Leeham News and Analysis
There's more to real news than a news release.
The deeper, longer term implications of IAM’s Boeing contract vote January 3
There are deeper, longer term implications for the January 3 vote by IAM 751 members on the revised contract proposal from Boeing than have been discussed in the public domain.
- Contract extension to 2024 brings “labor peace,” but also significantly weakens the union in the future.
- The replacement for the Boeing 757 lurks in the background.
- So does the replacement for the 737 MAX.
The near-term implications have been discussed ad nausea: for employees, vote for a contract that includes concessions, notably on pensions, or risk losing the assembly site for the 777X. For the states, Washington could be a winner, or a big loser. The state that’s awarded the assembly site would be a big winner. Suppliers will supply Boeing regardless of where the 777X is assembled.
Another near-term implication we’ve talked about: the fall-out on the IAM, both at the International level and the District 751 level. No matter how the vote turns out, there is a civil war within 751 members who are royally upset with their leadership and others who believe in it. The civil war between 751 and IAM International HQ will continue well beyond the vote, with the prospect that International could simply depose all the 751 leaders and place 751 under a trustee “for the good of the union.”
But there are much longer term implications of the vote.
A330neo prospect gains traction
Note: The following was distributed to our e-mail list December 23. Last week, American Airlines (as predicted) swapped the A350-800s for A350-900s.
The possibility of Airbus launching an A330 new engine option appears to be gaining ground.
Our Market Intelligence tells us that Airbus is considering a decision soon, probably next year, with a target entry-into-service date of 2018.
A decision to proceed with an A330neo would come after one to drop the A350-800, according to our information. Airbus has systematically switched -800 customers to the larger, and more profitable A350-900 and A350-1000. There are now just 79 A350-800s in backlog.
|
Customer |
Qty |
Comments |
|
Aeroflot |
8 |
|
|
Aircraft Purchase Fleet |
12 |
For Alitalia |
|
Asiana |
8 |
|
|
AWAS |
2 |
Probably will swap to A359 |
|
Hawaiian Airlines |
6 |
Waiting on US Airways |
|
ILFC |
6 |
Probably will swap to A359 |
|
Kingfisher |
5 |
Good as gone |
|
Libyan |
4 |
|
|
US Airways |
18 |
Expected to disappear now that AA merger completed, replaced with A359/A351 |
|
Yemenia |
10 |
|
|
Source: Airbus, Nov. 2013 |
79 |
Leeham Co Chart |
We identify 37, or 47%, that probably are already at risk of cancellation in favor of the larger A350-900 or A350-1000. These 37 are highlighted in red and pink. Another 10, those for Yemenia, are probably already iffy, according to Market Intelligence. The total of 47 represents 59% of the backlog. We have no information on the remaining customers’ intentions.
Boeing 777X RFP considerations
We obtained a copy of Boeing’s Request for Proposal documents. Much of the information contained therein has already been reported. You may link to these news articles here.
As with previous inquiries, Boeing spokesman Doug Alder declined to authenticate the RFP documents or to comment on the contents.
Boeing plans to announce its site selection decision soon into the new year.
We look at some key production and entry-into-service (EIS) issues today.
Site Selection
Boeing outlined three scenarios for site selection:
Scenario 1:
Wing Fabrication & Assembly, Body Assembly, Final Assembly & Delivery
Start of facility construction no later than November 2014
Production start July 2016
Scenario 2A:
Wing Fabrication & Assembly
Start of facility construction no later than November 2014
Production start July 2016
Scenario 2B:
Body Assembly, Final Assembly & Delivery
Start of facility construction no later than June 2015
Production start January 2018
EIS
EIS is promised for 2020. Boeing hasn’t been specific about when within 2020 this is planned, but Market Intelligence initially had EIS pegged for December 2019, based on previous Boeing representations to potential customers. For our purposes, we’ll assume EIS in mid-2020.
Design Timeline
Wind tunnel testing began December 5 in Farnborough, England.
Based on the proposed EIS of 2020 and the historical design-to-EIS timelines, we estimate roll-out of the first test airplane and flight tests will be in 2018.
|
Boeing 777X Timeline |
||
|
2013 |
Offer, first orders |
Wind Tunnel Testing begins |
|
2014 |
Site selection; facility construction begins Nov or…(see 2015) |
‘Top Level’ Design |
|
2015 |
Facility construction begins June |
Firm configuration |
|
2016 |
Production begins in July; or…(see 2018) |
|
|
2017 |
|
|
|
2018 |
Production begins in January |
Roll out, flight tests begin |
|
2019 |
|
|
|
2020 |
|
777-9X EIS |
|
2021 |
|
|
|
2022 |
|
777-8X EIS |
|
Sources: Boeing 777X RFP; Leeham Co. Estimates |
||
Production
According to the RFP, production is to begin in July 2016 or January 2018, depending on the site selection scenario chosen. The RFP raises an interesting question:
- If production begins in July 2016, this represents a four year timeline to the 2020 EIS.
- If production begins in January 2018, this represents a 2 ½ year timeline to EIS.
“Production” is undefined in the RFP but typically this means components, not just final assembly. Given a 2020 EIS, it seems that Scenarios 1 and 2A are more likely than Scenario 2B. But it all depends on how “production” is ultimately defined by Boeing.
According to the RFP, the facilities need to have a production capacity of 10.4 aircraft a month. The 777 Classic is currently being produced at a rate of 8.3/mo, although Boeing is known to have studied a rate of at least 9/mo.
Market Launch
Boeing officially launched the program at the Dubai Air Show with 225 orders from Emirates Airlines, Etihad Airlines and Qatar Airways. Lufthansa Airlines placed the first order prior to the show. Program orders now stand at 295. Forty-three of these were for the ultra-long range 777-8X, which can fly 9,400nm. We previously discussed the market potential for the ULR, which historically has been highly limited.
The 777-9 is, of course, in a class by itself at 406 seats. It’s larger than the current 777-300ER (365 seats), the Airbus A350-1000 (350-369 seats) and smaller than the Boeing 747-8 (advertised 467 seats) and Airbus A380 (525 seats). The question is whether Airbus will respond to the 777-9 or leave Boeing to this market segment.
We believe Airbus should proceed with a stretch of the -1000, commonly dubbed the -1100, that would be a straight-forward stretch using the same engines and wing. This would reduce the range of the -1000 by an estimate 1,200-1,500nm but the resulting 6,500-7,000nm range would cover 90% of the routes operated by airlines. This is the approach Boeing took with the 787-10. Furthermore, the Middle Eastern airlines have spoken with their orders for the 777X.
Is there enough market left for two airplanes in the 400 seat sector? Airbus, according to our Market Intelligence, doesn’t appear to think so. Current thinking appears to be that Boeing can have this narrow niche and Airbus will continue to pursue the narrow niche of the Very Large Aircraft (into which the 777-9 technically and barely falls) with the A380. Airbus believes the future of the 747-8I is dim and we agree. Thus, the large twin and VLA market appears to be shaping up like this:
|
Seats |
Airbus |
Boeing |
|
300-350 |
A350-900 |
787-10 |
|
350-370 |
A350-1000 |
777-8 |
|
370-410 |
None |
777-9 |
|
410-Up |
A380 |
747-8I* |
|
* Likely discontinued ~2020 |
|
|
|
Leeham Co. Chart |
|
|
Airbus has had trouble throughout its existence with its wide-body strategy. The A300, its first airplane and the first twin-engine, twin-aisle airplane, was a mediocre design and performer. The A330/340 line was originally a medium range pair that didn’t truly find favor until the A330 range was increased in recent years to more than 5,000-6,000nm. The A340 sold fewer than 400 and was easily eclipsed by the 777, particularly the 777-300ER.
Odds and Ends: AirAsiaX orders A333; WA and Airbus; Boeing names COO
AirAsiaX orders A330-300s: As forecast earlier this week, the budget carrier ordered 25 Airbus A330-300s. According to reports, AirAsiaX may not be done. Group CEO Tony Fernandes wants Airbus to develop an A330neo. Stay tuned.
Washington State and Airbus: The Associated Press wrote a story about the courtship of Washington State of Airbus, making a link between the Boeing 777X site selection Schizophrenia and the Airbus effort. Some headline writers made an even more direct cause-and-effect link. This vastly overstates what’s been going on. Gov. Christine Gregoire began reaching out to Airbus in 2010, but the effort was stalled by the then-contentious and bitter competition between Boeing and Airbus over the USAF KC-X tanker competition. Gregoire, who was just named chairman of the advisory committee to the US Export-Import Bank, naturally backed the Boeing bid but was wisely measured in her rhetoric when it came to the EADS KC-330 offering. The Washington Congressional delegation, however, was often vitriolic and as a result, Gregoire’s efforts largely stalled.
Once that competition was over in 2011, Gregoire resumed her efforts in the last year of her governorship, meeting with EADS and Airbus officials at the 2012 Farnborough Air Show. The WA Dept. of Commerce had continued efforts throughout. This past summer, Commerce and the Pacific Northwest Aerospace Alliance hosted an Airbus suppliers meeting in the Seattle area, attended by about 120 suppliers (about 30-40 had been expected).
So while the AP story is factually correct overall, any linkage to 777X and the Airbus courtship is overstated. This has been a long-term effort by Airbus, PNAA and it is a concept we called for in October 2009 in a speech before the Governor’s Aerospace Summit just days before Boeing announced it was locating 787 line 2 in Charleston (SC). The Airbus effort, if anything, has more of a link to that event than to the 777X.
Boeing names Muilenberg COO: Dennis Muilenberg, CEO of Boeing’s defense business, has been named COO of The Boeing Co. He is succeeded by Christopher Chadwick. Ray Conner, CEO of Boeing Commercial Airplanes, was named Vice Chairman of the Board and continues in his current position. The press release is here.
McNerney reaches retirement age next year but given the timing, we think he’ll stick around a bit longer to give Muilenberg more time in the #2 corporate position. Since Muilenberg is younger than Conner, we think Muilenberg is the more likely choice for successor.
Another Day, Another 777X story: The obsession continues. Seattle Times columnist Danny Westneat has this commentary worth reading. The Everett Herald has a good wrap up of where things stand in Washington State right now. The Seattle Times looks at Long Beach (CA) in depth and its potential for the 777X.
Odds and Ends: AirAsiaX plans A330 order; AA’s livery; vote for TWA heritage livery
AirAsiaX plans A330 order: AirAsiaX, the long-haul low cost carrier, plans a large order for the Airbus A330 this week, according to Bloomberg.
A380’s future: Bloomberg News talks about the future of the Airbus A380 with CEO Fabrice Bregier. Among his comments: no stretch anticipated until 2030.
American Airlines livery: Doug Parker, the new CEO of American Airlines, says employees will get to vote whether to keep the new American livery or restore the double AA/eagle livery to the tail. American will also add a TWA “heritage” livery airplane. US Airways has several heritage paint jobs in its fleet.
So…which TWA era would you like to see? Vote in the poll following the photos.
In focus: the 777 Classic
This week we take a look at the Boeing 777 Classic primary and secondary markets as a follow-on to our report last week in advance of the A340 Summit hosted by Airbus, Rolls-Royce and CFM International with additional presentations by Lufthansa Airlines and HiFly. We have a follow-up of this meeting on Leeham News and Comment.
The 777 Classic presents a very different picture compared with the A340. As a reminder, here is the current status of the A340 program, which is now out of production:
|
Status |
A340-200 |
A340-300 |
A340-500 |
A340-600 |
|
In Service |
19 |
175 |
20 |
90 |
|
Stored |
6 |
27 |
14 |
7 |
Source: Ascend Leeham Co Chart
On the other hand, Boeing has delivered 1,156 777 Classics and has a current backlog of 318. There are 259 orders and commitments for the 777X, officially launched last month at the Dubai Air Show, for a total of 1,415.
The Ascend data base, which tallies Letters of Intent, Options and Option LOIs, (and calculates orders and commitments somewhat differently than Boeing), has 2,059 units listed.
|
|
777-200 (All) |
777-300 (All) |
777 Classic TBD |
777-8 |
777-9 |
777X TBD |
|
In Service |
637 |
504 |
|
|
|
|
|
Orders |
43 |
272 |
|
8 |
45 |
|
|
Options |
35 |
68 |
1 |
|
|
62 |
|
Option LOIs |
20 |
5 |
15 |
|
|
|
|
LOIs |
42 |
75 |
6 |
35 |
179 |
|
|
Stored |
6 |
1 |
|
|
|
|
|
Total |
783 |
925 |
22 |
43 |
224 |
62 |
|
Source: Ascend |
|
|
|
|
Leeham Co. Chart |
|
The 777 program has been more successful than Boeing’s wildest dreams, and the 777X is off to a promising start.
While Airbus faces challenges with the A340 family on the secondary market, Boeing doesn’t have any similar issues today. There are just seven Classics stored, according to Ascend: six 200s and one 300, compared with 54 A340s of all sub-types, or 15% of the total fleet compared with 0.6% for the 777 Classics.
Most of the Classics remain with the original operators. Only a few -200ERs and five -200LRs have traded, the latter a special case because the original operator, Air India, was in financial distress and elected to dispose of the airplanes at a distressed price to raise cash.
What is the secondary market potential for the Classics? Market Intelligence suggest very little-to-no market for the 86 777-200 “standards,” the light-weight, 545,000 lb, 5,240nm initial version of the Classic family. The heavier weight 777-200ER at 656,000 lbs and 7,725nm range is a secondary passenger market and a freighter conversion candidate. Boeing has been studying a P2F conversion for the 200ER, but this potentially is a costly option, according to the Market.
The -200ER was optimized for passenger service and includes composite floor beams that will have to be replaced with steel beams, according to a 2012 Boeing briefing. Major structures and component work will be required. Then, Boeing assumed early -200ERs would be priced in the high $20m range, and the conversion would cost in the low $30m, for an out-the-door price of the low $60m.
Kostya Zolotusky, managing director for Capital Market Leasing at Boeing Capital Corp., tells us that nothing has changed in P2F timing. Feedstock values, however, are too high and a weak cargo market means there are plenty of Boeing 747-400s and MD-11s surplus today. Boeing does not expect the freighter market being strong at least for a couple years.
He believes there is a potential market for the 777-200 standard for package carriers outside the mature USA market. A 777-200ER P2F would be a different airplane vs the new-build 777-200LRF: an 80 tonne airplane vs 100T.
Zolotusky notes that the 777 “has one of the lowest movements out of the original operators out of all the wide-bodies. There is nothing that is parked or in distress.” All 777s are within 90 percentile of original operator, he tells us and compared the Airbus A330s in 80s and the A340s in 70s.
One of the issues with the A340s are the Power By Hour arrangements with Rolls-Royce for the A340-500/600 engines. “We are talking to engine makers to be sure we don’t have A340 situation that limits the liquidity with PBH situation,” Zolotusky tells us.
While this is a follow-on to the A340 report of last week, Zolotusky urged that we “decouple the conversation from A340. The A340 became economically unviable.”
Airbus to cut new airplane R&D, focus more on derivatives
Airbus is going to cut back its new airplane research and development spending and redirect efforts more toward derivative airplanes, EADS CEO Tom Enders told aerospace analysts at the EADS Global Investors Forum.
Buried in a Bloomberg News report of the GIF is this:
Enders also wants to curb cash-hungry development efforts in favor of milking existing products for higher returns. At Airbus, he backed the re-engining of the A320 narrow-body over building a new plane. No new jets are planned at Airbus beyond the A350, which is due to commence deliveries late next year.
“Why should we spend large amounts of money when we can make significant incremental improvements?” he said. “This principle can be applied outside of just civil aircraft.”
Airbus, like Boeing, suffered under the strain of new aircraft programs, notably the A380 and A400M. As yet, the A350 doesn’t seem to have been a black hole, with normal development costs.
Richard Aboulafia of The Teal Group was critical of Boeing for years for starving R&D for new aircraft and over-relying on derivatives while Airbus invested in new aircraft programs. He had this to say about Enders’ news:
This is only possible as a percent of sales. Airbus is at a twin aisle product line disadvantage relative to Boeing, so this isn’t the time for them to rest on their laurels. Some kind of response to the 777-9X is essential, even if it arrives a few years after the Boeing jet. Whether it’s an A350-1100 or a clean sheet, it requires a significant investment right after A350XWB-800/900/1000 spending winds down. Thus, in absolute numbers, the company would be advised to keep spending high for the next ten years. But on the positive side, since Airbus’s revenue will grow with A350 (and incrementally with the A320 neo), the company’s percent of revenue spent on IRAD will decline.
Enders’ comments reflect the changing nature of Airbus’s shareholder relations more than anything else. They’ll need to focus more on profitability rather than new product development over the next ten years; they may wind up looking more like Boeing.