Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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2009: Recovery for Boeing, Challenges at Airbus
Update, January 10:
Bloomberg News reports EADS says it will be three years after the A400M’s first test flight–which remains unscheduled–before Airbus will ship the airplane to customers. This is hardly good news.
Original Post:
Commercial Aviation enters 2009 with a high level of uncertainty. Boeing’s headlining 787 program and the lower profile but increasingly costly 747-8 development face critical milestones this year. Airbus’ A350 does, too. The global financial market meltdown last year hopes for recovery this year but the global economy is questionable.
These are just a few of the issues facing Airbus and Boeing this year.
Boeing continues to dominate the headlines with its troubled 787 program, so we’ll look at the US aerospace company first.
Year for Recovery
This has the makings for being a year of recovery in new airplane programs. No new joint BCA-IDS program is without significant issues and two of BCA’s three new airplane projects have significant delays.
The 787 program needs little review here; its issues are well known. The question is when the first flight and flight testing will begin.
Boeing says the first flight will be in the second quarter; Air Transport World first reported that April 20 is now the schedule for first flight and Flightblogger followed with its own reporting on a timeline leading to this date. Our own checks suggest that a new development and testing timeline for the critical software systems is aimed for a sooner-than-later second quarter first flight (the old timeline suggested a June-August timeline for first flight). Our checks also report, however, that April 20 is thought to be aggressive and our sources are unsure this date can be met.
What is important to emphasize here is that this date is an internal timeline and Boeing is only saying first flight will be in the second quarter. This means it could take place on June 30 and still meet the publicly stated goal.
At long last, we expect that the first flight and the flight testing will get underway this year. These are obviously critical milestones in the recovery of the 787 program and Boeing’s operations.
Delta Air Lines may cancel the 787 ordered by Northwest Airlines now that NWA is a subsidiary of Delta. NWA ordered 18, but Delta’s CEO Richard Anderson is unhappy with the delays and performance issues (the 787 is overweight and has a shorter range than originally advertised, though the extent of the latter is in dispute). Anderson likes the 777LR and it’s possible there could be a deal for more 777LRs to replace the 787-8s ordered by NWA.
A cancellation will be nothing but a minor embarrassment for Boeing—with 900 orders, losing 18 won’t matter much and it’s possible others will come forward to grab these in any event. Read more
Odds and ends
As the year trickles down to a close, we’re going to post some news items in one post with any commentary we see fit to add. We don’t expect to be posting at all (unless some huge happens) between Christmas and New Year’s.
December 22:
Air Transport World reports that Boeing has set the end of April for the first flight of the 787. We hope that works, but there is still risk of unknown-unknowns that could delay this until the third quarter. Boeing has previously announced first flight will be in the second quarter, which could be any time from April 1 to June 30.
The Seattle Times has this year-end story, looking at Airbus and Boeing.
The tanker competition is back in the news, with this editorial and this news story, both from The Mobile Press-Register, and these items quoting Boeing IDS president James Albaugh and Northrop Grumman president Ron Sugar that kick off the latest controversy.
December 17:
From: Schaeffers Research comes this item:
The Boeing Company
Dow component The Boeing Company (BA: 
sentiment, chart, options) was slapped with a “sell” rating today by Societe Generale, as the French firm made its way through the aerospace-and-defense sector. Also in today’s note, B/E Aerospace (BEAV) was initiated at “hold,” General Dynamics (GD) was started with a “hold” rating, and Lockheed Martin (LMT) was started at “buy.”
The downbeat initiation today comes on the heels of Boeing’s warning last week that the launch of its 787 Dreamliner would be delayed by yet another 6 months, due to issues caused by a machinists’ strike and improperly installed fasteners.
As its Dreamliner drama drags on, analysts have grown increasingly skeptical of BA. Zacks reports 9 “holds” and 1 “strong sell,” compared to 8 “buy” or better ratings. As today’s note from Societe Generale reveals, there’s still plenty of room for more negative brokerage notes to hit the shares. Any additional skeptical notes could extend the stock’s year-to-date drop of 55%.
Schaffers also has this related item:
The Boeing Company (BA: sentiment, chart, options) was broadsided with another bearish brokerage note this morning, marking the second straight session of negative news from the analyst community. Yesterday, Societe Generale initiated coverage on BA with a “sell” rating following yet another delay in the company’s much anticipated 787 Dreamliner. This morning, Deutsche Bank cut its price target on the shares to $39 from $48. The brokerage firm also reiterated a “hold” rating on the equity.
There is room for the situation to deteriorate further on Wall Street, as 8 of the 17 analysts following BA rate the shares a “buy” or better, according to Zacks.com. Meanwhile, Thomson Financial reports that the stock’s average 12-month price target rests at $57.11 per share – a 47% premium to the stock’s Monday close at $38.74.
Our comment: Societe Generale, or SocGen to those of us in the business, is awfully late to the party. We agree (unfortunately, since we have a long position in Boeing stock) that there is more downside left in the price. Until Boeing clearly is positioned to achieve first flight with the 787, doubts remain and the company’s credibility is shot. “Performance” is now the only thing that will count–not predictions and projections by Boeing.
Many brokerage firms consider a “Hold” rating a negative recommendation.
Back to the Tanker
Reuters has this story about the debate between Northrop Grumman supporting a “best value” approach to the re-compete for the KC-X contract and Boeing supporting a “low price” selection.
Northrop’s “best value” combines the most-capable concept that won it the contract last year. Boeing’s “low price” relies on the total life cycle analysis that favors its airplane. Northrop says the lowest price might not be the best product. (An interesting position to take since its price was $3bn less than Boeing, but Northrop fears that Boeing–knowing Northrop’s price–can now low-ball the next round of bidding.)
We’re reminded of the story when former astronaut Frank Borman became CEO of Eastern Airlines. Borman, commander of the first Apollo mission around the moon, was facing the notoriously militant IAM during one of his early meetings at the new chief of Eastern. A grizzled machinist finally asked Borman, “Why should we follow the advice of someone dumb enough to sit on top of a rocket built by the lowest bidder?”
Borman found the humor in the question as the entire crowd cracked up.
787 update due shortly
In this week’s column:
- 787 Update Due Shortly
- Other program issues at Boeing
- The decline and fall of the Chinese aviation sector
- The impact of the Global economies on Airbus and Boeing
787 Update Due Shortly
Boeing plans an update of the 787 program by mid-December, with expectations that a new timeline for first flight and first delivery will be forthcoming. Aerospace analysts diverge on these predictions right now.
JP Morgan forecasts first flight in the first quarter while Goldman Sachs predicts 2Q09 or 3Q09. Based on conversations we’ve had with Boeing insiders, the unions and others, we believe the first flight is likely in the June-August 2009 period.
When, then, will be the first delivery? Cowen & Co. predicts 2Q10; JP Morgan and Goldman predict delivery will be a year after the first flight. Boeing has consistently maintained that it can complete flight testing within 6-9 months after first flight, but given the track record of its predictions so far, we’re inclined to side with JP Morgan and Goldman and go with one year after first flight.
Boeing and the Southern strategy?
Steve Wilhelm of the Puget Sound Business Journal (Seattle) has a long story about Southern states “eyeing” Boeing in the wake of the IAM strike. Speculation has been rampant (in peaks and valleys) that Boeing might be fed up with its unions in heavily unionized Washington State and be looking South when it comes time to build its next airplane (or two).
One quote from the story that is filled with irony is:
“If I was a Boeing executive, I’d look at the state of Alabama and see there’s a qualified work force … I’d take a look at the assets we have,” said Stephen Nodine, president of the Mobile County Commission, whose offices are in Mobile, Ala.
Alabama, of course, is the proposed site for the Northrop Grumman/Airbus KC-30 tanker proposed in competition with Boeing’s KC-767, which will be assembled in the Seattle area if Boeing ultimately wins the contract. But what is more ironic is that Boeing’s Integrated Defense Systems denigrated the skills of the Alabama workers during the tanker competition, suggesting they might have trouble building a tricycle if Northrop got the tanker contract. (It apparently mattered not that IDS has a large facility in Huntsville, AL.) Boeing’s Commercial unit cringed at the IDS statement because the Northrop/Airbus production model isn’t that different from BCA’s assembly model, including the high-profile 787 program (in which case IDS may have a point) but to a lesser degree with the 767 itself.
And speaking of tankers, Northrop didn’t even wait for the new Congress and the new president to take office before resuming the tanker wars with an advertisement that got the Pentagon’s chief purchaser up in arms (so to speak). Read about this one here and here.
We criticized Northrop for being slow off the PR and advertising mark in 2007, letting Boeing’s well-oiled machine set the agenda and frame the debate. (Once Northrop got running, it did make up for lost ground and scored some great PR/advertising hits.) But this advertisement, and more so it’s timing, strikes us as very premature. Nobody knows who the decision-makers in the Pentagon will be (and in any event, they shouldn’t be influenced by ads) and we doubt Members of Congress are paying much attention to the tanker debate right now anyway. With four million people expected for the inauguration of Barak Obama and the organization of the power structure in Congress, we suspect the Members of Congress might just be focused on something else right now.
767 sales keep line alive for tanker
Boeing last week announced an order for four more 767s (in this case, -300ERs) that help keep the line alive pending a new competition for the USAF aerial tanker.
Boeing previously booked an order for nine 767s for All Nippon Airways, a customer affected by delays with the 787. Japan Air Lines is expected to take nine 767s as well; there are nine listed on Boeing’s website as unidentified–these are believed to be JAL’s. Another airline ordered two 767s.
All four carriers are 787 customers affected by the delays.
There are now 68 unfilled orders listed on Boeing’s web site for the 767. Boeing’s production rate is currently one a month but it likely will go to two a month as early as 2010.
This is good news for Boeing in keeping the 767 line active while Boeing competes for the KC-X contract. (Good news, that is, which originates from the bad-news 787 delays, of course.)
It’s unclear how the Department of Defense and the Air Force will handle the new round of KC-X competition. DOD hasn’t said if it will simply restart the competition suspended from the GAO decision upholding the Boeing protest or completely restart the competition. If the former, a decision could be rendered within a year and the 767 production rate is moot. If the competition is completely restarted, worse-case, it could take up to four years. Before the 767 orders were placed to take care of 787 customer delays, the backlog was about four years at one a month. The current backlog and production rate gives Boeing four years to keep the line open.
Update, November 11: Lan Chile just announced the acquisition of four 767-300ERs for delivery starting in 2012 to accommodate delays in its 787 order.
Bad news for Northrop?
With Pennsylvania Congressman John Murtha (D-Foot-in-Mouth) suddenly in danger of defeat in Tuesday’s election after calling his constituents racist and rednecks, Norm Dicks (D-Boeing/Washington) is in line to succeed Murtha as chairman of the House Appropriations Committee.
This would be bad news for Northrop Grumman and its effort to sell the Airbus-based KC-30 to the USAF instead of Boeing’s KC-767. Regular readers need no reminder of the dynamics here.
Update, 10:15 PM EST, November 4: Northrop can breath easier; NBC News just declared Murtha was reelected.
Back to the Tanker: Price Competition
A new strategy for the competition to award an Air Force contract for the aerial tanker might be a compromise for the next president, according to this article.
A sidebar to the home page has the following item, which does not have its own URL and may disappear after a few days. So with full credit to the USAF Aimpoint:
AMC: Securing Today’s Energy, and Fueling Tomorrow’s Mission
A 2006 study revealed 82 percent of the Air Force’s total energy consumption is aviation fuel. Air Mobility Command, through its fleet of tankers and airlifters, used 27 percent of that total, or roughly $1.5 billion. For over a year, AMC has undertaken an ambitious fuel efficiency program making use of the best airline industry programs/practices. Doing so not only ensures our mobility fleet operates more efficiently, but will secure today’s energy in order to fuel tomorrow’s missions.
Our Airmen aggressively identified and implemented numerous initiatives to reduce aviation fuel consumption and operate the fleet more efficiently. Here are just a few:
-Removed standard ramp fuel loads using only the required fuel for the mission
-Reduced weight by eliminating excess equipment carried on our aircraft
-Enhanced flight planning with accurate computer programs and shorter, direct routes
-Streamlined ground operations through engine shutdown and taxi procedures while minimizing APU usageTransferred additional aircrew training, including practice emergency procedures, to more capable simulators
-Continuously improved data collection tools and metrics to capture improvements
-Standing up a fuel efficiency office to oversee all fuel efficiency initiatives and policy
Although these initiatives are helping to avoid an extra $120M annual fuel bill, we can’t rest on these accomplishments. Other efficient initiatives can be identified, implemented and performed not just by our aircrews, but by Airmen at all levels — throughout the entire Air Force. From commanders, aircraft maintainers, flight planners, to the aircrews who execute the missions, we all need to ensure we do our part to be able to “Secure Today’s Energy, and Fuel Tomorrow’s Missions!”
Obama considers dual tanker buy
The US Air Force AIM online newsletter reported October 24 that presidential candidate Barack Obama is considering a dual tanker purchase. The article is here.
The same publication has another story quoting a retired general as saying delaying the tanker purchase is unwise.
Politics continue on the tanker
(Special projects precluded us from updating last week, so some of the links below backtrack into then.)
Politics continue to plague the tanker program even though the Bush Administration has punted the decision to the next presidency. Today we play catch-up with selected stories of interest.
Update, September 26:
Inside Defense reports that US Rep. John Murtha (D-PA), chairman of the House Appropriations subcommittee, says a split buy between Northrop and Boeing is the only way to recapitalize the USAF tanker program any time soon.
Murtha generally has been supportive of Boeing’s KC-767 tanker proposal.
He’s added language to the 2009 defense appropriations bill directing the DOD to study the feasibility of a split buy, Inside Defense reports. Murtha, according to the publication, acknowledged that Boeing and DOD don’t like the idea and he didn’t know if Northrop does, “But let me tell you something, we’re not going to have tankers if we don’t do that, I’m convinced,” Inside Defense quotes Murtha as saying.
Murtha predicted that in a re-compete, Northrop is likely to receive the order because its plane is ready to go.
Inside Defense is a paid-subscription service only but readers may register for free and receive three free articles (and then pay a la carte thereafter). This article may be found here, with the registration process the first thing you will see.
Update, September 25:
Be careful what you ask for. US Rep. Norm Dicks (D-Boeing/Washington) announced that he’s inserted language in a new House bill to require the USAF or DOD to review any adverse ruling from the World Trade Organization on the “illegal” subsidies complaints filed by the US Trade Representative and the European Union against Airbus and Boeing. He has said for years that Airbus received “illegal” subsidies and presumes the WTO will back up the USTR complaint. Most objective observers, including us, agree with his biased viewpoint on this one.
But most objective observers, including us, also think the WTO will find Boeing received “illegal” subsidies as well–something Dicks and other Boeing supporters in Congress seem blind to.
The full House has to approve Dicks’ language (likely) and then the Senate has to agree (unlikely).
A decision by the WTO is overdue.
Update, September 24:
Mobile Press-Register: Gates against tanker split buy.
Aviation Week: DOD’s Gates eyed changes to RFP before canceling contract.
JD Crowe at The Mobile Press Register is at it again.
Update, September 23:
Associated Press: DOD Secretary Robert Gates says the next administration should buy the cheapest tanker.
Original post:
Washington Times: [Tanker] Rigged in Boeing’s favor. US Sen. Richard Shelby (R-Northrop/Alabama) writes in an Op-Ed piece that DOD’s decision punting the tanker to the next presidency was nothing more than a sop to Boeing.
JD Crowe at Mobile Press-Register
Business Week: Boeing’s CEO beat the Pentagon, but lost some, too. Boeing CEO Jim McNerney gambled in taking on the Pentagon over the tanker, and won.
Defense Industry Daily: A400M delays creating contract controversies. Airbus’ sole military program isn’t going too well. (We count the KC-330 as a broader EADS program; the A400M is Airbus.)
Washington Post: Defense buyer says Northrop’s bid was $3bn cheaper than Boeing. DOD’s John Young said the smaller KC-767 should have been cheaper to buy than Northrop’s KC-30–but it wasn’t. We say perhaps the US taxpayer was going to benefit after all from all those “illegal” subsidies alleged to be provided to Airbus.
Inside Defense: Flyoff will determine tanker win. The Air Force’s top buyer predicts a flyoff between Boeing and Northrop for the tanker contract. Inside Defense is a paid subscription service but with registration you can get three freebies, including this article.
Los Angeles Times. Northrop entitled to termination fee. The Pentagon says Northrop is due tens of millions of dollars for the canceled tanker contract.