The industries’ CASM trap

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By Bjorn Fehrm

Introduction

August 11, 2022, © Leeham News: The airliner world measures efficiency in CASM, Cost per Available Seat Mile, and RASM, Revenue per Available Seat Mile. An airliner with more seats then has lower CASM or RASM.

Looking at seat counts, we can see that the hottest selling single-aisle, the Airbus A321neo, is closing the gap to widebodies like Boeing’s 787-8 and Airbus’ A330-800.

So it’s CASM, and RASM should be phenomenal. Or is it? Are we comparing correctly, or are these Apples and Oranges comparisons? We use the cabin generator of our airliner performance model to understand it better.

Summary
  • The measurement of economics per seat makes sense for internal airline work.
  • When comparing different airliner types in the same size class or between types (single-aisle, widebody), it’s the wrong method.

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HOTR: Boeing resumes 787 deliveries after long hiatus

By the Leeham News Team

Aug. 10, 2022, © Leeham News: Deliveries of the Boeing 787 are slated to resume today after a pause of nearly two years. American Airlines is set to receive a 787-8. The Federal Aviation Administration announced Monday that it approved Boeing’s plans to fix a production flaw that resulted in a paper-thin gap where certain sections of the fuselage are mated.

Rework of up to 120 787s in inventory has been underway for some time, both in Charleston (SC), where the airplane is assembled and in Everett (WA), where the former Line 1 Final Assembly Line was located. Plane spotters occasionally noted 787s being flown into Everett from stored locations.

Some estimates indicate that the 120 airplanes were sold for an average of $129m each. (The split between the 787-8, 787-9 and 787-10 is not detailed.) This places the inventory value at an estimated $15.5bn. But don’t assume this is the amount of cash that will be coming to Boeing as inventory is cleared into 2024. About 40% of the sales price is typically paid via deposits and progress payments by the time of delivery. This means that Boeing may look for an estimated $9bn in cash.

However, customer compensation for the delivery delays could reduce this some. Boeing prefers to compensate customers via discounts on future airplanes or via services and parts. How much—or how little—cash compensation is provided is known only to Boeing.

During the fourth quarter last year, Boeing took a forward loss on the 787 program of $3.46bn.

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Boeing avoids strike as St. Louis Machinists OK contract

By Bryan Corliss

Aug. 3, 2022, © Leeham News: Machinists Union members working for Boeing’s St. Louis-area defense plants today ratified a three-year contract with the company. 

The vote means that Boeing will avoid a strike that would have shut down production of new T-7 trainers for the U.S. Air Force and MQ-25 Stingray refueling drones for the U.S. Navy.

Members of International Association of Machinists District Lodge 837 on July 24 had rejected an earlier offer from Boeing with a 91% no vote, with 94% of members voting to go on strike Aug. 1. 

That prompted Boeing to go back to the table over the weekend. It came up with a new offer that added an $8,000 ratification bonus, with the option for workers to take that in cash or as a contribution to their 401(k) retirement funds. 

That, apparently, made all the difference.

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Update 8-3: Contract Approved (St. Louis Machinists vote Wednesday on latest Boeing contract tweaks)

Update, Aug. 3, 2022: The IAM 837 approved the revised Boeing offer for a three year contract. No strike tonight.

By Bryan Corliss

Aug. 2, 2022, © Leeham News: Machinists Union workers at Boeing’s St. Louis-area defense plants will vote on a revised three-year contract offer from the company Wednesday.

Workers on July 24 had rejected a previous offer from the company with a 91% no vote. In addition, 94% of workers voted to strike. The strike was scheduled to start at 12:01 a.m. Monday, but after a marathon weekend bargaining session, the union side agreed to take Boeing’s latest offer to its members in today’s vote.

Negotiators from International Association of Machinists District Lodge 837 had urged their members to reject the company’s previous proposal, saying it did “not equate to a fair and equitable offer.”

As of mid-day Tuesday, the IAM 837 negotiating committee hadn’t issued a public recommendation on the latest offer. However, our read is that it’s doubtful that Boeing has improved its package enough to satisfy Machinists, who are looking for significant improvements in pay and retirement benefits after giving up major concessions in their last contract.

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Jump in R&D spending at Boeing Commerical Airplanes points to renewed studies for new airplane

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By Scott Hamilton

Return of the NMA? Photo credit: Leeham News.

Aug. 1, 2022, © Leeham News: Buried in Boeing’s second quarter results released last week was a sharp jump in research and development spending.

It wasn’t just a small increase at Boeing Commercial Airplanes (BCA). Boeing spent more on research and development in the quarter and the half year. Expenses hit $1.33bn for the half-year compared with $996m a year earlier. For the quarter, expenses rose $996m vs $497m. R&D for Commercial Airplanes rose to $693m for the half and $372m for the quarter, compared with $524m and $255m, increases of 32% and 46%, respectively.

Spending is still short of the peak in 2019. But the reduced spending post-grounding of the 737 MAX and the COVID-19 pandemic was reversed in the first six months of this year.

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Update 2: (Boeing modifies offer, strike called off for now) After upbeat air show and 2Q financial report, Boeing faces strike Sunday

Update, 2:45PM (PDT) July 30: Overnight negotiating resulted in a modified offer from Boeing to IAM 837, resulting in postponing the strike set to begin at 12:01 AM CDT Aug. 1. A new vote has been set for Aug. 3.

By Bryan Corliss

Analysis

UPDATE: 4 p.m. (Pacific), July 29: On Friday afternoon, a St. Louis television station reported that Boeing and Machinists Union District Lodge 837 were heading to mediation. The station quoted an IAM 837 spokesman who said a federal mediator would lead the talks. The station said Boeing has not confirmed this.

Meanwhile, the St. Louis Business Journal reported that negotiators on both sides had met with a mediator but made no progress.

Neither side has issued a statement on potential mediation.

We will update if developments warrant.

July 30, 2022, © Leeham News: Boeing’s Wednesday earnings call had some pretty big news in it: After years of red ink, Boeing now anticipates generating free cash flow.

But there’s a big potential blocker on the Defense side of the house, in the form of a looming strike with the Machinists Union workers in St. Louis.

Workers rejected a contract on July 24. Leaders of International Association of Machinists District Lodge  837 said 91% of those voting rejected Boeing’s “best and final” offer, and 94% of voters authorized a strike, which could begin at 12:01 AM Monday. The leadership did not release the vote totals.

Three plants in and near St. Louis would be affected by a walk out.

Boeing didn’t mention it in its earnings press release, and CEO Dave Calhoun didn’t mention it on the earnings call and downplayed the significance of the labor strife during a live interview with CNBC the same day.  

“They do have high expectations,” Calhoun said. “We feel we have made a very strong offer.”

The union workers, however, disagree, and that could very well mean another stumble for Boeing, as it moves to bring the key new programs – the T-7A trainer for the U.S. Air Force and the MQ-25 Stingray UAV for the U.S. Navy – into full production.

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Boeing ekes out positive cash flow; earnings numbers mixed; R&D spend jumps

July 27, 2022, © Leeham News: Boeing today reported that it eked out positive operating cash flow for the second quarter of $81m. Revenues his $16.68bn, down slightly from $17bn a year earlier as production and delivery delays continue to hammer the commercial division.

Boeing reported an operating profit of $774m and a net profit of $160m. This compares with $1bn and $567m respectively. Despite the lower earnings figures, the tiny positive cash flow compares with a negative cash flow of $493m last year.

For the half, Boeing reported revenues of $30.67bn vs $32.2bn, an operating loss of $395m vs an operating profit of $940m, and a net loss of 1.1bn vs a net profit of $6m.

The full press release may be obtained here.

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Pontifications: Boeing gets boost from Farnborough; now, it must deliver

July 25, 2022, © Leeham News: Boeing announced last week during the Farnborough Air Show orders and commitments for 278 737 MAXes, nine 787s, and two 777-8Fs.

By Scott Hamilton

Now, Boeing must deliver. Some of the 737 delivery positions in earlier orders were promised to begin in 2023. Some in the Farnborough orders are promised from 2025. These early delivery positions are one of the reasons (but not the only, to be sure) that Boeing has won some 1,000 MAX orders since the plane was recertified in November 2020.

But Boeing struggles to bump its MAX production rate. Officials hoped to hit a rate of 31/mo early this year. Boeing hasn’t confirmed a report that it hit rate 31 only this month. Confirmation may come during the Boeing 2Q2022 earnings call on Wednesday. Delays from the supply chain hurt Boeing’s ability to ramp up. With a projected production ramp up to 52/mo by 2025 (the pre-grounding level in March 2019), the question is whether the supply chain will be able to meet Boeing’s schedule.

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Boeing Defense labor union rejects contract, authorized strike Aug. 1

July 24, 2022, © Leeham News: The labor union representing Boeing workers at three plants in and near St. Louis (MO), the company’s defense operations, voted “overwhelmingly” to reject a new contract. The members of IAM District 837 voted to authorize a strike at 12:01 AM on Aug. 1.

The union leadership did not release the vote totals for the contract and separate strike authorization votes, leaving no way to verify the outcome or the margin.

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Farnborough Air Show winds up with post-pandemic slow pace

By Scott Hamilton

July 22, 2022, © Leeham News: The Farnborough Air Show produced little in the way of headline news. But Boeing comes away with some momentum. Airbus announced a big order on July 1, well ahead of the show, from China, leaving show orders in high double digits.

Boeing announced orders and commitments for 278 737 MAXes, including 100 firm and 30 options from Delta Air Lines. This order was the first from Delta in 11 years, ending a long-running behind-the-scenes streak of sour relations between the companies.

The order, for the 737-10 MAX, finally fulfills Boeing’s goal of getting the -10 into Delta. Boeing had counted on Delta being a launch customer of the airplane in 2017. As reported in my book, Air Wars, The Global Combat Between Airbus and  Boeing, the bake-off between the MAX 10 and the Airbus A321neo came down in favor of the MAX 10. But CFM declined to grant Delta TechOps rights to perform maintenance, repair and overhaul for other airlines and lessors. Pratt & Whitney agreed, tipping the order to Airbus.

Also during the competition, Boeing was engaged in a trade complaint over Bombardier’s sale of the C Series to Delta. Boeing alleged Bombardier engaged in price-dumping, contrary to trade laws. Boeing won the trade complaint and a tariff of 292% was assessed on each C Series imported from Canada. However, the final review found no harm to Boeing, which hadn’t competed for the order, a required element to impose the tariff. Many observers thought Boeing’s timing concurrent with the MAX-neo campaign affected the decision. But as reported in Air Wars, Delta officials said this wasn’t a factor.

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