Leeham News and Analysis
There's more to real news than a news release.
Boeing 2Q12 earnings up
Boeing reported its second quarter and half-year results today. The press release may be found here.
Initial analyst take:
Bernstein:
Boeing reported Q1:2012 EPS of $1.27, versus our estimate of $1.20 and consensus of $1.12. Q1 sales came in at $20.0 bn, above our $19.2 bn estimate and consensus of $19.4 bn. The difference in revenues was all due to higher defense revenues. Although we do not view near term EPS as the most important driver for Boeing stock, this was a positive result. Long term cash flows are most important, which we see as strongly linked to 787 program performance. Deferred production for Q2 again did not meet the trajectory one would want to see on a learning curve. But, we reached the conclusion after meetings with Boeing in June that it was premature to develop a baseline off of reported deferred production at this stage. There is still substantial uncertainty in that trajectory. We see progress on the production ramp and supplier performance as important indicators, though, which appear to be on track
Credit Suisse:
QTR DETAIL
- EPS of $1.27 beat by 15-cents leading to a guidance raise of 25-cents.
- Outlook: Expectations were high, but we do not think that this level of guidance increase was expected yet. That said, we believe there is additional upside to guidance as we do not think management would have used all of its “cushion” this early in the year. Consequently, we see consensus of $4.56 rising further.
- Margins in BCA of 10.2% were strong driven by volume and mix; BDS margins of 9.1% were in-line with Q1 and with the full-year guidance.
- 787: We see a nice improvement in learning curve with estimated intangible 787 unit costs declining to $118M in Q2 (from $133M in Q1). Note, the improvement is probably greater given that Charleston’s first delivery is embedded. The tangible unit cost of 787 is estimated at $108M for total cash unit cost of ~$226M, down from ~$241M in Q1.
- The change in 787 deferred production in the quarter was $1,235M; dividing this by the units produced in the quarter (3.5 aircraft x 3 months = 10.5 aircraft yields the $118M estimated intangible unit cost for Q2.
- R&D: BCA R&D was $560M in the quarter (up from $544M in Q1). Boeing retained its forecast for total R&D expense of $3.3-3.5B for the year.
JP Morgan
- Boeing delivered a solid Q2, and we expect the stock to perform well out of the gate. Our main concern coming into earnings was the outlook for 737 margin, and since the 737 block extension is likely to take place in 2H, we still expect some level of cautious commentary on the call. Management did raise BCA margin guidance to the top of the prior range of 8.5-9.0%, which is still below our estimate of 9.5% (we thought prior guidance was excessively conservative) but at least suggests that management feels good about performance. Higher defense sales also drove the 25-cent increase in 2012 EPS guidance.
- We see aircraft demand and 787 execution as the two key issues for the stock. Regarding aircraft demand, we expect little incremental info today. On 787, we expected little cash flow progress in Q2 since there were only six deliveries (this was already disclosed), but today management maintained guidance for roughly 40 deliveries this year, indicating confidence that the planned 2H pickup.
UBS
- *Q2 at $1.27: BA Q2 EPS at $1.27 vs $1.14 UBS and $1.12 consensus. All the upside relative to our model came from BDSS (Defense) as BCAG (Commercial Airplanes) came through slightly below our expectations with 10.2% margins. Pre R&D BCA margins at 15% roughly in line with Q1 while we estimate pre R&D margins ex 747-8/787 at 17%. BDSS surprisingly grew revenues 7% with stable margins at 9.1%. FCF at $552M or 57% of net income, although slightly better than our forecast, dragged down on $2B+ inventory build and $763M pension contribution.
- *Minor improvement in 787 cash costs: 787 deferred production grew by $1.2B, roughly in line with prior quarter, although on slightly higher production. We estimate deferred production at $120M per airplane produced during the quarter down from $132M in prior quarter. BCAG reported a $144M unit accounting loss reflective of 747-8 and 787 losses, slightly higher than $138M in Q1 on one additional 747-8 and 787 delivery.
Comments from the earnings call:
MAX v NEO, continued
Aspire Aviation has another long piece analyzing the two airplanes.
Aerotubropower takes issue with some of Aspire’s analysis in this piece. Aeroturbopower cites publicly available information from Turkish Airlines that is particularly noteworthy in the debate between Airbus and Boeing about the A320 v 737.
Odds and Ends: COPA, Aeromexico, GOL for MAX
The Wall Street Journal reported late today that COPA, Aeromexico and GOL are lining up for the Boenig 737 MAX.
The WSJ article is subscription-only but perhaps it will show up on Google News, as some do.
COPA was one of the original airline “commitments” for the MAX last year, which we reported. We reported that Aeromexico had been expected to announce MAX and 787 orders at the Farnborough Air Show, as its absence was a disappointment to expectations.
GOL, of Brazil, is a long-standing 737 operator but Airbus made a strong push to win this business.
The Seattle Times reported that United Airlines, which last week announced orders for 100 MAXes and 50 737-900ERs, has options that could mean 310 orders from Boeing. United also settled its compensation issues with Boeing over the 787 delays.
Odds and Ends: Designing 737 MAX; RR & PW; CFM
737 MAX: Boeing Frontiers Magazine has a long article with lots of pictures describing the designing process of the Advanced Technology Winglets.
RR-PW on big engines: Aviation Week has this article speculating on the prospect of Rolls-Royce and Pratt & Whitney teaming to offer an engine for the Boeing 777X.
CFM says the use of advanced materials will reduce fuel consumption in the LEAP-1A (Airbus) engine by 1.5%, which happens to be the amount John Leahy of Airbus said that PW’s GTF has an advantage over LEAP.
It’s official: United orders 150 firm Boeing jets (100 Max, 50 900ERs)
Press conference
Jeff Smisek, CEO United
- 100 737 Max 9
- 50 737-900ERs, replaces 757s flown domestically.
Jim McNerney, CEO The Boeing Co.
- Thanks to UA for putting trust in us.
- Boeing and United go back a long, long way. Once part of the same company.
- Boeing has delivered more than 1,400 airplanes to United and Continental.
- With today’s order, the 737 program has now surpassed 10,000 orders.
Boeing Photo.
Ray Conner, President Boeing Commercial Airplanes
- The 737 MAX like the 787 will provide customers best solution in air transport.
- Will provide greater value in fuel efficiency. MAX, like the NG, is perfect match for United.
Q&A:
Smisek:
- $14bn value, NG delivery begins in 2013. (Where did Boeing come up with delivery positions next year?–Editor.)
- -900ERs replace 757s domestically, 9 MAX will replace other, less fuel efficient aircraft including A320s. We have 152 Airbus airplanes today.
- First 787 due in late September. McNerney has personally guaranteed this.
- We had extensive discussions with Airbus and Boeing. Spent almost the past year in discussions with engine and airframe manufacturers.
- We’ll finance aircraft as we get closer to delivery.
- Deciding factors we negotiated what we believe to be the best airplane with the best engines at the best price.
Farnborough, Day 3: Even more dull than Day 2
Few little activity today.
Orders today
Airbus: CIT Aerospace, 10 A330 (five previously undisclosed); China Aircraft Leasing, 28 A320ceo, 8 A321ceo–MOU.
Boeing: Avolon (lessors), commitment for 20 737 MAX 8/9 and 10 737-800s. The MAXes are part of the previously announced 1,000 Orders and Commitments, so this portion is not new, but rather a public disclosure.
ATR: Nordic Aviation, one ATR 42-600; Air Lease Corp., two ATR 72-600s; LAO Airlines, two ATR 72-600s, TransAsia, six ATR 76-600s.
Mitsubishi: SkyWest Airlines, LOI for 100 MRJs
CFM: Juneyao Airlines (China), CFM56 for five A321s; Aviation Capital Group, LEAP-1A for 18 A320neo family.
Pratt & Whitney: Finalize previously announced engine selection for GTF for 40 A320neo.
But what of the runway performance?
Dominic Gates of The Seattle Times has this story in which he has the following observation:
Wyse revealed that Boeing, through structural efficiencies, has also beefed up the allowed maximum take-off weights for the three MAX variants.
Each is 5,000 to 7,000 lbs heavier than the maximum take-off weights of the current 737s.
That means each 737 MAX model, even though heavier than the corresponding current model of the 737NG, can either carry a heavier payload or carry more fuel and so fly farther.
This is good. But we’re hearing from airlines that runway performance may be worse than the 737NG. The airplane is heavier but the wing is the same and the engine thrust is still somewhat of a mystery. CFM International, maker of the LEAP-1B that will power the MAX, lists thrust on its website of 20,000-28,000 lbs without identifying the sub-types and thrust to which the engines will be applied.
These thrust ratings are similar to those now on the NG, rather than being increased to compensate for the increased weight.
One airline tells us that runway performance for the -8 MAX and -9 MAX is longer than the -800 and -900. (The airline is not considering the -7 MAX and doesn’t have the -700.) This, the airline tells us, makes the airplanes problematic at some airports it serves.
This illustrates the dilemma Boeing and CFM have with the physically-constrained 737. CFM could build any engine it wants that would get the job done. It has, after all, two LEAP engines in development for the COMAC C919 and the Airbus A320neo. But the 737 presents special challenges and CFM is constrained unless Boeing lifts the entire airplane with new main gear. But this would mean a new wing box and associated structural changes, adding significantly to the cost. And Boeing won’t to this.
There’s still a lot about MAX we don’t know. And many customers are also waiting for the information.