Leeham News and Analysis
There's more to real news than a news release.
777 production rate cut likely: Wells Fargo
Sam Pearlstein, the aerospace analyst at Wells Fargo, predicted a production rate cut today in a research note for the Boeing 777.
An announcement could come as early as this year, he writes.
Pearlstein, one of our favorite aerospace analysts, reached a conclusion similar to one we came to a few months ago: Boeing won’t be able to sustain the current production rate of 8.3/mo to bridge the 777 Classic to the 777X, which has a planned entry into service in 2020 (Boeing would like to advance this to 2019).
Pearlstein initially predicts a rate cut to 7/mo, followed by another to 5/mo. We believe a cut to 5/mo will be required, though a “step-down” rather than a “leap-down” along the lines Pearlstein suggests is certainly possible and would be in keeping with Boeing practice.
Pearlstein writes:
Analysis. We estimate Boeing will need to see demand for 600 777s (i.e., six years at 100/yr) to sustain current build rates until the 777X is available. Our analysis suggests Boeing could come up ~125 units short of this target. This conclusion is highly sensitive to assumptions of global capacity growth, aircraft retirement rates, and competitive dynamics with the Airbus A350-1000. In other words, actual demand could be somewhat better – or worse – than our forecast.
Rate Cut Likely. Assuming our estimates are reasonable, Boeing will have to cut the 777 build rate – with an announcement possible as early as year-end. We would expect the initial cut to revert back to the previous 7/mo; should the order skyline continue to show a large gap, a subsequent cut to 5/mo is possible.
Boeing CEO Jim McNerney said on the 1Q2014 earnings call that he believes full rate production can be maintained to the 777X EIS when current firm orders, options, letters of intent and sales campaigns are considered. We don’t think so.
Odds and Ends: Airbus’ Enders; A320neo; Ex-Im Bank; Delta vs Alaska
Airbus’ Enders: Airbus Group CEO Tom Enders muses about what he will do when his current term ends in two years. He might seek another three year term as CEO or he could move on. In the Byzantine structure at Airbus, the CEO’s job rotates between a German and Frenchman with the opposite nationality heading Airbus (the airplanes) during the term. Enders has made great progress in bringing Airbus Group into the real corporate world and away from the government meddling that has proved the bane of the company’s existence. He still has things to accomplish, including a more traditional executive office structure regardless of nationalities and term limits.
Smooth A320neo introduction: Meantime, Enders says it’s imperative that the introduction next year of the A320neo go smoothly and that A350 program still has “challenges.” The A350 is supposed to enter service by the end of this year.
Ex-Im Bank: The Seattle Times editorialized that the Ex-Im Bank authorization should be renewed by Congress, and as readers know, we agree. Boeing will be put at a disadvantage to Airbus because the European Union Export Credit Agencies will continue to provide ECA financing for Airbus. Write your Congressman. Ex-Im is more than just Boeing, too.
Delta vs Alaska: The air wars continue between giant Delta Air Lines and Alaska Airlines, the smallest of the US legacy carriers. Delta announced it is adding more service to Seattle, Alaska’s largest hub, on routes that compete with Alaska. The latter announced it will increase service by 11% in Seattle, mostly (but not entirely) to cities that don’t directly compete with Delta.
Can a cheap 767-300ER replace the 757W?
As some customers press Airbus and Boeing for a replacement for the Boeing 757-200W used on selected trans-Atlantic, long-thin routes, Flightglobal floated a suggestion that that the Boeing 767-300ER might be a possible replacement.
The last passenger 767 was delivered this month. The line remains open with the 767-300ERF and the early stages of the USAF KC-46A tanker. A cut-price 763ER might be cheap enough to offset the operating cost disadvantage, or so the theory goes.
The 763ER is the right size in a three-class configuration—218 seats–and will be in production for many years to come due to the KC46 production line. We know Boeing sold the 763ER for a very low price in connection with compensation for the 787 delays, and we know that at a very low price, the 763ER economics do match the 787’s operating costs. But how does this stack up against the 757 in Flightglobal’s hypothesis?
Not very well. We did a quick economical analysis with our proprietary model.
NTSB releases report on 787 battery incidents
The National Transportation Safety Board released a report on its investigation of the Boeing 787 battery fire on the Japan Air Lines 787 and the smoking battery on the ANA 787 in January 2013. The Federal Aviation Administration grounded the 787s for more than three months while a fix was designed.
The NTSB press release summarizing its points is here.
The agency’s 12-page letter of Safety Recommendations is here. Additional information is here.
ILA Berlin Air Show begins tomorrow
The ILA Berlin Air Show begins tomorrow. The Air Show is a poor cousin to the Farnborough Air Show (July this year) and the Paris Air Show (in odd-numbered years). We went to this show in 2006 and were more excited about returning to Berlin for the first time since before the Berlin Wall came down than we were about going to the event itself.
Boeing doesn’t place much stock in the show since it is viewed as an Airbus star vehicle. Best we can tell from the ILA website, Boeing isn’t even an exhibitor.
Airbus tries to have some major announcements for the show, although Farnborough and Paris–being the bigger draws and having greater international prestige–are clearly the favored forum.
What might Airbus announce at the Berlin show, other than a few orders? The aviation world is waiting and watching for what Airbus will do about the A330neo and, with it, the future of the A350-800. Airbus is sending the A350-900 to the Air Show for the first time–will this be the place Airbus puts the nail in the coffin of the A35-800? We have our doubts about that.
Could Airbus launch the A330neo at the ILA? We received an email over the weekend that an announcement could be forthcoming at this show, but the source is from outside Airbus (though information from this source is usually reliable). Expectations for the A330neo have centered on Farnborough, however. Our Market Intelligence tells us few potential customers have actually seen proposals from Airbus on the A330neo as yet, so we think it might be a bit premature to have a launch of the program. Information is also that Airbus has been looking at the “second half” of 2014 to make a decision (at least publicly). May isn’t in the second half–but July is.
Other than this suspense, if you can call it that, we don’t expect much out of ILA this week.