Boeing fails to assure on 777 production gap

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Introduction
Boeing’s ability—or inability—to bridge the production gap for the 777 Classic to the 777X entry-into-service in 2020 was a top concern of a series of Wall Street types during a recent series of meetings we had across the USA.

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There is a great deal of skepticism over whether Boeing can successfully maintain the current production rate of 100/yr (8.3/mo). People we talked with look at the number of orders Boeing needs to bridge the gap, the Boeing claims that it can obtain 40-50 or 40-60 a year, and, in a more recent development, the falling oil prices depressing the need for a new, more efficient 777-300ER compared with the 2004 model and the even older 777-200ER series.

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We have been telling our clients since March that Boeing will have to reduce the production rate of the 777 because of the large production gap. Aerospace analysts began waking up to this possibility by May and the broad consensus today is that Boeing will have to reduce the rate—the only questions remaining is by how much and how soon.

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As recently as the 3Q2014 earnings call, Boeing continues to assert it will be able to maintain rates with new sales. Boeing has booked 43 firm orders through October for the 777 Classic—39 for the 300ER and four for the freighter. This is as the low-end of the range Boeing says it needs.

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However, our Market Intelligences gathered over the summer and into the fall indicates sales efforts are struggling.

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Summary

  • Boeing clearly hasn’t been persuasive in its claims it will bridge the production gap at current rates;
  • Boeing has open delivery slots in the second half of 2016;
  • The big drop off in backlog begins in 2017 and gets worse going forward;
  • Key airlines that have been pitched have said “no;”
  • Emirates sends the industry’s first operational 777-300ER to scrap;
  • Bow wave of 777s coming to 12 years and off lease begins soon, creating cheap alternatives to new sales; and
  • Lessors will be compelled to offer -300ERs for low prices, depressing opportunities for Boeing.

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Airbus group reports Q3 and first nine month 2014 results

Airbus today reported Q3 and first nine months results for 2014. It could be summarized with one sentence, “steady so”.

It is an Airbus group more in control of their destiny and programs then it has ever been, also when it was called EADS. There are still challenges in several programs but these are addressed from a position of strength and against a backdrop of these programs having passed their most risky periods.

First the financial results: revenue for the first 9 months were up 4% to € 40.5 bn, EBIT up with 12% to € 2.5 bn, both compared to first 9 months 2013. Free cash consumption is down to € 2.1 bn from € 4.7 bn last year and shall be break even on a full year basis.

Looking at the Airbus group divisions and their major programs the following can be noted:

Civil airliners
Has already passed the order target for the year with 791 net orders until 1 October, the strong market for airliners continue. Airbus has also reached both European and US certification for A350-900 and delivery of first aircraft is planned for December to Qatar Airways. Airbus points out that the program is still challenging and can cause provisions, we judge the program to be past its most challenging phase however.

Airbus says they are not worried to firm up the 127 A330neo order commitments they have got, these commitments are not counted in the order tally of 791. We hear good things about the program with airlines. The one program which is still challenging when it comes to sales and execution is the A380, no new orders so far, just the cancellation of the Skymark deliveries. Airbus maintains that A380 will stop costing money to produce and deliver come end of 2015. 

Helicopters
The market is weaker then expected, bookings was down to 208 from 276 units a year ago. Backlog has shrinked to 908 helicopters, about 3 years of production. EBIT margin is still acceptable at 5.7% on virtually flat deliveries and revenue.

Defense & Space
Defense is the problem child of the group, the large programs either don’t sell (Typhoon) or are hard to deliver to demanding customers (A400M). Airbus flagged that customers which has taken delivery of A400M are not fully pleased and that a program review will be made in time for full year results that can include further provisions for the program.

The highlight of the division is space which is developing well both for launchers and satellites and this will continue as Airbus sees it. In total revenue was down 2.2% to € 8.2 bn, cost control kept EBIT above 4% at € 370 m.

Summary
All in all no spectacular results but also no surprises. When comparing Airbus results with Boeing’s Q3 results one shall observe that Airbus takes the present development and ramp-up intensive period (A350, A320neo, A330neo and still A380) directly to the bottom line where Boeing uses program accounting and spreads development and ramp up costs for 787 (still costing the company to produce), 737 MAX and 777X over a longer period, the so call accounting block.  One shall therefore compare these two on the civil airliner side over a long period of time to understand the real performance difference between them.

Zhuhai airshow: Airbus gains A320 MOU while regional A330 needs explaining

The Zhuhai airshow has not brought the expected slew of announcements from Western aircraft manufacturers. Boeing announced an order for 80 737 MAX Monday but this was characteristically from a leasing company across the Chinese see, SBMC Capital of Tokio.

Airbus on the other hand has not been able to move the much talked about A330 regional to order yet, despite announcing it in China last year and enticing with an announcement for a Chinese completion center for the aircraft before the show. Flightglobal reports that the A330 regional needs further explaining, Chinese carriers seems hesitant to buy what Boeing pitches as “obsolete technology” in a weight variant that only could fly local missions.

Airbus China president Eric Chen explains that the 200t variant is not constrained to Chinese mainland and can fly any missions that its range would allow. He also points out that the weight variant is just that, a de-papered weight version that can be upped to whatever take off weight the customer wishes at a later date by paperwork changes (and perhaps some additional galley equipment). As for technology level, an aircraft shall be valued for its contribution to a carriers business says Chen, not by which years it says on its airworthiness certificate.

The smaller A320 did not disappoint reports Aviation Week, Airbus CEO Fabrice Bregier could announce a Memorandum Of Understanding (MOU) for 100 A320 from state affiliated China Aircraft Leasing whereof 74 would be A320neo. The order, once confirmed, can help Chinese carriers with the aircraft demand for the 2016-2020 economic planning period. Chinese carriers have been slow to place the necessary early OEM orders for the period (needed due to the large backlogs), the lessor sees it can back-fill that demand when the carriers comes around to needing the aircraft.

Airbus also has explaining to do in other corners of the world, Emirates intend to start second round talks around A350 in the next months according to Reuters. The first round of 70 aircraft was cancelled after Emirates did not understand a specification change that Airbus undertook without consulting Emirates. This time Emirates will see the aircraft flying with neighbor Qatar Airways before agreeing to any specifications according to Emirates CEO Tim Clark.

Odds and Ends: Goldman Sachs on CSeries; Embraer in China; A350 gets FAA certification;

CSeries: Bombardier presented to the Goldman Sachs Industrial conference this week. Goldman’s take:

  • CSeries test flight: BBD believes it can achieve the significant acceleration in flight test hours per month required to get to EIS because more aircraft are moving in to testing and because it did testing during the grounding. FTV4 is supposed to be in the air in weeks, and FTV5 in early 2015. BBD does not see any one or two major challenges remaining in flight test, rather just a need to get through total hours.
  • CSeries demand: BBD says it is on track for its 300 firm order by EIS target. When asked if anything could come from the current Zhuhai Air Show it said it is not a place for signing, and China tends to order in service jets.
  • CSeries impact on P&L: BBD says the CSeries is likely to be dilutive to the P&L as it ramps from unit 1 to full rate production, which could be a near three year process. Early aircraft would be more dilutive than later aircraft.
  • CRJ update: BBD believes they can maintain current CRJ production rates, but will clearly need success in current order campaigns to do so.

Goldman has a Sell rating on BBD.

Embraer in China: Embraer is shifting its sales strategy in China, failing to gain much traction with the mainline carriers, according to Bloomberg. Now it’s going to concentrate on start-up airlines.

EMB appeared at the same Goldman conference as BBD. Goldman’s take:

  • Overall Embraer continues to believe it can keep production relatively flat from current E-Jets to E2. It thinks 2015 and 2016 currently look solid. 2017 is a bit more of a question mark, but the timing of EIS of each E2 aircraft helps – largest E-Jet backlog (E175) has latest E2 EIS, and all aircraft are built on the same line. 2015 delivery mix will be similar to 3Q14 mix. Orders are likely to be in the 5-15 per range, or come from conversion of US options. ERJ says in the scenario where Bombardier does not refresh CRJ, E-Jets could become a substantial piece of the regional jet market, along with Mitsubishi (which it says is a solid aircraft).

Goldman has a Neutral (Hold) on EMB.

A350 certification: Airbus obtained certification for the A350-900 from the Federal Aviation Administration Wednesday.

Asian airline market: overheated, balanced or just some spot troubles?

The Zhuhai Air Show, underway this week, comes against the backdrop of rising concerns–and large orders announced in recent weeks–of an over-ordered Asian market.

We’ve expressed concern about the large number of orders at Lion Air and AirAsia Group and AirAsia X–these two airlines alone have about 1,000 orders of various Airbus and Boeing types–and the proliferation of low cost airlines for which a shake out is inevitable. We also have expressed concern about India.

Two reports were issued in recent weeks, one arguing Asia is not over-ordered and the other taking a much deeper dive into the entire Asian market.

Lessor CIT Aerospace concludes not only is Asia not over-ordered but China is vastly under-ordered.

The Centre for Asia-Pacific Aviation (CAPA) issued a 72 page study that examines Southeast Asia, India and China. CAPA concludes the LCC market is only in its infancy in China, India continues to be a financial disaster and Asian airlines are struggling for profitability.

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Zhuhai Airshow: China’s aircraft industry is gaining speed

The 10th Chinese airshow at Zhuhai opened today. It was a day with fewer announcements than expected from the usual suspects (Airbus, Boeing…) but the Chinese industry did not disappoint. China is now showing more and more of its coming might as a player on the aeronautics arena.

The most prominent displays at this show were on the military side, where China has two stealth aircraft projects flying (the large Chengdu canard J-20 and the smaller Shenyang J-31) while their canard Chengdu J-10 was flying the display circuits overhead (Figure 1).

J-31 Kopie

Figure 1. Chinas latest fighter developments; the J-31 and J-20 stealth fighters and the canard J-10. Source: China internet.

All aircraft are of latest structural and aerodynamic design if not in engines and systems. This is a big difference to previous shows where the Russian Sukhoi and MIG aircraft and their local copies did the flying display until 2008. Since then everything has changed and now China and USA are the only countries in the world with two different stealth designs flying. USA has one in operation (F-22) and one close to (F-35) whereas China still has many years to go until they have their new aircraft operational. But it is significant that the old aeronautical behemoths Europe and Russia have none respective one (PAK-50) stealth fighter in flight test.

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Boeing 737 MAX 8 as a long and thin aircraft and how it fares in general versus Airbus A320neo.

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By Bjorn Fehrm

Introduction

Over the last weeks we have looked at Boeing’s 757 replacement possibilities on its long and thin network niche, including a ground breaking launch interview for the A321neoLR with Airbus Head of Strategy and Leeham logo with Copyright message compactMarketing, Kiran Rao. In the series we have seen that the A321neo has the potential to replace the 757-200 on long and thin international routes. Boeing’s equivalent single aisle entry, 737 MAX 9, has problems to extend its range over 3,600nm. It is too limited in the weight increase necessary to cover the longer range.

Many have asked how the less- restricted Boeing 737 MAX 8 would fare, suitably equipped with the necessary extra tanks. This is the subject of this week’s sequel on the theme long and thin. At the same time we look at Airbus entry in this segment, the A320neo, to see how it stacks up to the 737 MAX 8, both in their normal 1,000 to 2,000nm operation and then also in a long and thin scenario.

Let’s first summarize what we found so far in our four articles around the Boeing 757 and its alternatives:

  • The Boeing 757-200 with winglets can serve international routes with city pairs up to 3,500nm. The rest of its range capability (about an additional 500nm) is needed for unfavorable winds and reserves.
  • The A321neo has the capabilities to be extended to cover the range of the 757-200. This was also announced by Airbus during our series. The improvements are an increase in range of 500nm by virtue of three extra center tanks and an increase in max takeoff weight of 3.5 tonnes ( 7,400 lb). The efficiency improvement over 757-200 would be 25% with a small decline in passenger capacity (162 vs. 169 seats) in a typical First, Premium economy and economy cabin.
  • Boeings 737 MAX 9 fares less well. While it has the wing to fly the range, the aircraft’s squat stance hinders the aircraft to cant the wing to generate the necessary lift for an increased takeoff weight. MAX 9 can’t rotate to more than 70% of the angle of an A321neo. Subsequently the take off distances get too long with any weight increase.
  • Boeing’s New Small Airplane study covers from 130 to 240 seats and evaluates both single and dual aisle alternatives. The big question mark is when an entry into service (EIS) is necessary and therefore when a launch decision has to be taken. We think after the 777X has entered flight test in 2018/19 for EIS 2025. Boeing’s CEO, Jim McNerney, says he sees EIS as 2030 for a new small airplane. We argue this risks missing the boat.

Summary

  • The 737 MAX 8 is 1.5m (5 feet) longer than A320 with a 2.5m (8.2 feet) longer cabin. This brings a 12 seat higher capacity, everything else being equal. The result is that the MAX 8 beats the A320neo on per seat efficiency while being worse on trip efficiency.
  • The MAX 8 has a range on internal fuel of 3,700nm. This makes it suitable for extending the range up to 4,000nm with smaller changes. It thereby is probably Boeing’s best bet of offering a long and thin aircraft before the New Small Aircraft (NSA) comes to market. Its major drawback is a 33 seats reduction in capacity compared to 757-200 when both are configured for long and thin.
  • A320neo is less ideal to extend to long and thin. It requires several extra fuel tanks to get to 4,000nm nominal range and then there is too little space left for luggage.

737 MAX8 overlaid with A320neo

Figure 1. Boeing 737 MAX 8 overlaid with Airbus A320neo. Source: Leeham Co.

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Airbus, Boeing freighter demand forecasts optimistic, says P2F company

Special to Leeham News

By Cliff Duke
LCF Freighter Conversions

I have mapped out below the last five years of OEM forecasts (Boeing World Air Cargo Forecasts and Airbus Global Market Forecast data) on widebody conversions calibrated against the actual widebody aircraft conversions redelivered and the current respective order books. If this is half right, it suggests that if in 2010 you were a widebody aficionado and you set your stall out on the Boeing or Airbus 20 year forecasts published that year, you would, reading their 2014 forecasts, now be looking at a 46% reduction in that forecast and your 2010 business plan might be developing cracks.

In terms of performance to date, a quarter the way through the 20 year 2010 forecast (assuming an equal spread of conversions across the 20 years of the forecast) we are currently some 70 conversions behind the Boeing 2010 forecast, a 50% drop off from where we thought we would be. It looks unlikely that the variance can be recovered in the remaining 15 years of the 2010 forecast. In the meantime Boeing and Airbus have updated their 20 year forecasts, and the overall drop off forecast is significant.

One question is, have the OEMs now updated their outlooks enough? Could both forecasts still be too optimistic and could our 2010 investor be looking at a further 50% drop off when revisiting the OEM forecasts in five years’ time (2020)?

LCF Conversions says the Airbus and Boeing 20 year freighter demand forecast have been substantially over-optimistic. Click on image to enlarge. Source: LCF

Figure 1. LCF Conversions says the Airbus and Boeing 20 year freighter demand forecast have been substantially over-optimistic. Click on image to enlarge for crisp image. Source: LCF

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MD-11’s final pax flights contains lessons for McBoeing as NSA targets 2030

  • Boeing’s CEO, Jim McNerney outlines his vision for the next New Small Airplane in this report from Reuters. We believe this will cement Airbus’ dominance in the single-aisle market for the next 15 years.

A retrospective of the McDonnell Douglas MD-11 and the last passenger flights for enthusiasts contains lessons for Boeing, or McBoeing as many still call the combined companies.

Leeham logo with Copyright message compactAviation Week’s story by highly respected technical reporter Guy Norris contains this key paragraph:

Despite its many technical advances, most notably on the flight deck, the MD-11 was handicapped from birth by its derivative dependence on the obsolete DC-10.  Created on the eve of the era of the fuel-efficient big twin, the MD-11 emerged as a committed three-engined product too early to be redesigned around the new generation of big turbofans. Notoriously starved of serious investment by its ‘MD’ leadership, all attempts by the Douglas product development group to develop either twin-engined or larger stretched versions of the MD-11 sadly came to nothing. (Emphasis added.)

Boeing, burned mightily by the twin program development debacles of the 787 and 747-8, isn’t about to take any more “moonshots,” says CEO Jim McNerney. Yet Boeing is now at a crossroads where another moonshot is needed.

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Airbus poised to overtake Boeing in wide-body sector, bracket Boeing at both ends

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Introduction
Airbus is poised to produce more medium twin-aisle airplanes than Boeing by the end of 2017 and maintain Leeham logo with Copyright message compactthe lead into the early 2020 decade, according to production rates that have been announced, unannounced and based on estimates according to production gaps; and other information, a Leeham News and Comment analysis shows.

The wide-body arena has traditionally been Boeing’s to dominate. Although Airbus has outsold Boeing in this sector in recent years, Boeing’s greater production capacity and earlier-to-market 787 vis-à-vis the A350, which will only deliver to its first operator next month, maintained the advantage for Boeing’s market share for years.

The A340 wasn’t a high-demand airplane, eclipsed as it was by emerging ETOPS authority and a highly desirable, very efficient 777 Series.

Airbus and Boeing each face challenges with their aging wide-bodies. The 777 Classic is now on its downward life cycle following the launch of the re-engined, re-winged 777X. Boeing claims it can maintain current production rates of the Classic, but the official line is about the only one that believes this.

Airbus’ A330 Classic, now called the ceo after the launch of the A330neo program, similarly was headed toward sharp declines in the production rates. Airbus quickly achieved 121 commitments for the neo, but first delivery isn’t planned until December 2017 (which probably means 1Q2018) and it still needs to bolster the backlog of the ceo, which drops sharply in 2016. Airbus has been far more transparent than Boeing about the risk to the production rate, and announced a reduction from 10/mo to 9/mo in 4Q2015. We don’t think this will be enough, and Airbus has talked about rates of 7-8/mo.

With this as a backdrop, we believe Airbus will begin out-producing Boeing in medium-wide-bodies within a few years. We leave out the Very Large Aircraft as highly niche. But inclusion would only make the case worse for Boeing. We expect the 747-8 production rate to be cut from 1.5/mo to 1/mo, with an announcement coming as early as next month. Airbus is currently producing the A380 at 2.5/mo.

Summary

  • We forecast the crossover point in production favoring Airbus in 2017.
    Airbus has notified the supply chain to plan for a higher-than-announced rate of 10/mo for the A350.
  • We expect the A330ceo rate to be further reduced, offset by the ramp-up of the A330neo.
  • We expect the 777 rate to begin falling in 2017 and continue to fall up to the EIS of the 777X in 2020.
  • Ramp up of the 777X rate will take several years, providing Airbus a production rate advantage from 2017 through at least 2022.
  • Airbus already has the advantage over Boeing in the single aisle sector. Gaining the advantage over Boeing in the twin aisle sector brackets Boeing in a way that has never been done before.

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