, it’s a good thing Boeing is moving on, get rid of this inventory and be done with the storage programs, regardless of the costs.
The future for Boeing in China though is not very promising. I’m just wondering what they’ll do with the delivery center in Zhouchan? Just another money pit….. Boeing is quite good at this.
Airdoc:
Those very same fixes that CAAC said needed to be implemented and it would and did return recertification?
Or are you saying EASA let the MAX back in the air despite it being a lethal flying (or non flying) machine?
The same EASA that says the A350 grid is fine, just fine?
Me thinks the Liberty Bell is ringing.
@Transworld
I’m not saying it … you are.
EASA is a much better organization than the corrupt FAA.
The EASA only *provisionally* let the MAX back in the air, pending certain changes for which a grace period was given.
@TW
Emotion blinds. Period.
Questions:
IIRC – Scott had received a quoted price of between $5-7 million per aircraft, when switching from one airline to another. Apparently, you can’t just knock some holes in the floor, move your plumbing and be done with it.
Who knew? 🙂
Now this $5-7 is a pre-pandemic price and I’m guessing it’s gone up a bit, since then. If BA cannot deliver those aircraft to Chinese airlines:
1) Is the order considered lost, or will it remain on the books?
2) Will deposits and PDP’s be returned to the airlines? (this is a biggie…)
If Boeing must return any monies to those airlines, as they avail themselves to the cancellation clause in their contracts AND then Boeing will have to spend $5-7 million to move stuff around to get it ready for another customer IN ADDITION TO offering the new buyers a cut rate price for taking an aircraft that’s been sitting for a coupla-three years, in some cases…
What a mess.
Unless China out and out cancels these orders, I would expect them to get moved to the ASC 606 bucket.
Good point. There are currently 635 in the bucket:
https://www.boeing.com/commercial/#/orders-deliveries
I’m guessing they’re already in there…
“Will deposits and PDP’s be returned to the airlines? (this is a biggie…) ”
BA will only refund customers’ PDP after the y.e., I bet.
Oops.
-> FedEx to park some cargo aircraft …
Is BA obliged to pay compensation to Chinese carriers for the fact that their fleets remain grounded by the local regulator? After all, the grounding is not the fault of the airlines, but is instead due to shortcomings in the MAX. There’s a greenlighted fix for MCAS (CAAC condition #1), but the lack of EICAS — which contributed to the crashes by causing cockpit confusion — would appear to preclude CAAC condition #3 from being satisfied.
Any signs that Chinese carriers are starting to rid themselves of MAXs that were delivered prior to the grounding, e.g. by returning frames to lessors?
Good questions, I think. As to the second one, I remember reading (here, I think) that a Chinese lessor- or perhaps more than one- had returned some 737MAXs to Boeing.
Corrections are welcome.
How many crashes of the A320 series with the EICS?
That is a bogus link.
We know what caused the MAX crashes and it was not an alerting system.
There were two main causes. MCAS grew to be lethal.
MCAS was dismissed as a change and hidden (by Boeing)
Ethiopian Pilots were aware of MCAS and still crashed (loss of speed was a contributing cause)
Adding system to systems not only does not improve safety it causes more confusion and issues and detracts from it (as well as loosing commonalty)
But then how many have a pilots license?
Its the latter point you make “were aware – and still crashed” that is now the binding issue. At its simplest did the complexity of the system responses overwhelm the capability of even (as in this case) very capable pilots – thus justifying a long term (at the time) requirement for the introduction of a more effective warning system. Clearly Boeing says no – some regulators feel otherwise. Being military not civilian I have no valid view other than dismay at the chaos in an existing 737 warning system – but am highly suspect of a company which seems still incapable of implementing speedy responses to regulatory demand.
The primitive and counterproductive 737 CAS was identified — by both the NTSB and MITRE — as a causative factor in the 2 MAX crashes; MITRE also implicated it in 3 other crashes.
The EASA also has concerns about the CAS (provisional re-cert AD, page 9), as does the CAAC. The fact that the cert of the MAX-7 and -10 is taking so long, might also indicate that the FAA is refusing to certify the planes with the present CAS.
Yet another shortcut that’s coming back to haunt BA.
I believe Canada shares EASA’s position on the MAX.
“But then how many have a pilots license?”
Chesley Sullenberger has a pilot’s license, and he publicly criticized the 737 CAS:
“Sullenberger also says something must be done about the cacophony of alarms and flashing lights that assault pilots when something goes wrong with the MAX. He said the noise and resulting confusion in the Lion Air and Ethiopian cockpits likely played a role in the outcome as they tried to isolate the source of the problems. “It was clear to me how the accident crews could have run out of time and altitude,” he said.”
https://www.avweb.com/aviation-news/sully-says-max-needs-more-fixes/
Human machine interface is not a factor?? 😂
Does BA know this is coming??
https://mobile.twitter.com/dominicgates/status/1570847853416968192?cxt=HHwWgMDTsZnz4swrAAAA
One wonders if/when we’ll be seeing investor lawsuits with regard to this matter.
Although BA only revealed the re-allocation last Thursday, it’s obvious that the decision had been put into effect much earlier; a close inspection of the Planespotters production list 2 weeks ago showed that ex-Chinese frames were being re-assigned to new customers.
Investors can argue that this was/is materially important information that was not disclosed in a timely manner by BA, thus violating its duty of candor.
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