First reports from Boeing’s MAX briefings last week

Dec. 10, 2019, © Leeham News: The first reporting from last week’s Boeing briefings for analysts, opinion-makers, influencers and consultants (but not the media) began to emerge Saturday. (Media briefings may be scheduled in January.)

The briefings are the latest in Boeing’s effort to restore confidence in the 737 MAX.

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US trade rep rejects Airbus tariff reduction claim

Dec. 9. 2019, © Leeham News: The US Trade Representative (USTR) Friday dismissed Airbus; conclusion last week that the tariff authorized by the World Trade Organization (WTO) should be lowered by about $2bn.

The WTO’s Compliance Panel last Monday largely rejected the European Union’s appeal of the amount the Arbitration Panel set in October that $7.5bn in tariffs could be levied by the US.

The Trump Administration levied tariffs on a wide variety of non-aerospace goods from across the EU. It also levied a 10% tariff on Airbus airplanes imported into the US. It exempted the A320 family of planes assembled at the Mobile (AL) plant.

Airbus responded to the Compliance Panel’s decision by noting it viewed reduced the “harm” to Boeing as a result of the decision in February by Airbus to cease production of the A380 in 2021.

Accordingly, Airbus asserted that the tariff should be reduced by about $2bn.

Contesting the assertion

The USTR issued a statement Friday rejecting this claim.

“Two months ago, the WTO arbitrator found that the EU’s subsidies caused adverse effects worth $7.5bn per year,” the USTR said. “Nothing in the WTO report even suggests that the compliance panel found that the amount has decreased.  There is accordingly no basis for Airbus’s assertions that the report “implies” that the U.S. countermeasures should be reduced by $2bn.

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A tectonic shift towards large narrowbody

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By Vincent Valery

Introduction

A321XLR. Source: Airbus.

Dec. 9, 2019, © Leeham News: There are now more firm orders for the Airbus A321neo than all the latest generation widebody programs combined: Airbus A330neo and A350, Boeing 787 and 777X. The largest Airbus narrowbody makes up 44% of all A320neo family orders, compared to 22% for the A320ceo family.

After peaking in 2015, twin-aisle aircraft now represent a smaller portion of all deliveries. Boeing will lower the future Dreamliner production rate from 14 to 12 per month, while Airbus did not proceed with an A350 rate hike.

Being at a later point in the cycle, economic slowdown, and trade tensions explain part of the lower demand for widebody aircraft. However, there are good reasons to believe something more fundamental is at play.

LNA wrote a few months ago that Trans-Atlantic market fragmentation is hurting large widebody sales. This article analyzed the strategic shift occurring at numerous airlines that is hurting all twin-aisle sales, including the smaller A330neo and 787.

Summary
  • Late cycle and trade war hurt widebody demand;
  • Mitigating operating cost pressures on shorter routes;
  • Narrowbody capital efficiency cannibalizes widebody;
  • Monitoring the highest traffic growth region;
  • Consequences for future programs.

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Pontifications: Stop hitting the snooze button, Boeing

By Scott Hamilton

Dec. 9, 2019, © Leeham News: I know Boeing is preoccupied right now. But it has to get off the pot and decide to proceed with a new airplane.

We believe the New Midmarket Airplane is still required. But Boeing salesmen have also floated the concept of a new, single-aisle airplane to key players in the market. Either way, Boeing has to do something.

At least, that’s how we see it at Leeham Co.

The order last week by United Airlines for 50 Airbus A321XLRs should be a wake up call.

It’s not the only one Boeing has had.

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FAA takes first steps for re-certification of the MAX

December 6, 2019, ©. Leeham News: The FAA issued a draft of the updated Master Minimum Equipment List (MMEL) for the Boeing 737 MAX 8 and 9 on its website yesterday. It’s there to be commented on by anyone who has input to its content within 30 days.

This step is the first external sign the re-certification of the 737 MAX has begun.

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WTO compliance decision poses new risks for Airbus, US customers

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Introduction

Dec. 5, 2019, © Leeham News: The Trump Administration Tuesday threatened to increase the tariffs on European goods after a World Trade Organization (WTO) compliance panel concluded Airbus and the European Union have not fully cured illegal subsidies on the A350 and some residual “harm” to Boeing remains as the A380 program winds down.

The EU and Airbus criticized the conclusions as faulty. The EU is expected to appeal by next Wednesday.

The Administration already imposed a 10% tax on the A320 family, the A330neo and A350 imported into the US. So far, the A320 family assembled at Airbus’ Mobile (AL) plant are exempt.

US airlines and lessors whose lessees are US carriers are required to pay the tax. Airbus and its customers are working the problem behind the scenes.

Summary
  • The EU awaits a WTO arbitration decision next spring and is prepared to retaliate with taxes on Boeing airplanes.
  • Airbus believes it will be in a stronger position than Boeing once the WTO acts.
  • US customers are liable for tax.

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United orders 50 A321XLRs

Dec. 3, 2019, © Leeham News: United Airlines today announced an order for 50 Airbus A321XLRs.

The airplane has an advertised range of 4,700nm (5,400 statute miles), or a nine hour flight.

Airbus A321XLR in United Airlines “swoop” colors. Source: Airbus.

UAL will replace its aging Boeing 757s on a one-for-one basis beginning in 2024.

The XLR’s targeted entry into service is 2023.

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WTO affirms non-compliance in Airbus-WTO case; another appeal expected

Dec. 2, 2019, © Leeham News: Boeing and the US won another round at the World Trade Organization today when the compliance panel upheld a decision to impose tariffs on the European Union, including Airbus airplanes, in the 15-year trade dispute between the US and the EU.

The compliance panel did hand a minor win to Airbus and the EU by reducing the impact of “harm” to Boeing over the A380. Airbus argued that there should be no impact because the program is being terminated in 2021. In a partial victory, the WTO compliance panel agreed that the impact of the A380 is reduced with the decision to terminate the program in 2021.

But, according to a Reuters report, because the airplane continues to be delivered into 2021, the impact is not entirely eliminated.

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Understanding Rolls-Royce’s financials

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By Vincent Valery

Introduction  

Dec. 2, 2019, © Leeham News: Rolls-Royce continues to be in the spotlight for the Trent 1000 durability issues, with no end in sight. The engine manufacturer recently increased the total disruption cost estimate to £2.4bn.

The engine-related charges and substantial research and development expenditures have raised questions about Rolls-Royce’s financial health. As of the end of 2018, the company had a net negative £1bn equity on its balance sheet.

However, the company has a market capitalization of around £14bn and holds a credit rating comfortably in Investment Grade territory.

This article analyzes the reasons for the disconnect between the company book value and market capitalization. Accounting differences between the USA’s GAAP and Europe’s IFRS play a significant role.

Rolls-Royce’s strategic choices in the early 2010s will have ramifications for engine development on future commercial aircraft programs.

Summary
  • A tumultuous history;
  • From cash cow to binge development spending;
  • Brexit and IFRS accounting paint bleaker pictures than reality;
  • Strategic decision bites back;
  • A lifeline and future engine programs.

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Pontification: A320 production challenges may extend to 2022/23

By Scott Hamilton

  • Update of Boeing 737 NG Pickle Fork cracking issues.

Dec. 2, 2019, © Leeham News: Airbus sees struggles for A320 production continuing throughout next year, into 2021 and spilling into 2022/23 as the Air Space cabin is introduced on the A321XLR.

Executives also see lower margins than the target 15% for the A350 and losses on the A220 continuing into the middle of the next decade.

Even so, profit targets are expected to be met and officials still want to ramp up production rates on the A320.

This mixed picture was presented by Airbus CFO Dominik Asam during  series of investors meetings last month in Asia, arranged by Citi Research’s London office.

In a research note issued Nov. 22, Citi summarized the three days of meetings with investors in Australia, New Zealand and Tokyo.

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