Leeham News and Analysis
There's more to real news than a news release.
Sorting out reports of new 787 delay
For anyone who has picked up the reports on Yahoo or Google News about the Focus magazine story of another potential round of 787 delays, and Boeing’s response Sunday denying the report, this all must be very confusing.
We don’t know if the report, which cites unidentified sources in the FAA, is correct or not. The report also says Boeing will announce another delay of three to six months in May, though the English-language reporting of the Focus story doesn’t say where this timing information comes from.
What we do know is that since before the 787 roll-out, the FAA has been concerned about a variety of issues relating to the ground-breaking technology of the 787 and has issued several “special condition” rules that Boeing has to meet. This is not anything to get exercised about.
We also have been told, however, on many occasions–also beginning before the roll-out–that the FAA is short on the technical expertise to assess some of the technology and that it’s had to rely on engineers at the US Air Force who have greater experience in composites and other areas than those at the FAA. This lack of technical expertise at the FAA may be what’s at work here, if the Focus report has any validity.
Ominous development for Northrop’s tanker
An ominous political development for the Northrop tanker award by the USAF may be developing in the US Senate.
An article today in The Washington Post discusses the future of Sen. Robert Byrd, chairman of the Senate Appropriations Committee. Byrd is 90 years old an ailing. He’s been frequently absent from his Senate duties, and here’s where this could become ominous for Northrop. According to The Post, Byrd at times last year turned to Sen. Patty Murray (D-WA) to assume the lead role in appropriations matters.
Murray, known within Washington State (and probably Washington, DC, too) as the Senator from Boeing, has made it her mission to kill the Northrop award. If Byrd’s ill health means turning over reigns, even on spot-issues, to Murray, this does not bode well for Northrop–which, along with partner EADS, has blithely dismissed Murray’s effectiveness as a Senator.
(As a constituent of Murray’s we can attest that she is far more effective than either Northrop or EADS give her credit for.)
Assuming the Democrats gain seats in the Senate in the November election, as conventional wisdom currently concludes, Murray could gain even more clout as a senior member of Appropriations. Regardless of the outcome of the Boeing protest to the GAO over the contract award, Murray’s increasing influence and stature on Senate Appropriations isn’t good news for Northrop.
Boeing Commercial plans for KC-767 protest rejection
Another in a series of cartoons from The Mobile Press-Register’s JD Crowe. The reference to flying tricycles is to a comment a Boeing official made about Northrop Grumman’s planned production model for the KC-30 was like building tricycles at Christmas.
Flight International reported today that Boeing may tap the 767-300ER to help fill the gap created by 787 delays. Writes Flight: “Boeing has yet to tell 787 customers exactly how their delivery schedules will be impacted by the latest delay, but it has floated the idea of producing brand new 767-300ERs to help fill the capacity gap.”
Boeing would gain the 767 capacity from the KC-767 program, which looks doubtful now that the Air Force has awarded the tanker contract to Northrop Grumman. Boeing protested the award, but has acknowledged the likelihood of prevailing is remote. Accordingly, supply-chain and production capacity that had essentially been reserved for the tanker could shift to the commercial 767-300ER.
Boeing should know by June 19 whether the protest will be upheld.
The company would not be able to boost the production all that much vis-a-vis 787 demand, and not immediately. The current production rate of the 767 is one a month; Boeing could double that, or go slightly more to perhaps an incremental 15 a year, or 24-27 a year, including current customers, but not before 2010. By then, Boeing originally planned to be delivering 120 787s a year.
Here’s a Boeing-oriented cartoon.
Boeing complains that a cost disadvantage is that it has to pay for health care costs while Airbus, which builds the A330 on which the KC-30 is based, is part of Europe’s social health care system and doesn’t have this burden. (One could argue the taxes paid by Airbus for the national health care system is their representative burden, but the point in the cartoon is on the mark nonetheless.)
A little humor in a humorless debate….
Northrop’s supplier distribution map.
Qantas again reveals penalties
When the Airbus A380 was delayed two years, everyone from airplane geeks to airlines and Boeing wondered what kind of penalties Airbus would have to pay. Australia’s Qantas, apparently from a regulatory filing, revealed at the time that it received A$104 million (about US$84 million at the exchange rate at the time).
Now comes a new piece of information from Qantas via The Herald Sun. In a story dated April 16 (it’s already tomorrow there), The Sun writes, “Qantas sources said only that the amount will be will in excess of the $200 million Airbus paid after it pushed back by two years the delivery to Qantas.”
Note the amount is double what originally was reported. The story goes on:
“‘If you look at the size of the Boeing order against the 12 planes that Airbus delayed, you get some idea of how much Boeing will have to pay,’ a senior airline source [said].”
At A$100m, this suggests Boeing’s penalty for the 65 contracted 787s is more than A$540 million. Double the Airbus penalty and this suggests Boeing’s penalty to Qantas alone is north of A$1 billion. At list prices, the Qantas order is worth more than $11 billion, but figure hefty discounts because Qantas was an early customer.
If the penalties are north of A$1 billion–and this may or may not be a big if–then the penalties suggested by a host of Wall Street aerospace analysts are way under the mark. Their estimates range from $800 million to a high of $1 billion (USD), as we reported in our Corporate website update this today.
The Qantas number, whatever it is, is food for thought, and the first tangible indication, however vague, of the penalties facing Boeing.
Boeing Field book
We found a new book about Boeing Field. This 128 page book has only black and white pictures and it’s $19.99. Photos date to 1910, before Boeing Field was built, with a plane landing on the site, to the arrival of the Concorde. It has a photo of the nose-gear collapse of the 707 prototype, happening when the brakes failed and the airplane had to be ground-looped.
The book description and an on-line order form may be found here.
We found our copy at Barnes & Nobels.
Tanker wars, continued
Boeing and Northrop continue their tanker public relations war. Boeing fired off this press release about the KC-767’s “survivability” vs. the Northrop KC-30.
Northrop fired off a release about jobs, steering people to a 3 1/2 minute National Public Radio report.
Northrop partisans also made sure we saw this biting cartoon.
(For the record, we previously have asked Boeing to send us any similar cartoons supporting the KC-767, but were told none existed. If there are any, we’ll post them.)
Here’s a pro-Boeing cartoon, which for some reason we can’t insert the image, so here’s the link.
Lost 787 Revenue: WAG $30bn
The WAG estimate for lost revenue to Boeing for the delays of the 787 program is around $30 billion through 2013, based on some production estimates from a Goldman Sachs report issued this morning.
Goldman predicts $3 billion in penalty payments.
Goldman revised its delivery forecast, based on the Boeing program update conference call Wednesday, from 629 airplanes through 2013 to 407 airplanes. This forecast, by aerospace analyst Richard Safran, shapes up this way:
GS Current Assumption
2009: 25
2010: 60
2011: 85
2012: 120
2013: 120
Total: 407
January 2008 assumption
2009: 109
2010: 120
2011: 120
2012: 140
2013: 140
Total: 629
Difference: 222
We took these figures and applied it to Boeing’s list prices for the 787-8 and 787-9. Goldman’s data doesn’t break out how many of each type might be delivered during these years, so we calculated the average price of both models. At the low end based on all 787-8 deliveries, Boeing’s lost revenue during this period is $35.96 billion. Based on all 787-9 deliveries, the average lost revenue is $43.18 billion.
Applying an average 25% discount, which is not atypical in deals, the low end revenue loss is guesstimated to be $26.97 billion and the high end revenue loss is guesstimated to be $32.38 billion. Taking a somewhat middle-ground figure, we settled on $30 billion in lost revenue through 2013.
KC-30, KC-767 prices revealed
In a remarkable piece of reporting, Reuters‘ Andrea Shalal-Esa uncovered the price offered by Northrop Grumman to the US Air Force for its KC-30 and from there the extrapolation of the price Boeing offered for the KC-767.
Reuters also details a number of other cost details in this report.
Boeing confirms new 6 mo delay
Boeing confirmed a new delay of six more months for the 787 program. By now readers will likely have seen the press release. The update conference call begins shortly.
We’ve constructed this table below based on information in the press release and previous information available through Internet research.
Market reaction to the press release was good, with stock up $2.78 in the minutes before the conference call. As we noted yesterday, since the news of the six month delay had been “out there” for weeks, the stock was already beaten down.
The press release has a read of confidence this time that contains some firm delivery dates and definitive information about new timing for the 787-9 and 787-3 derivatives. All of this clearly reassured Wall Street in the lead up to the call.
(As an aside, the “elevator music” on the webcast while waiting for the call is pretty much a downer. It’s somber and plays more for a funeral. Boeing needs to put a more upbeat tune for those of us on hold. Maybe a little Jefferson Airplane would work better.)
The conference call begins:
From Scott Carson, president of BCA:
The 787-9 entry-into-service moves from late 2010 to early 2012. No new EIS of the 787-3 was announced from its original 2010 EIS.
From Pat Shanahan, program manager:
The interior on airplane #3 will be installed this summer, giving the first look at a nearly finished airplane.
The power-on reset changed from April 2008 to June because not enough progress has been made, with change orders and strengthening the center wing box.
Rework continues to impact the schedule. As luck would have it, the rework fell right in the path of wiring and other issues.
The more conservative approach extends testing period by two months, but if we don’t need the additional time we won’t use it.
Four months will separate power-own and first flight.
Current assessment assumes production rate to reach 10/mo by 2012. (Originally Boeing expected to be at 10 well within 18 months of first planned delivery (May 2008), or by the end of 2010–Ed.)
(Stock market responding positively–up $2.98 on heavy volume, nearly matching a full day’s trading by 11:20 EDT.)
Q&A begins:
Carson says Boeing is working with individual suppliers to ease cash pressures as a result of the delays, but he declined to go into details.
Carson terms the wing box weakness discovery “relatively routine” at this point in the program. Readers will recall that Boeing had to undertake some wingbox redesign, as revealed recently by Steve Hazy, CEO of ILFC–Boeing’s largest customer for the 787 and the entire 7-Series line.
Shanahan says there is 15% of the component testing remaining. When we look at the balance of tests to go, it’s our judgment that these are low risk. The test-to-destruction will be a “really great” demonstration of our design. Structure testing will be this summer, flight testing 4Q08/1Q09 will be key time periods. All six test airplanes will be flying by early 2009.
(Stock up $3.25 on volume surpassing the average daily volume at 11:40 am EDT.)
Shanahan says that Boeing has more confidence in this schedule because it’s added more time into the schedule, progress on problem-solving and resolving supply-chain issues. The inherent risk remains in the capability of the supply chain to get things done, however. Until we demonstrate performance, it will be difficult to eliminate skepticism in the program.
Carson says Boeing is not at the stage to discuss penalties–discussions are just getting underway with customers. Carson ducked a question whether reserves have been set aside until the earnings call in late April.
Shanahan expects to have 24 airplanes built prior to certification, including the six test airplanes. He said there are four months in the third and fourth quarter to deliver these airplanes, which suggests the first delivery will be in September 2009.
Carson says that it’s too soon to say when Boeing will catch up delivery dates on all 892 outstanding orders. Assessments are underway when Boeing could go beyond 10/mo production rate.
Carson said we have had a lot of discussion with customers who have ordered the 787-3 and at this point it’s our intention to execute program with two derivatives (as opposed to canceling the -3).
(Stock up $4.17 as the conference call closes on 26% more than average daily volume at 1200 n EDT.)
Podcast Commentary
Here is a 7 minute podcast with commentary on the conference call, offered by AirInsight.
|
Item |
Original Schedule |
Revised Schedule (April 9, 2008) |
Delay |
|
Power On |
April 21, 2007 |
June 2008 |
14 months |
|
Roll-Out |
July 8, 2007 |
|
|
|
First Flight |
August 27, 2007 |
4Q08 |
+12 months |
|
First Flight #4 |
Sept. 30, 2007 |
|
|
|
Certification |
April 30, 2007 |
3Q09, likely August |
16 months |
|
Delivery |
May 31, 2008 |
3Q09, likely Sept. |
14-16 months |
|
Service Entry |
June 21, 2008 |
3Q09 or 4Q09 |
+14-16 months |
More on the KC-767 technical merits
Boeing just published its Boeing Frontiers magazine for April and it it there is a one-page story about a low-tech solution to a high-tech problem.
The story may be found here.