Bloomberg News has this report that the Air France-KLM talks for 25 Airbus A350s remain stalled over the long-running dispute between the company and Rolls-Royce over AF’s desire to overhaul the Trent XWB engines.
The Air France-KLM group offers its own maintenance, repair and overhaul services and wants the ability to provide MRO to others as well as perform the work itself.
Engine suppliers are loath to grant MRO rights to others. Engines are often sold at deep discounts, and in extreme cases, even given to airlines in exchange for the exclusive parts and MRO contracts. This is where the engine makers truly make their profits.
Rolls-Royce is known to be particularly hard-nosed in this regard.
So how will the log-jam be broken?
Rolls wants Air France to order the Trent 1000 for the 25 Boeing 787 orders announced last year. Given the long relationship between Air France and GE, the supplier on AF’s current fleet of a variety of aircraft, this will be a tough pill to swallow. But don’t count it out.
EADS-BAE: NOW that a few days have passed since the announcement BAE and EADS want to combine, here’s some more worldwide press:
Reuters: Government demands could make or break deal.
Interactive Investor: Merger will advance EADS military goals.
Mobile Press Register: Merger will advance Gulf Coast aerospace cluster.
London Daily Post: Defence worried about UK security.
International Business Times: US access key to merger.
Surviving crashes: A crash test of a Boeing 727 in Mexico drew snickers from some quarters, but the test concluded it’s safer to sit in the rear of the airplane than in the front. No kidding, and this is not new; this has been known in aviation for decades. But we actually like the response of Ted Baker, the founder and long-time CEO of National Airlines in the US (he sold out around 1961). When asked by a reporter where the safest place to sit in a plane in the event of a crash, the blunt Baker replied, “flat on your ass.” And you didn’t need a crash test to figure this one out.
Shrinking UAV market: Once thought to be one of the bright spots in a shrinking defense budget, Boeing now says the drone market will decline despite moves to increase civilian use.
Update, Sept. 13: Here are some stories from today:
Bloomberg: EADS move seen by Boeing as growth; Revives decade-old plan; and this update about the rankings:
BAE is the ninth biggest vendor to the U.S. government, with $7.3 billion in direct, or prime, contracts in the year that ended Sept. 30, according to a Bloomberg Government study ranking the top 200 contractors. EADS ranks No. 100, with $684 million in awards.
Reuters: US approval seen likely.
AOL: Big deal in Europe, not so much US.
Mobile (AL) Press-Register: EADS-BAE in merger talks, with a spin on local impact.
Original Post:
The prospective combination of BAE Systems and EADS is a growth opportunity for EADS, particularly in the US, where it has been striving for years to expand its defense footprint.
BAE Systems in 2009 was the Defense Department’s #5 of the Top 10 defense contractors. At that time 50% of BAE’s business was in the US. We have checked more recent figures. EADS North America, during the KC-X tanker competition, did about $1bn worth of business with the US government, in defense, Homeland Security and other contracts. We don’t believe this has appreciably changed in the 18 months since the tanker contract was awarded to Boeing.
Although the immediate reaction among observers and media is that the combination will make a strong competitor to Boeing, in fact BAE Systems services defense segments that are more closely aligned with Lockheed Martin and Northrop Grumman than with Boeing. There is also little if any overlap between BAE and EADS, whether here or in Europe and the UK, where BAE is headquartered.
BAE has about 40,000 employees in the US.
The combination, which has to be approved by the boards of both companies as well as a host of governments on both sides of the Atlantic, will certainly strengthen EADS and its argument that it is a substantial contributor to the US economy and US employment. Airbus, a wholly owned subsidiary that accounts for around 80% of EADS revenues, purchases $12bn in goods and services in the US and says it employs or supports 100,000 jobs directly or indirectly.
BAE, which owned 20% of Airbus until EADS bought these shares in 2006, isn’t a current supplier to Airbus. Although defense cuts in Europe and the US are limiting growth at this time, these come in cycles and BAE would strategically position EADS to grow its defense business and reduce reliance on Airbus revenues and financial performance.
The new company will be 40% owned by BAE shareholders and 60% owned by EADS shareholders. The current shareholdings in EADS of the German and French governments, presently 15% each, would almost certainly be diluted. (The German EADS shareholdings are currently indirect but may become direct. The French shareholdings are direct.)
The new company would be listed on several European exchanges, including BAE’s listing on the UK stock market.
Looking at the future: Airbus takes a look at the future in this company-issued document. Airbus discusses the environment, Air Traffic Management and more. This link has more information about how Airbus looks at the future.
Air India: We’ll still believe it when we see it but Air India is supposed to take delivery of its first 787 Saturday. (This is skepticism about the airline, not Boeing, for clarity….) Here is a microsite from Boeing. The best part is the construction of the airplane.
John Leahy: The COO-Customers at Airbus got a promotion of sorts. See this Bloomberg article. It’s well deserved.
Boeing and SPEEA: Things aren’t going at all well in the contract negotiations between Boeing and SPEEA.
On Twitter:
ReutersAerospaceNews @ReutersAero
Alabama move won’t open door to Airbus in US lobby group: We dont want foreign govts to use AIA to lobby ours, CEO Blakey tells #ReutersA&D
This is hypocrisy. The UK’s BAE System is a member of AIA. Rolls-Royce (North America) is a member. Brazil’s Embraer Aircraft Holdings is a member. France’s Dassault Systems is an associate member. Safran USA (obviously part of France’s Safran) is an associate member. And these are just the ones we immediately recognize from the AIA member list.
There key issues that Airbus and Boeing have in common: flight safety, air traffic management, environment, bio-fuel. There is no reason why Airbus Americas shouldn’t be a part of this group to participate in lobbying Congress for these kinds of issues. EADS North America, which already has major Defense contracts, could help on something like sequestration.
Airbus buys $12bn worth of supplies from the US and plans to double this. Even Washington State, Boeing’s home, is a top supplier to Airbus.
Who or what is black-balling Airbus?
Shame on AIA on this one. The reason given is transparently bull[stuff].
We just finished a book about China National Aviation Corp. (CNAC). It’s a long book, 498 pages. it’s meticulously footnoted. The Bibliography is 100 of the 498 pages. We found the book a bit tedious for all the detail, but others will find the vast, detailed history of CNAC and the politics of dealing with the pre-World War II Chinese government fascinating.
The book details the famed “Douglas 2 1/2,” the war-damaged DC-3 with the right wing replaced by one belonging to a DC-2. The airplane flew, as did another with a mis-matched, smaller engine and smaller propeller.
There are several instances of the DC-3 being flow overweight, one in which the airplane carried more than 70 passengers vs the then-standard 21. The airplane couldn’t get off the runway. But the runway was built ending against a sloped berm, and the DC-3 became airborne ski-jump style.
CNAC was run by an American, William Langhorne Bond, whose son Langhorne became US Transportation Secretary under President Carter (and who was responsible for grounding the McDonnell Douglas DC-10 after the crash of American Airlines flight 191 in Chicago-a crash we covered as a reporter).
The senior Bond was one of those rare individuals who successfully went up against the legendary Juan Trippe, whose Pan Am owned a minority stake in CNAC, and persuaded him to stick with CNAC when Trippe was ready to abandon the airline during the Sino-Japanese war preceding Pearl Harbor.
Bond’s disappointment of losing CNAC to the Communists after World War II after all he’d been through to keep the airline alive is palatable.
The book is easily available through Amazon.com.
Eyes are on Boeing over the prospect of a 777X.
Chatter doesn’t cease about the prospect of an Airbus A330neo.
Boeing is in no hurry to proceed with the “7X” and an A330neo is unlikely any time soon, if at all.
Here’s why.
Boeing rolled out Ray Conner, the new CEO of Boeing Commercial Airplanes, to analysts in New York yesterday. The first research note we’ve received, from Imperial Capital’s Ken Herbert, portrayed a positive meeting. Below is a synopsis. As we receive more notes, we’ll add those comments.
We don’t like the resumed policy of using cash to repurchase stock, instead of putting it into new airplane programs (something Richard Aboulafia of the Teal Group, normally a pro-Boeing consultant, has roundly criticized for years).
Imperial Capital
We believe BA is benefitting from several tailwinds, and is demonstrating increased confidence regarding its 787 execution and the ability to take further costs out of the supply chain. However, we believe much of the good news is reflected in BA stock, and we see slowingorders in 2013 as limiting the multiple; therefore, we are maintaining our In-Line rating. Investors areexpecting a significant dividend increase or share repurchase program, which could be a positive catalyst, but we see the new program developments, which include the 737MAX, the 777X and 787-10, as potential competing cash pulls.
Regarding the 787, Boeing confirmed that Charleston is ahead of plan, but that it has been staffed to over deliver. Boeing also made a point of stressing that its movement down the cost curveon the 787 will be similar to that of the 777. We believe that there is an opportunity for Boeing toexceed expectations on the 787.
We continue to believe, however, the much of the execution upside is priced into Boeing stock. We believe that in order for the stock to see material upside, Boeing needs to demonstrate a very bold use of the expected free cash flow, in the form of both increased dividend and share repurchases, that will attract new investor interest and accelerate the EPS growth. However, this will limit the new product development options, considering the potentially competing development requirements of the 737MAX, the 787-10, and the 777X. We believe current BCA leadership wants to do both the 777X and the 787-10, and believes that there is significant pent-up order demand for both new aircraft, but we believe the focus on share repurchases and/or the dividend, reiterated at the 8/28/12 reception, could push some development effort to the right.
Separately: