Leeham News and Analysis
There's more to real news than a news release.
Boeing’s future in Puget Sound, Washington–maybe Airbus, too
Yesterday we opined that the Boeing “exodus” from Washington State is a tad overblown so far. Here’s why we think so.
- As long as the airplane programs are derivatives of in-production aircraft, Puget Sound’s place in aerospace is solid. We don’t think the 777X will be assembled anywhere but here, just as MAX–a derivative of the 737 NG–was certain to be assembled here (and it was). The debate, such as it was, over where to assemble the MAX was in our view nothing more than making the airplane a pawn in the labor dispute with IAM 751 and the NLRB lawsuit over the second 787 assembly line. IAM dropped the suit in exchange for the MAX. Or so it appeared.
- So what if the 787-10 is assembled in South Carolina? Boeing has to take production to 14 a month, in our view, in order to accommodate the 787-10 and to open up delivery slots for the 787-9 and 787-8. We think this means seven 787s a month at Everett and seven at Charleston.
- Demand for the 737NG and 737 MAX is such that Boeing has to take production rates higher. The Renton factory has the capacity for 63/mo.
- Demand for the KC-46A tanker may boost rates on the 767 line. Also, as we previously reported, Market Intelligence tells us FedEx is preparing to order the civilian freighter version of the KC-46A, the 767-2C. This also means higher rates.
- In fact, our Market Intelligence tells us Boeing is already reaching out to the supply chain to plan on production boosts for the 737, 767 and 787 lines.
Source: Leeham Co. Market Intelligence. 777 and 747 rates not included.
Will Boeing continue to shift jobs from unionized Washington to non-union states? You betcha. But if these production rates come to pass (and the supply chain will have to gear up to meet these rates), not only will Boeing be adding jobs but so will the suppliers.
Airbus is talking to suppliers about similar rate hikes. For Washington, this means more jobs, to0, because our state is the No. 2 US supplier to Airbus by company count.
The Seattle Times reports that Airbus may consider opening an engineering center in Washington.
Note the comment about the USAF tanker in the story. We asked Gov. Jay Inslee about his relationship with Airbus during a conference call Wednesday, the final one held by the State to recap its daily activities at the Paris Air Show. Inslee bowed out of the trip to deal with Washington’s lack of a budget.
When he was in Congress, Inslee was one of the most vociferous opponents of the Airbus/EADS bid for the USAF tanker in competition with the Boeing KC-767. Inslee introduced legislation to require the Air Force to take into account WTO findings that Airbus received illegal subsidies for the A330, the plane on which its tanker design was based. Even the US Trade Representative’s office said such legislation violated WTO rules and the effort went nowhere.
Inslee’s efforts at the time offended Airbus officials, who were considering holding a suppliers fair in Washington, which is the No. 2 US supplier to Airbus. Because of the vitriolic opposition by Inslee and other members of the Washington delegation, Airbus shelved consideration of the fair.
We asked Inslee Wednesday how he might mend fences now that he is governor, seeking to expand our supply chain business with Airbus. Inslee was beginning to answer when US Rep. Rick Larson, who was leading the State’s Paris Air Show delegation in Inslee’s absence, interrupted to say he had talked with McArtor, who said the tanker wars were over.
Airbus has a suppliers event scheduled here next month.
Boeing’s “exodus” from Washington State a tad overblown–so far
Boeing has been eliminating thousands of jobs–union jobs–in Washington State and moving them to other states–non-union states.
Boeing won’t say where it will assemble the 777X. Nor will it say where it will assemble the 787-10.
So, predictably, new hand-wringing has begun among local officials and state politicians that Boeing is leaving the state. An “exodus,” in the headline over an OpEd piece in The Seattle Times by State Sen. Mike Hewitt, a Republican.
There is much in Hewitt’s piece with which we agree. Just yesterday we commented that Washington leaves a lot to be desired in its competitive stance against the Southern States. In May we offered specific ideas of what needs to be done.
The State’s new Aerospace Strategy, unveiled in May, reads more like a history than a forward-looking document. And as a state aerospace strategy, it’s woefully lacking in innovation or looking beyond Boeing to the rest of the aerospace industry. Washington’s supply chain is the No. 2 supplier by company count to Airbus and No. 6 by dollar volume. Yet the Aerospace Strategy doesn’t detail how to increase this business with Airbus, nor does it address the rest of the global business opportunities except in the most general way.
Hewitt is right that there is little to really point to in Washington’s strategy. But Hewitt omits the biggest sin of his own party: the Republican budget proposal eliminates funding for the Governor’s Office on Aerospace, which was created less than a year before.
That was a dumb move, and it hardly supports Hewitt’s decrying the shortcomings of the Democratic governors he is so keen to criticize (with justification, we repeat).
Washington’s Legislature, like Congress, is divided, and we’re at a budget impasse. The Office of Aerospace funding is in the Democratic budget, and the contrasts haven’t been resolved. Hewitt needs to buck his party and put this funding back. (Maybe he’s done so, but he certainly didn’t mention it in his OpEd piece.)
But there’s more in the flaw of Washington’s aerospace strategy.
Paris Air Show, Day 3: A320, 737 production rates of 50+ seen
Highlights from the show, as we see it:
- Boeing said the entry-in-service for the 737 MAX will be accelerated from the fourth quarter 2017 to the third quarter. Southwest Airlines of the USA is the first operator. Bloomberg reported this is a six month acceleration, but we believe this is no more than three months at the outside. We had EIS for October 2017. Ascend data base shows the first delivery now for September 2017 and a total of four in 2017, the latter unchanged from when we wrote a story for Flight Global about the order from Southwest.
- Update on the above item: Boeing has clarified that citing “six” months was a mis-speak; the EIS moves from Q4 to Q3 [along the lines we’ve written–editor].
- The long-awaited order for Airbus A350s from Air France finally happened.
- Ryanair firmed up its order for 175 737-800s.
- Airbus says it’s alerted suppliers about the prospect of boosting A320 production to 50/mo by 2020. Boeing didn’t reveal at the air show (as far as we can tell from news reports) but our Market Intelligence tells us that Boeing has alerted suppliers about the prospect of boosting 737 production to 52/mo by 2019.
- For all the hoopla of the Embraer E-Jet E2 launch, most of the orders and commitments were for the smallest E-175 E2.
Paris Air Show, Day 2
To us the biggest news coming out of Day 2 was not the launch of the Boeing 787-10–this was widely expected–but the suggestion by Boeing CEO Jim McNerney that he might seek a waiver to the mandatory age 65 retirement to hang around a bit more.
We comment on this in another post.
Otherwise, today was pretty anti-climactic: Airbus won easyJet–this had been reported as likely. Boeing launched the 787-10 with the expected launch customers. Boeing added five sales to the largely dormant 747-8I program. The Wall Street Journal has a somewhat cheeky view of Airbus’ sales targets, with Boeing’s Randy Tinseth predictably churlish.
And it rained and rained and rained. We’re glad we’re in Seattle.
The debate over using DOT Form 41in comparing A320 and 737 costs
Long time readers know that we don’t think much of the veracity of data filed with the US Department of Transportation under Form 41, detailing maintenance and fuel costs. We know from a consultant who helped an airline create its methodology for filing the data that the airline “fudges” the methodology to distort the data for competitive reasons.
Boeing has cited Form 41 data for years in making its comparisons between the 737 and the Airbus A320. A key piece of information Boeing uses is the maintenance cost data, in which Boeing claims the 737 was up to 29% less costly to maintain than the A320. This comparison in particular drives Airbus crazy, and officials say the Form 41 data is “garbage.”
Boeing also previously used a study from IATA from 2006-2009, but dropped that in this year’s comparisons at the pre-Paris Air Show briefings.
Boeing also relies on DOT 41 data for fuel comparisons.
Beverly Wyse, VP and general manager of the 737 NG program, emphasized the reliance on DOT data in the comparisons.
“You don’t just have to believe us,” she said during the briefings. “We know that out there in the market ‘Airbus says,’ ‘Boeing says,’ and it’s hard to find the truth, so wherever we can we’re trying to use independent sources to substantiate the information that we are providing you. This data actually comes from the US department of Transportation Form 41. Depending on the model, and the configuration of the aircraft, the Dash 800 compared to an A320 or the A321 compared to the 900ER, you’ll see between 5% and 8% better fuel efficiency for the 737.”
Wyse credited the 737’s rival with good dispatch reliability, a rare Boeing compliment of the A320. But she claimed the 737 was nonetheless better.
“The A320 and 737 both have incredible reliability. Anything with 99 point something reliability is something to be proud of. The simpler design of the 737 contributes to 20% lower maintenance costs resulting in 67 fewer days out of service,” she says.
Given the reliance on DOT Form 41 data and our open doubts about using this data, we followed up with a series of questions to Boeing. Here is the exchange.
Boeing cites DOT 41 data in claiming the 737NG costs 20%-24% less on maintenance than the A320. First, DOT 41 data is crap. The airlines manipulate the data to mask what their true costs are from competitors. So how does Boeing purport to un-crap it?
DOT F41 data is a good source because it has rigorous reporting processes, contains constant costs in U.S. dollars, and includes reported data by operators who maintain both aircraft fleets, insuring consistent accounting practices. But it is not the only source of data for our claims. That goes toward your second question…
Secondly, Bev in one-on-one said, well, Boeing compares maintenance schedules between the 737 and the A320. Which is it? DOT 41 or company manuals?
The Maintenance Schedules or Check Intervals (that is the interval between performing various levels of Checks, typically classifieds as A, C and D-Checks) are obtained from our company manuals and for the A320, from industry publications and conferences. Specific A320 check intervals are periodically announced in Airbus press releases, journals and conference papers. It may be noted that F41 data provides a look at historic data while the Maintenance Planning Document (MPD) provides the check intervals for the future occurrence of check events. The continuous improvements that occur in the Boeing MPD usually result in even lower maintenance costs to airlines than being currently reported in F41 data. Our focus is to enable the airlines to continuously reduce their operating costs including maintenance costs through better product and services.
Third, I know from my own sourcing from within Boeing that to get to 24%, Boeing has compared new 737s to the oldest A320s using the earliest engines. When new-to-new is compared, the delta is 4% in favor of Boeing. Bev responds to this that this is a fleet-wide analysis.
Bev is absolutely correct; we use fleet-wide data in our comparison. There are many differences in the fleets of different airlines, like airplane age and the average stage length (Fhrs/Trip). Both affect maintenance costs. To enable true comparison, maintenance cost is normalized for a common airplane age. Since A320 is usually an older airplane the normalization process actually reduces the A320 costs to bring it to say a level of 737NG airplane age (say 8 years). Without normalization for age, the cost difference would be an additional 4 to 5% to the advantage of 737NG, but we diligently apply our processes while showing the relative cost and remove this fleet age based difference . Similarly, costs are normalized for stage length and some other factors. All these normalizing processes are approved by the IATA Maintenance Cost Task Force of which both Boeing and Airbus are also members and uniformly used by most of the industry. We compare costs and do modeling in our tools on basis of the normalized costs.
In summary: All maintenance costs are compared on basis of like airplane age. Our multi level data analysis is for “as reported data”, normalized data and data from airlines operating both airplane types. In each case, the airframe costs for the 737NG are lower and on an average 20 percent lower.
Fourth point: If this is a fleet-wide analysis, how is this possibly fair? The NG didn’t enter service until 10 years after the A320, so maintenance on aging aircraft skews everything.
Maintenance cost data is normalized to the same age level for instances where the airplane ages are different. This is done for each airline and then grouped together. The analysis ensured we were comparing like-aged aircraft not the entire fleet. By that comparison, the 737 has about 20% (+/-) lower airframe maintenance cost than the A320. But consider that there also are a number of other factors …
Five facts that drive lower maintenance cost for the 737:
1. Newer simple value added design
2. Lighter weight, smaller size;
3. Fewer systems
4. Fewer installed components
5. Longer intervals; fewer maintenance visits
Airlines believe and give us credit for our maintenance story.
If there were truly a 20%-24% maintenance delta, why would anyone buy the A320? It doesn’t all come down to price, you know. The A320ceo evenly splits the market with the 738 but the A321ceo outsells the 739 by a wide margin and the neo widely outsells the MAX.
Maintenance and its cost is only one of the criteria by which airlines judge airplanes, and a relatively small one at that. Airframe Maintenance is usually 4 to 5 percent of cash operating cost. However, maintenance and reliability plays an important role in the operational experience for an airline. Price is an important factor in airline decisions, but you are correct that it doesn’t all come down to that. As you’re aware, for example, there can be political issues, or even funding issues. As for the division of the single-aisle market, we are very aware of the inroads Airbus has made in its relatively short existence and are very much motivated by that. Arguably, that’s another reason some airlines opt for one plane or another. So, too, is the ability to deliver an airplane when an airline wants or needs it. The on-time reliability of one model or the other can be a factor (while both companies produce reliable airplanes, Boeing’s 737s have better on-time statistics). Too, some airlines prefer to stick with airplanes compatible with their installed fleet to reduce maintenance, training and scheduling costs. The choice is very complex.
I note, too, that this year Bev dropped citing the 2006-2009 IATA maintenance data. How come?
IATA data is used extensively within our own internal analysis. However, we acknowledge that there are some issues with IATA data. IATA airlines do not report data consistently over a long period. They may drop out entirely, miss reporting in some years and new airlines may join for a period. The Form 41 (US DoT) data is mandatory to report and usually aligns with the airline’s Annual Reports reported costs. In addition, variation in currency exchange rates becomes come into the picture. Airlines report in their own currency and that is converted to U.S. dollars. Inconsistency of reporting and the additional currency variable frequently clouds the data.
Bev says, though, that what tipped its use in the end in these slides, however, was that the data we had at the time was old.
We asked Airbus for a response to some of these questions. Engaged in the Air Show this week, we have yet to hear back.
It’s official: Boeing launches 787-10 with 102 orders, commitments
Here’s the Boeing press release.
Boeing expects the 787-10 to perhaps be the best selling model of the family over time. With a range of 7,000nm, it will have the ability to do most airline missions; 8,000nm-8,500nm range airplanes (let alone the proposed 9,400nm range of the 777X) is really more than most carriers need. We expect the orders to double by the end of the year.
In other Paris Air Show news, easyJet chose to stay with Airbus for its fleet renewal ordering a combination of 35 A320ceos and 100 neos. This was hard-fought competition. Boeing thought it won the deal on price, and Bombardier was ready to go with its own contract when Airbus came in at the last minute with a low price of its own, blowing both competitors out of the water.
Bombardier: This story explains in part why Bombardier has been challenged in selling the CSeries. The US Scope Clause inhibits sales to regional airlines; and lessors want to see a broader customer base. This is in addition to Airbus under-pricing Bombardier in key campaigns to block sales.
ATR landed an order for up to 90 ATR-72-600s.
Boeing will market the Embraer KC-390 to the Pentagon. After all the Boeing campaign about the Pentagon buying a foreign airplane for a tanker, this really takes the cake.
Paris Air Show Day 1
UBS has this easy-to-read Table of the orders and commitments announced on Day 1 of the Paris Air Show:
The big news, of course, is the launch of the Embraer E-175/190/195 “E2” (second generation). The press release is here.
Embraer Rendering
Airbus scored an unexpected order for the A380: 20 from specialty lessor Doric Leasing, which has financed a number of A380s. We think this is an odd deal, and it must be one that already has some A380 customers lined up.
Tomorrow is expected to be the day Boeing launches the 787-10, so it should be Boeing’s day. We also believe tomorrow will be the day Airbus does a fly by of the A350 XWB. A little tit-for-tat, perhaps.