Leeham News and Analysis
There's more to real news than a news release.
The all-important Unit Cost
- Part II of the Boeing Liabilities Problem
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By the Leeham News Team
Aug. 15, 2024, © Leeham News: Chief Financial Officer Brian West recently cautioned Boeing (BA) analysts and investors about the cash burn on the Q2/2024 earnings call;
“I’m just not smart enough right at this moment to say whether it’s $5bn or $10bn,”
BA used $4.3bn in the second quarter, which followed a burn-off of $3.9bn in the first quarter. The company shored up its cash position by borrowing $10bn during Q2/2024, injecting much-needed funds to cover losses. Eventually, all that money must be repaid.
LNA continues to analyze just how short Boeing is from that point and where it needs to be to make that happen.
Supply chain may be stabilising — but risks remain, says Accenture’s aerospace lead
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By the Leeham News Team
August 12, 2024, © Leeham News at Farnborough: After a period of intense disruption, the aerospace supply chain is showing signs of stabilisation, partly due to Boeing’s recent production slowdown, according to Accenture’s global aerospace and defense lead, John Schmidt.
Titanium is now a scarce material given the sanctions against Russia. All Airbus and Boeing airplanes use the material. Photo Credit: Leeham News.
The reduction in output has eased some pressure on suppliers, allowing them to catch up on backlogs and recalibrate operations. However, Schmidt warned this respite may be short-lived as new challenges loom on the horizon.
Geopolitical tension involving Western nations and Russia, and the Asia-Pacific region, risks raw material shortages that may disrupt the delicate balance once more.
“The supply chain has evolved and changed in terms of where the focus is since COVID,” noted Schmidt in a sit-down interview with LNA at the Farnborough Airshow in July. “It wasn’t too long ago that we couldn’t get chips – chips were holding things back. It seems like we’ve gotten ahead of that, and now we’re dealing with trying to find other sources of supply, and sometimes it’s an issue with quality coming in.”
“What’s next is going to be sources of supply for things like titanium? There is enough in the supply chain already that has insulated the impact, but we’re starting to see early indications that [titanium] might be the next thing that comes up.” Read more
Airbus a sideshow in Boeing-Spirit deal, but intertwined
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By the Leeham News Team
Aug. 9, 2024, © Leeham News: The financial results for the first half of 2024 are in for the corporations of the aviation industry and it has been a mixed bag for many. Notably, Tier 1 supplier Spirit Aerosystems (SA) faces increasing cash flow pressure, despite reporting a 9% increase in revenues.
President and Chief Executive Officer Pat Shanahan was supportive of employees. “This has been a dynamic and eventful period for the company, and I want to extend my gratitude to each employee for their dedication and hard work.”
Profitability, Free Cash Flow (FCF) and Cash on hand were driven down by a joint product verification process on the 737 MAX shipsets, to ensure conformity of fuselages prior to transportation to Boeing’s (BA) final assembly site in Renton (WA). During the second quarter, a paltry 27 units were shipped to BA, averaging nine a month. Quarterly and half year deliveries were either relatively flat or down, over 2023.
Source: Spirit Aerosystems 1H2024 Results
Meanwhile, deliveries to Airbus (AB) were up across the board, with the exception of the A330 program, which dipped slightly for the first half. Year-over-year, SA shipped 37 more shipsets during the second quarter and 52 more over the half-year to Airbus.
While Boeing has faced increased scrutiny from regulators, which has trickled down to SA, why does Spirit seem able to produce components for Airbus that pass inspection and enter into the AB supply chain, in increasing numbers?
Calhoun’s biggest failure at Boeing: fixing safety
By Scott Hamilton
Commentary
David Calhoun
Aug. 8, 2024, © Leeham News: Kelly Ortberg becomes president and chief executive officer of The Boeing Co. today. He replaces David 
Calhoun, who was named to the position in January 2020. Calhoun replaced Dennis Muilenburg, with a charge to save Boeing from the first 737 MAX crisis and extended grounding; and fix, among other things, the safety culture failures that led to the 21-month grounding of Boeing’s cash cow.
Ortberg has a long list of things to fix, including but not limited to:
- The union contract with the IAM 751, in negotiations now; the contract expires in September
- Fixing Boeing’s safety culture
- Quality control at all the BCA and BDS factories
- Stemming losses at BDS
- Getting BCA production back up to normal rates (50+ for the 737, 10-12 for the 787)
- Getting the MAX 7, MAX 10, and 777X certified
- Regaining the confidence of the FAA, EASA, and other regulators; getting authority to oversee its operations and ticket airplanes back from the FAA
- Repairing the balance sheet
- Integrating Spirit AeroSystems into Boeing
- Returning BCA to profitability
- Launching a new airplane to replace the 737
- Regaining global market share closer to parity with Airbus
- Repair relations with the supply chain
- Negotiate a new contract with the engineers union, SPEEA, in 2026
- Repair relations with the airlines and lessors
- Repair relations with the IAM 751 and SPEEA unions
Ortberg’s long list of things to do reflects a failure of leadership by Calhoun.
Trouble with the Boeing backlog?
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By the Leeham News Team
Aug. 8, 2024, © Leeham News: On July 31, 2024, Boeing (BA) released the financial results of the second quarter, in what was widely expected to be a dismal reporting period. The company had been facing pressures from all sides of the spectrum, including certification, production, supply chain and financial, to mention a few.
The third quarter now brings fresh challenges as BA will have to deal with an increasingly militant union membership (and contract negotiations), who want to claw back concessions previously granted to the company.
Indeed, the 2Q2024 results were less than stellar, with an ever-increasing cash burn and a decreasing amount of commercial aircraft delivered. The silver lining to the very dark cloud which hung over the release, was news that the embattled reign of CEO Dave Calhoun was coming to an end, and newly minted Kelly Ortberg of Rockwell Collins fame, would replace him on August 8.
Lost in the eruption of euphoria which saw Boeing shares rise 2% on the day, despite losses that surpassed the previous quarters figures, was news that all was not well with the Boeing Commercial Aircraft (BCA) backlog.
Typically, when previous results were poor, optimists pointed to the duopoly Boeing shares with Airbus and the multi-billion-dollar backlog of orders it holds. “Airbus production is maxed out, so what are airlines going to do for new aircraft?”, was the common refrain.
The Boeing Liabilities Problem: A decade to resolve
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By the Leeham News Team
Analysis
Aug. 1, 2024, © Leeham News: During the second quarter, Boeing (BA) CFO Brian West admitted that the first half of 2024 will be a cash burn period, given the problems over at Boeing Commercial Aircraft (BCA) with suppliers, deliveries and certification issues. Estimates varied and West was non-committal in his comments. However, he alluded to a repeat of the performance in Q1, which had a Free Cash Flow (FCF) burn rate of ($3.9bn) and an operating cash flow usage of ($3.4bn).
The second quarter results released on July 31, 2024, underlined just how badly things have deteriorated. FCF for the period was ($4.3bn) and operating cash flow was ($3.9bn).
BA attempted to mitigate the drop in cash by borrowing an additional $10bn in April, which bumped the Long-Term Debt (LTD) back up to previous highs and guaranteed that Interest Expense will be a troubling item for them, moving forward. In Q1/2024 Boeing paid out $569m in debt servicing costs with almost $47bn in LTD sitting on their balance sheet. With the new obligations, consolidated debt now sits at $57.9bn.
For comparison, at the end of 2020 Boeing reported (in millions of dollars):
To what extent can the A321XLR replace the Boeing 757, Part 4
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By Bjorn Fehrm
August 1, 2024, © Leeham News: We are comparing the Airbus a321XLR to the Boeing 757 to understand to what extent it can replace the 757 on the longer routes it operates for major airlines like United, American, and Delta.
We have examined the aircraft’s development and operational history, their Apples-to-Apples capacity and range, and their operational costs for a typical domestic configuration. Now, we equip the A321XLR with a long-range, lie-flat cabin and look at what long-range routes it can fly in this configuration.
Summary:
- The A321LR/XLR can fly up to 10-hour routes in a long-range configuration, flying from mid-USA to mid-Europe.
- With its passenger capacity, range, and operational economics, it covers most of what Boeing set out to cover in its MOM and later NMA studies.
Boeing names new CEO; losses widen, negative cash flow again. Update 1, reaction.
July 31, 2024, © Leeham News: The Boeing Co. today named Kelly Ortberg president and CEO, effective Aug. 8. He succeeds David Calhoun, who retires then. Calhoun was named president and CEO of Boeing in January 2020.
Boeing also announced 2Q2024 and 1H2024 earnings. The company reported 15% lower revenues for the second quarter compared with 2023, a net loss of $1.4bn vs a net loss of $149m last year, and negative operating cash flow of $3.9bn vs positive cash flow of $2.875bn in 2Q2023.
For the half, revenues were $33.4bn vs $37.67bn last year. The net loss was $1.794bn vs a loss of $574m. There was a negative operating cash for the first half this year of $7.285bn vs a positive flow of $2.557bn last year.
Ortberg is 64 years old, much older than previous CEOs when named. He’s been in aerospace for 35 years, most recently as CEO of Rockwell Collins. He led the integration of Rockwell’s merger with United Technologies (now RTX), retiring in 2021. Ortberg began his career as an engineer with Texas Instruments and served as a program manager during his ascent up the corporate ladder.
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Boeing, Embraer differ on the future of upgauging
By Judson Rollins
Introduction
July 30, 2024, © Leeham News: Embraer’s new 20-year Market Outlook, released during the Farnborough Air Show, forecasted the demand for jets with more than 150 seats for the first time. This comes as market observers speculate the Brazilian jet maker is mulling a move into aircraft larger than its current flagship E2 family.
However, the Brazilian jet maker delivered temperate commentary on the future of upgauging, citing one-time developments it believes are unlikely to repeat. It said, “The market environment that led to [an] increase in average aircraft size will not be the same in the future. Consequently, the growth trend likely will not continue.”
For instance, a typical two-class Boeing 737-800 Layout of Passenger Accommodations (LOPA) in the mid-2000s comprised approximately 150 seats. By the late 2010s, this shifted to 160-166 seats. A similar Airbus A320 LOPA went from 140 to 150 seats.
Source: Embraer Market Outlook (data from Sabre).
Will the pre-COVID upgauging trend continue, and what are its implications for future aircraft selection? Boeing and Embraer have decidedly different views, and the latter’s view will drive its decision whether to enter the market for 150+ seaters.
Summary
- Boeing says upgauging will continue, driven equally by cabin densification and aircraft size selection.
- Embraer believes upgauging is largely over.
- Both OEMs’ views have key flaws.
- The upshot: “Bigger” doesn’t always equate to “more profitable.”
Boeing Estimates: How accurate and clear are the predictions?
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By the Leeham News Team
Analysis
July 29, 2024, © Leeham News: Annual projections for the upcoming year are an important piece of information released to the world at large for any publicly traded corporation, on what can be expected for the near and extended future.
Boeing (BA) reports its 2Q2024 earnings this Wednesday. An update of its guidance may be forthcoming as Boeing continues to work through additional costs following the Jan. 5 accident involving a 737-9 MAX with Alaska Airlines.
Boeing relies heavily on the use of estimates when filing its annual report and this information is crucial to investors when considering whether to invest, hold, sell or short stock in the company. Not only are estimates used in its financial reporting system, generally known as Program Accounting, but each year BA puts out an expected value of revenue to be generated in the future.
This prognostication is based on converting a percentage of the backlog for the following year and for a total period of four years to come. The 2023 projection is as follows:
“Our total backlog includes contracts that we and our customers are committed to perform. The value in backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue, primarily based on the cost incurred at delivery and acceptance of products, depending on the applicable revenue recognition model. Our backlog at December 31, 2023 was $520,195 [million]. We expect approximately 16% to be converted to revenue through 2024 and approximately 62% through 2027, with the remainder thereafter,” Boeing wrote.
There is also a caveat:
“There is significant uncertainty regarding the timing of when the backlog will convert into revenue due to timing of 737 and 787 deliveries from inventory and timing of entry into service of the 777X, 737-7 and/or 737-10,” Boeing writes in its 2023 annual report.