Leeham News and Analysis
There's more to real news than a news release.
Qantas, Transaero buy Airbus; Hazy cool to 737RE
AirInsight just posted three pieces about aircraft developments. One concerns the big order from Qantas for A320/A320neos, another is about the Transaero deal for the A320neo and the third is our report referenced in the 777 post below about Steve Hazy’s cool view toward the 737RE.
Boeing continues to work on design definition of the 737RE, with plans to send the program to the Board of Directors this month for approval to launch the airplane.
Assessing the 777 upgrade
The “godfather of leasing,” Steven Udvar-Hazy, the CEO of Air Lease Corp., weighed in on the 737RE and the prospective improvements to the 777 during ALC’s earning’s call. And when Hazy speaks, the industry listens.
Hazy, who favored a new airplane in the 737 class, wasn’t too happy about the 737RE decision and thinks Boeing has a ways to go on developing this aircraft. We’ll have more about this in a separate post.
As for the prospective improvements of the 777, Hazy had this to say:
Narrowing the 737RE design
While the aviation world is waiting to see what the Boeing 737RE will be, information that has emerged publically from Boeing and information we’ve obtained gives, we think, a reasonable picture of what the airplane will look like.
This information is current as of last week. Boeing is still settling on the 737RE design and things could change, but from what has been said and on what we have pieced together, this appears to be a reasonable assessment. It appears the 737RE will largely come down to this:
Boeing comments on the 737RE
As the aviation world waits for Boeing to define the 737RE, it might be worth taking a close look at the July 27 earnings call discussion relating to the airplane, apart from the topic of where the aircraft will be built—we covered that thoroughly last week.
Our resource is the earnings call transcript as published by Seeking Alpha. As we go through the transcript, we will highlight certain statements and then offer some commentary at the end of the section.
Here is what CEO Jim McNerney said in his prepared remarks.
Also in recent months, a broader customer view has emerged in support of the greater certainty of gaining significant incremental improvement in a re-engined 737 in the near to midterm over the more perfect solution which may be available further down the road. It has always been our view that if it looked like we are putting meaningful market share at risk by waiting to do a new airplane, we would re-engine instead. That combined with our new engine technical production assessment against lead time for new engine decision led us to the judgment that we have made.
We are confident that our re-engined 737 will maintain the value proposition we have in the marketplace today and we expect to see strong demand for this product. It will be the most fuel-efficient airplane in its segment and have the lowest operating cost, while also meeting customer needs for range, payload, standardization, reliability and fleet compatibility.
Over the next several weeks, we will continue our work to finalize the configuration and other details in anticipation of a launch this fall pending board approval.
Comment: As we have talked with our various market sources, one believed Boeing would suffer a market-share drop of at least 20% if it elected to proceed with a new airplane instead of a re-engine. This drop would come because customers would pull back on orders for the 737NG while waiting for the new airplane. Whether this is a valid number might be debatable, but the theory is consistent with McNerney’s comments. Earlier this year, Boeing Capital Corp. held an investor’s meeting in New York and remarks indicated that Boeing was prepared to take a 10% 737 market share drop in favor of a new airplane, figuring it would regain it with an aircraft superior to the A320neo family. Then there is the question of whether Boeing could actually afford a new airplane program, a topic McNerney did not address, in light of the losses on the 787 and 747-8 programs and the billions in cost overruns and delayed cash flow. Finally, there was strong undercurrent that the Board of Directors was not prepared to approve another new airplane program with the 787 and 747 programs in the condition they are in.
Aviation Week has new twist on American Airlines Airbus-Boeing deal
Aviation Week has a story on the Airbus-Boeing deal–and says it isn’t really a firm order, likening it to the Boeing 787 of a few years ago.
Analysts view the Re-Engine competition
We were traveling last week and are only now getting around to going through the analyst reports we receive, commenting on the American Airlines order. We put together a long synopsis after the jump.
Meanwhile, there are a couple of charts we want to highlight before getting into the recaps.
UBS put together the following charts of 2010 and 2011 orders at Airbus and Boeing. What we find notable is the break-out of A320 family Legacy orders vs NEO, with the clear preference for the NEO. Note that Boeing’s 737 orders are low this year. Compare the A320 Legacy orders last year, as the market waited for Airbus to decide what it was going to do about reengining. We previously wrote that we felt 737 orders were likely on the low side (though in fact YOY they were roughly the same through June) pending a Boeing decision on the 737’s future. The UBS tables support this view. Click on the tables for a more crisp and readable view.
Source: UBS
Source: UB
Credit Suisse put together a good chart on the potential USA orders Airbus and Boeing will compete for:
Strategically speaking, why American Airlines?
Update, 11:30am PDT July 25: The Ft. Worth Star-Telegram summarizes the delivery schedule of the huge AA order. Of particular note: AA doesn’t receive its first 737RE until 2018. This raises the question: is the EIS of the 737RE not until 2018? Or is AA truly not the “launch operator” of the 737RE (we wonder what a certain UK person would have to say about this)?
Original Post:
Wells Fargo issued a note today in which one small segment said:
“One curiosity about Airbus’s and Boeing’s aggressive marketing campaigns to replace AA’s narrow-bodies is the extent to which the manufacturers appear to have cut deals for one of the least profitable airlines in the world.
“We understand the “strategic” importance of AA, but according to consensus estimates AA is not expected to generate any profit until after 2013. Meanwhile, healthier airlines (see Delta, Ryanair, and Southwest above) are also looking at major re-fleeting plans and no doubt will pursue comparably attractive pricing and financing terms.”
The conventional wisdom is that Airbus wanted to penetrate American and brake the Boeing exclusivity, and this is certainly true. We have a broader take.
$30m for the Airbus, Boeing at American: Wells Fargo
Update, July 26: Wells Fargo issued this update today:
American Airlines Pricing Update. On July 26 we heard from American Airlines regarding our calculation that the average price it is paying for reengined A320s and 737s is around $30M (ex-escalation: $27M). We now understand that the airline’s $10.3B projected Q3-ending purchase commitment balance excludes the 100 re-engined 737s but includes pre-delivery deposits (PDPs) for 230 aircraft (100 737NGs + 130 A320s) to be leased. Based on this new information, we can estimate an A320neo unit purchase price based on an assumed PDP level. Assuming a 20% PDP rate, the estimated implied unit price per new A320neo would be $40M (ex-escalation: $35M). Assuming a 30% PDP rate, the estimated implied price would be $35M (ex-escalation: $31M).
Original Post:
We were traveling last week and didn’t pick up on this-but here’s what Commercial Aviation Online reported about the purchase price of the Airbus and Boeing orders by American Airlines.
This is entirely consistent with the pricing we heard in advance of the deal.