As the world economy and the airline industry seemingly implodes, there is an increasing amount of concern emerging among some aerospace analysts and Internet bloggers over what this means for Airbus and Boeing.
The consensus is that Airbus and Boeing will begin seeing serious declines in aircraft deliveries as early as next year.
These concerns have been exacerbated by the announcement from China’s central government that it wants the airlines to defer deliveries next year. As we pointed out some weeks ago, this is highly unusual: China historically has been a stalwart through bad times for Airbus and Boeing, growing and ordering airplanes when other regions in the world were going through major downturns.
This has led some to particularly point to the new Airbus assembly facility in China as a risk factor for Airbus.
There certainly is sound reason for concern, but so far this is overwrought.
We participated in a conference last week that included Airbus and Boeing officials. During our private conversations with them, we came away more comfortable that for 2009 at least, the two companies are not going to see major declines in deliveries, based on current market conditions.
This is a different distinction than deferrals, and a this is an important distinction.
If anyone had any doubts about Boeing paying penalities for delays as a result of the 58-day IAM strike, in which the conventional wisdom was that Boeing did not, doubt is removed with this contract language we found (while looking for something else) between Southwest Airlines and Boeing.
“The Customer acknowledges that (i) the obligations of Boeing…are premised upon Boeing’s manufacturing capability prior to the IAM Action; and (ii) delay in the performance in any obligation of Boeing under this Purchase Agreement resulting from the IAM Action is an Excusable Delay….”
As expected, Boeing revised its 787 schedule, now listing the first flight in the second quarter next year and first delivery into the first quarter of 2010. These represent slips of about six months.
The Boeing press release may be found here.
The timetable infers a nine month flight test program. Most observers believe this is aggressive. Aerospace analysts are nearly unanimous that a full year is more likely.
Boeing’s statement is vague about when in the second quarter it now expects first flight. Based on information we have, we think the end of the second quarter is the most likely scenario, but the first flight could also slip to the third quarter. This is also based on information we have.
Boeing wants to get the program moving, but insiders tell us that there remain risks and uncertainties that continue to cast doubts on any schedule announced.
Update, 10:15 AM PDT: Addison Schonland, Jon Ostrower and Scott Hamilton have a 20 minute podcast discussing the 787 delay and new management changes announced by Boeing shortly after the 787 delay was announced.
Update, December 12:
Reaction is mixed about the delay and the management changes.
First, on the delays: These had been widely expected, both as a result of the strike by the IAM, the discovery of fasteners incorrectly installed and of reports (including our own) that software integration continues to be an issue.
Aerospace analyst Howard Rubel of Jefferies Co. calls the newly announced schedule “realistic” and has a buy on the stock. Robert Stallard of Macquarie Capital (with an Outperform) is less kind. He writes in a note issued afterward:
Given its 100% failure rate in forecasting the 787 timetable so far, we expect airlines, suppliers and investors to be suitably skeptical on to whether this latest revised schedule will actually be achieved.
Goldman Sachs (Sell) believes Boeing will run over both new time estimates. Goldman projects a 3Q09 first flight instead of Boeing’s projected 2Q09; and a 3Q10 delivery instead of Boeing’s projected 1Q10, the major difference being a one year flight test program instead of a nine-month schedule put forth by Boeing.
The market reacted benignly to the announcements Thursday, with the stock trading down less than 2%. But today is a different story. While the market is off (at 9AM PST) less than 1%, Boeing is off 4.75%.
On the management changes:
Surprisingly, some inside and close to Boeing don’t know whether Pat Shanahan’s appointment to oversee all new airplane programs is a promotion or a kick upstairs because of the continuing problems with the 787 program, which he was brought in from Boeing’s Integrated Defense Systems unit to oversee and fix. Shanahan still oversees the program, as well as the troubled 747-8 development, but a new person, also from IDS, has been appointed to directly manage the 787 program. This person reports to Shanahan.
It’s telling of Boeing’s credibility problems that even some inside Boeing question just what the Shanahan moves means. The efforts to read between the lines is like reading The Kremlin at the height of the Cold War.
Analysts generally applaud the moves as an effort by Boeing to fix problems. One of Boeing’s industrial partners believes Shanahan has done a good job and that he is on track to do greater things at Boeing. The Wall Street Journal reporting suggests Shanahan is now one of two candidates to succeed Boeing Commercial Airplanes president Scott Carson, who is on countdown to mandatory retirement in about four years. The other contender, announced in the management restructuring, according to The Journal, is Ray Conner. Conner comes from a top position in sales but has a solid background in supply management and this is his new position position within BCA–something that has been a key stumbling area for the 787. Conner doesn’t report to Shanahan; he reports directly to Carson.
With the capital market crunch, Airbus and Boeing each said it is prepared to step up and help with customer financing. Below are two stories we did for Commercial Aviation Online, a subscription-only service, about Airbus and Boeing financial arms. Each is reprinted here with permission. The stories appeared on CAO’s website November 3.
Profile: Boeing Capital Corp.
Industry officials and observers fret that the capital market crunch will make it difficult for airlines to finance airplanes through the rest of this year and well into next. Accordingly, analysts predict that OEMs will have to step up next year with $5bn in financing support.
The Boeing Co. said its Boeing Capital Corp. (BCC) finance arm stands ready to provide $1bn in financing next year. Airbus, engine makers and regional airliner producers can be expected to pick up the rest of the OEM, based on history.
BCC’s federal 10Q filing with the US Securities and Exchange Commission shows that BCC has $1.9bn in financing commitments for 2009 out of $9.5bn in total on its books (see Table).
Boeing officials are clear that they want BCC to be the lender of last resort for its customers, and BCC officials are pounding the pavement looking for financing for its customers so BCC doesn’t have to step up.
The pressure on BCC is building, however. BCC received “a number of requests from both domestic and foreign airlines to reduce lease or rental payments or otherwise restructure obligations,” the company said in its 10Q filing. BCC did not provide any details, other than agreement to restructure the terms on 16 717s leased to Midwest Airlines. Midwest is hanging on by its flaps, returning these 16 airplanes to BCC and downsizing by contracting with regional airlines to operate the Embraer 170 jets. All 717s are to be returned by the end of this year.
In this week’s column:
787 Update Due Shortly
Boeing plans an update of the 787 program by mid-December, with expectations that a new timeline for first flight and first delivery will be forthcoming. Aerospace analysts diverge on these predictions right now.
JP Morgan forecasts first flight in the first quarter while Goldman Sachs predicts 2Q09 or 3Q09. Based on conversations we’ve had with Boeing insiders, the unions and others, we believe the first flight is likely in the June-August 2009 period.
When, then, will be the first delivery? Cowen & Co. predicts 2Q10; JP Morgan and Goldman predict delivery will be a year after the first flight. Boeing has consistently maintained that it can complete flight testing within 6-9 months after first flight, but given the track record of its predictions so far, we’re inclined to side with JP Morgan and Goldman and go with one year after first flight.
Update, 10:30 PM PST:
It’s official: 79% of the engineers and 69% of the technicians voted for the contract.
Update, 9:00 PM PST:
Unofficial returns: it appears that both contracts passed. It may be another 30-60 minutes before the returns are official.
Update, 8:00 PM PST:
SPEEA is still counting the votes. There was a record vote of more than 14,000. Estimates are another 60-90 minutes for the tally to be completed.
SPEEA, the engineer’s union at Boeing, will tally votes today on a new contract.
Actually, there are two contracts–one for the technicians and one for the engineers.
Up to now, technicians have been pretty vocal that they don’t like the terms negotiated by the SPEEA leadership, responding with a vitriol that surprised the negotiating team, who thought they had a good contract deal. This raised fears that the technicians might reject the contract, while the engineers are expected to approve it.
Final results aren’t expected to be counted until late tonight (Seattle time), but we’re geared up to post results as soon as we have them this evening.
If, by chance, either contract is rejected and a strike is authorized, don’t expect a walk-out. SPEEA historically goes back to the bargaining table to renegotiate if a contract is rejected. SPEEA has only struck twice in 40-some years.
Bloomberg News has a story quoting the head of mega-lessor saying he has a deal to buy International Lease Finance Corp. from insurance giant AIG.
ILFC is the largest customer of Airbus and Boeing. It owns and manages a fleet of slight more than 1,000 planes with a value of $55 billion.
This is a highly positive development for the airline industry. But as is often the case, the devil is in the details. The deal has to close (next year) and it remains to be seen how it is structured and what flexibility the company has in the future.
Steve Wilhelm of the Puget Sound Business Journal (Seattle) has a long story about Southern states “eyeing” Boeing in the wake of the IAM strike. Speculation has been rampant (in peaks and valleys) that Boeing might be fed up with its unions in heavily unionized Washington State and be looking South when it comes time to build its next airplane (or two).
One quote from the story that is filled with irony is:
“If I was a Boeing executive, I’d look at the state of Alabama and see there’s a qualified work force … I’d take a look at the assets we have,” said Stephen Nodine, president of the Mobile County Commission, whose offices are in Mobile, Ala.
Alabama, of course, is the proposed site for the Northrop Grumman/Airbus KC-30 tanker proposed in competition with Boeing’s KC-767, which will be assembled in the Seattle area if Boeing ultimately wins the contract. But what is more ironic is that Boeing’s Integrated Defense Systems denigrated the skills of the Alabama workers during the tanker competition, suggesting they might have trouble building a tricycle if Northrop got the tanker contract. (It apparently mattered not that IDS has a large facility in Huntsville, AL.) Boeing’s Commercial unit cringed at the IDS statement because the Northrop/Airbus production model isn’t that different from BCA’s assembly model, including the high-profile 787 program (in which case IDS may have a point) but to a lesser degree with the 767 itself.
And speaking of tankers, Northrop didn’t even wait for the new Congress and the new president to take office before resuming the tanker wars with an advertisement that got the Pentagon’s chief purchaser up in arms (so to speak). Read about this one here and here.
We criticized Northrop for being slow off the PR and advertising mark in 2007, letting Boeing’s well-oiled machine set the agenda and frame the debate. (Once Northrop got running, it did make up for lost ground and scored some great PR/advertising hits.) But this advertisement, and more so it’s timing, strikes us as very premature. Nobody knows who the decision-makers in the Pentagon will be (and in any event, they shouldn’t be influenced by ads) and we doubt Members of Congress are paying much attention to the tanker debate right now anyway. With four million people expected for the inauguration of Barak Obama and the organization of the power structure in Congress, we suspect the Members of Congress might just be focused on something else right now.