Leeham News and Analysis
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Odds and Ends: More from the Airbus Innovation Days
We have some follow-up to our trip last week to the Airbus Innovation Days:
A350 Program: Aviation Week has this article about the A350 program, noting that the A350-800 seems to be suffering from from benign neglect.
A350 Engineers: There is a lot of buzz “out there” that the A350-900 program is sucking up engineers from the A350-1000. We asked Airbus about this at the Innovation Days. There is no question that the -900 timeline is challenging (see chart) but Didier Evard, EVP of the program, says engineers will be released soon for the 1000.
“This year we have to ramp up the 1000 team,” Evard said. “We have internal plan and to increase the workforce from the outside to start the detail design this year.”
We asked what was the level of engineers assigned to the 900, using the example that if 100% were the norm, was the program at 100% or 125%, for example. Evard didn’t directly address that but said:
“The 900 this year will go down from 100% to around 60% or 70% and be stable.”
A380 Wing Rib Fix: Airbus showed this illustration:
Although the slide shows 60 ribs per wing, in practice, Airbus says only 20 have needed repair.
A320neo affecting A320ceo demand: JP Morgan issued this observation following the Innovation Days:
A320neo EIS is affecting demand for the current version. The imminent introduction of the a more efficient version of the A320, the neo is scheduled to enter service in 4Q2015, should make it more difficult to drum up demand for current generation A320s in 2014/2015. The years immediately preceding the changeover have always seemed like a potential rough patch, both for the A320 and the 737, which will transition from the NG to the MAX, in 2017. According to Ascend, A320 slots are filled for 2014 with 484 aircraft scheduled for delivery, 42/month implies ~480 deliveries, but 2015 is not yet full at 362 A320s. As some customers could walk away ahead of the neo introduction or for other reasons and new orders should be hard to come by, holding the rate at 42/month looks reasonable. Lease rates on current generation A320 family aircraft have been the weakest among major Airbus and Boeing platforms, an indication that the market is not as hungry for more of them as it is for other models.
We heard long ago that Airbus was worried about demand for the ceo, but we also heard the same is quite true for Boeing on the 737NG with respect to MAX sales. This is why we are seeing many Airbus and Boeing deals include the current generation of airplanes with the re-engined models. It’s also why, we believe, we’re seeing pricing on the current generation of airplanes dropping precipitously, which will of course affect residual values and lease rates.
Airbus Innovation Days: synopsis of a lot of stuff
We’ve been at the Airbus Innovation Days in Toulouse, with about 200 others from around the globe. Here are some highlights:
A380 wing rib issues: As reported previously in various media, Tom Williams, EVP-programs, outlined the issues with the wing rib cracks. A new metal alloy was used, intended to save weight, that cracked in operations despite fatigue testing failing to discover the issue on a test airplane. Williams attributed the failure to detect the cracks to inadequate instrumentation on the test plane. The new alloy saved about 300kg. There are 60 L-brackets out of 4,000 that require inspection and only 20 are affected. The issue does not affect flight safety and the ribs can be replaced either during a C Check or during a nose-to-tail maintenance check. The “Type 2” cracks, the most serious of two types found, have to be replaced by 1,300 cycles.
A350-800/1000 sales: Boeing has been aggressively casting doubts on these two sub-types, pointing out that there have been no sales since 2008. John Leahy, COO Customers, said there haven’t been sales because he doesn’t have any delivery slots available until the end of the decade. He’s been switching some customers from the 800 to the 900, which is more profitable to Airbus. Where did he get the slots? He won’t say but in a press gaggle after his presentation, he acknowledged to an Indian journalist that Kingfisher Airlines—an A350, A320 and A380 customer—deferred all its deliveries to relieve the need for pre-delivery payments. We asked Leahy if he was re-selling the Kingfisher slots and he demurred, saying that was “confidential.”
(We note that Boeing had a long dry spell in sales of the 787 during the depths of the problems with the airplane and the backlog stretching to late this decade.)
Leahy also said Boeing’s claims that he, Leahy, doesn’t know what the -1000 “is” are false.
A320 v 737: If the war of words over the A350 wasn’t enough, Leahy—and to a lesser extent, Williams, whose focus was principally the A380—repeated the Airbus messaging begun last November at the Credit Suisse conference in New York that fan size does matter and the 737 MAX comes up short. Airbus figures the MAX at best (pre-dating the recent Boeing changes) will gain 8% over the 737NG. We asked Leahy later about the move by Boeing to take the CFM LEAP-1B fan size to 69.4 inches and to add the “Boeing Advanced Technology Winglets” (BATW) to the MAX. Boeing now claims the MAX will be a 13% improvement over the NG. Leahy, who compared the BATW with the MD-11 winglets, said Boeing will get only about one-half percent improvement from this. The 69.4 inch fan still falls short, he said.
Williams, a former engine engineer, said the hotter temperatures and ceramics technology required of the LEAP-1B, will present maintenance challenges.
Comparing Neo, Ceo, NG and MAX
As Airbus and Boeing battle for orders for the current generation A320 and 737 families and for the re-engined models, comparisons between the four sets of aircraft has been difficult to come by.
Furthermore, with Boeing continuing to evolve the MAX–not only with the engine specifications but also the airplane weights–ambiguity sometimes dominates.
Boeing continues to talk with customers about the definition of the MAX, with higher weights under study. Airbus is more advanced, but of course until flight testing confirms figures, nothing is certain.
Over time, information as emerged through Airbus, Boeing, Pratt & Whitney and other statements and information. Aspire Aviation (now Orient Insight) also has been a solid source of information. Our own data gathering has obtained some solid information as well.
From all these sources, we’ve put together the following table. The 737-7 MAX is the murkiest, with little apparent interest so far from the customer base. Taking known facts for the 8/9 MAX, we estimated some of the specifications for the 7 MAX.
What struck us on the NEO is that Airbus specifications for range are greater than has been previously revealed.
We consider the specifications of NEO and MAX still evolving until flight tests for all six sub-types prove design goals.
Click to enlarge and use zoom-in or magnifier to enlarge further for fine print.
Wells Fargo estimates Southwest paid base price $34.7m for MAX
In a new research note issued today, Wells Fargo estimates that Southwest Airlines paid a based price of $34.7m each for the Boeing 737-8 MAX.
The investment bank published the following table, followed by the text:
Prior to Southwest Airlines’ decision to defer 30 Boeing 737-800 deliveries from 2012-13 to 2017-18, it
published the data above in its latest 10-Q. We estimate that (after factoring in PDPs) SWA is paying ~$5.67B for the 131 MAXs in 2019-2022, or $43.3M each; assuming an average of nine years of price escalation at 2.5%/year, the base price would be $34.7M – a 64% discount off the 737MAX-8 list price. We do not view this as an indication of a “price war” between Boeing and Airbus, as SWA is a priority 737 operator that was certain to receive the most favorable MAX launch-customer pricing.
This is a somewhat deeper discount than we thought: 60%. If true, we can say that discounts of 60% for top customers are not unknown, even if they are not common. We understand Boeing is currently offering the MAX at discounts in excess of 50% but we can’t nail it down any closer than this.
Airbus likewise is known to offer discounts of up to 60% on the A320 family.
So what about the “price war?” Our information is that this extends to the 737NG and the A320ceo. Airbus and Boeing have each connected sales of the current generation of airplanes to the re-engined models in part to sustain current and announced production rates and to prevent a drop in cash in the run-up to EIS of the new airplanes. This means dropping the price on the current generation to help. (Separately, this also means drops in lease rates and residual values.)
Then there is the competition for only current generation aircraft, such as last year’s Delta Air Lines order for 100 -900ERs over the A321. He heard straight away that this came down to a price war and Boeing won. After the Airbus win at American Airlines, there was no way Boeing was going to lose Delta, and we heard at the time Boeing under-priced Airbus by about 10%. (Recall, too, that Boeing under-priced EADS by 10% in the tanker competition.)
We are hearing United Airlines also came down to price. We expect this Boeing win to be announced before at at Farnborough.
Bernstein Research, in a note also issued today about the EADS first quarter earnings call, had this to say about a price war:
A320 pricing should be a near term strength, but long term risk. A320 pricing was described as
“above expectations” with no declines seen in 2011 orders, and premiums captured for the A320neo. In
contrast, Boeing has said that it sees Airbus pricing aggressively, with the result that narrowbody prices are being taken down for both the A320 and 737. We believe the answer lies somewhere in the middle with certain customers (e.g. American, Norwegian Air Shuttle) driving aggressive price competitions, but with reasonably solid A320 pricing elsewhere. Based on our customer discussions, however, we do not believe that either Airbus or Boeing is capturing significant premiums for their reengined models (only relative to lower prices for their current generation airplanes).
Odds and Ends: A380 & other Airbus tidbits; “SC-787-1” to be airborne soon
A380 & other Airbus tidbits: Aviation Week has this article about the latest on A380 wing cracks in the L brackets, along with some information on the A350 program, A330 production rates, a comment on the price war and the prospect of an A320 production line in Mobile (AL). A reader asked us for a report on the wing cracks; we’ll be in Toulouse next week for the Airbus Innovation Days and anticipate some discussion of this topic then.
“SC-787-1” to be airborne soon: The first Boeing 787 built in South Carolina will take to the air very soon, Boeing revealed during its investors day Tuesday. The Everett Herald has this article with some detail of production challenges and opportunities. There is also a reference well down in the article about diversifying production risk.
Speaking about that diversification: We were in Spokane (WA) yesterday addressing the Washington Public Ports Association. We urged the Port Authorities present to plan to propose to Boeing that the company should locate future assembly lines or supply clusters in Eastern Washington, away from the earthquake zones of Puget Sound. The April tornado in Wichita (KS) shut down 737 production for nine days and really brings home the potential risk factors to Boeing. This has been a song of ours since 2009 when we made a similar call to arms at another conference, which also was in Spokane. After our talk, one Port Authority commissioner noted that a computer model simulation of a Kobe, Japan-style earthquake concluded the ports in Puget Sound would be shut for three full months. The Boeing Renton plant is in close proximity to the Port of Seattle.
Sea of Foam: Check this out.
Airbus, Boeing accuse each other of price war; what’s the real story?
We find this very interesting: Boeing says Airbus is engaged in predatory pricing on the A320. Airbus says Boeing is engaged in a price war.
What’s the truth? It seems to us that orders might tell the story. The scorecard YTD:
Airbus A320 family: 88
Boeing 737 family: 413
It seems to us that if Airbus were engaged in predatory pricing, the scorecard would be reversed.
Last year, of course, Airbus pounded Boeing at a time when it had the NEO defined and Boeing’s MAX was still evolving. But Boeing ended the year with about 1,000 orders and commitments while Airbus ended the year with about 1,200 firm orders and another 200 or so commitments. So while Airbus ended the year ahead, we believe it was essentially because Airbus had a firm product and Boeing did not.
Something doesn’t pass the sniff test here.
Odds and Ends: Puzzling math remains puzzling in 737 v A320 debate
Puzzling math remains puzzling: Boeing has said for the better part of two years that the 737-800 is 8% more economical than the Airbus A320 and the advantage translates into leads it claims for the MAX over the NEO. With the addition of the Advanced Technology Winglets (BATW), Boeing now claims the 737 MAX will be a whopping 18% more economical than today’s A320 and up to 10% better than the NEO.
Such claims make Airbus almost apoplectic. Airbus rejects outright Boeing’s 8% claim and further said its own analysis on the MAX (pre-BATW) indicated the best improvement Boeing could get was 8%, not 10%-12%. Airbus also sniffs at the new BATW. Airbus evaluated the design before settling on the sharklets as more advantagous.
We’ve always been skeptical of numbers advanced by Airbus and Boeing because, after all, they are hardly objective. We’ve placed more weight in analyses offered by customers, for obvious reasons: they are the ones who have to operate the aircraft and truly know theory in real life.
We’ve previously written that Lufthansa concluded the 737 MAX will have a 2% advantage over the A320neo (also pre-BATW), which returns the competition to the “status quo.” This means that in Lufthansa’s analysis, today’s airplanes are only 2% apart, not Boeing’s claim of 8%.
Now comes information to us that Qantas–which operates both types through its own airline and the JetStar subsidiary–finds its operating experience to be so close as to be indistinguishable.
So we asked Boeing about that, and about how its methodology comes up with the numbers it advertised. Here’s the response, foregoing addressing the results of the airlines, citing long-standing policy of not commenting on customers. As for the methodology:
[Our analyses] are based on our average vs. Airbus and not individual customer statistics. There are too many variables to be able to address specifics and details.
Our numbers are cost per seat and are based on a 500 nm mission using typical European economic rules for airplanes with two-class seating giving the Next-Generation 737-800w (with PIP – Performance Improvement Package) 162 passengers and the A320 150 passengers.
Fuel burn values are Boeing tested values for the Next-Generation 737 and Boeing estimates for the A320. Maintenance costs are estimated using Boeing methodology which takes into account industry reported data from the FAA and IATA for both manufacturers. Same crew cost, landing and navigation and passenger handling cost models are applied to both airplanes.
We’ll note from our previous discussions with Boeing that Boeing acknowledged factoring in 737 PIPs (as cited above) but not factoring in A320 PIPs. Airbus claims Boeing uses the CFM56 as the base engine for the A320, rather than the V2500, which is 1.5% more efficient. Airbus also claims that Boeing uses older versions of the CFM56 as the A320 base engine rather than the newer, more efficient model. Airbus also uses 800nm vs Boeing’s 500nm for its analysis. (AirInsight’s analysis of US operation confirms that A320s and 737s tend to fly, on average, around 1,100sm, concluding that the longer range assumption is indeed a fairer data point.)
So the puzzling math used by Airbus and Boeing remains puzzling. The airlines say the airplanes are very close. We believe the airlines.
ExIm Bank: Just when we thought this was over, it turns out the Republicans in the US Senate Wednesday blocked a vote to approve reauthorization of the US ExIm Bank and a hike in its ceiling to $140bn. This story has additional detail. Boeing and GE take a hit on this.
Emirates to Boeing on 777X: Get a move on. You’re taking too long.