Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Embraer selects PW GTF for E-Jet RE; concept clarity comes at last
It’s official: Embraer selected the PW GTF to re-engine the E-175, E-190 and E-195.
In doing so, it looks like the E-170 will be allowed to wither on the vine.
This is a huge win for PW and setbacks for Rolls-Royce, which sorely wanted to win the E-Jet RE for its Advance 2 RR development; and for GE, the incumbent supplier of the CF34 and which was developing the Next Generation variant for the E-Jet.
It’s yet another validation for the GTF. Versions of this engine will power the Mitsubishi MRJ, the Bombardier CSeries, the Irkut MS-21, the Airbus A320neo family and now the E-Jet RE.
It’s a huge comeback for PW, which made a major strategic error in not competing to power the Boeing 737 300/400/500. Boeing continues to use the GE/CFM LEAP engine as its sole-source supply for the 737 MAX, though Boeing seriously evaluated the GTF as well.
Below is EMB’s press release:
Embraer Selects Pratt & Whitney’s PurePower Engines for Second Generation of E-Jets
São José dos Campos, January 8, 2013 – Embraer SA (NYSE: ERJ; BM&FBOVESPA: EMBR3) announced today that Pratt & Whitney´s PurePower® Geared TurbofanTM engines have been selected for its future, second generation of E-Jets, with entry into service planned for 2018. The decision is an important milestone in the program, which is expected to be officially launched later this year.
The new engines – the PW1700G and PW1900G – range in thrust from 15,000 to 22,000 pounds. In combination with new aerodynamically advanced wings, state-of-the-art full fly-by-wire flight controls and other systems evolutions, they will result in double digit improvements in fuel burn, maintenance costs, emissions and external noise.
“We are very happy to expand our partnership with Pratt & Whitney, keeping the E-Jets family as the best solution for our customers, today and in the future”, said Frederico Fleury Curado, President & CEO of Embraer. “The PurePower GTF engines are a great fit to the next generation of our E-Jets and we look forward to another long lasting and successful program with Pratt & Whitney”.
“We are proud that Embraer has recognized the unmatched value of the PurePower engine, and we are committed to supporting a successful launch of the new E-Jet aircraft family,” said Pratt & Whitney President David Hess. “To date, Pratt & Whitney has completed more than 4,200 hours and 12,400 cycles of full engine testing for the PurePower engine family, demonstrating the benefits and reliability of the engine architecture.” Pratt & Whitney is a division of United Technologies Corp. (NYSE: UTX).
The second generation of E-Jets will be a significant step in Embraer´s commitment to continuously invest in this line of commercial jets, complementing a series of ongoing improvements currently being implemented in the existing family, with great benefits to its customers. Embraer´s objective is to offer the best product and maintain its leadership in the 70 to 120 seat market.
Odds and Ends: Boeing stock buyback; Charging suppliers for doing business; AA+US
Boeing Stock Buyback: Boeing announced a stock buyback of #3.6bn for next year. Wells Fargo has this to say in a research note issued today:
Boeing had more than $11B of cash on the balance sheet at the end of September, and after free cash flow of $5.7B in 2013 and more than $7B in 2014 (i.e., almost $10/share in free cash), we believe Boeing could have over $20B in cash available to return to shareholders over the next few years. This is why we see about a $130MM increase in dividends and a $1.5-2.0B buyback in 2013 as small steps in returning cash to shareholders.
We’re not a fan of buybacks, which serve to prop up stock prices. We believe stock should rise on its own merits, not because of some artificial prop-up. More to the point, however, is that Boeing has a hard time telling SPEEA it needs to cut costs when it is spending billions on buybacks that benefit (among others) Boeing’s largest shareholders–the McDonnell family, Harry Stonecipher and Jim McNerney.
SPEEA is preparing for a strike February 1. Talks resume January 9, but the gulf between the two sides is so great, SPEEA expects them to break down almost immediately.
With Wells Fargo estimating that Boeing might return $20bn to shareholders in the next few years, we somehow think this will be an issue when IAM contract negotiations come up in 2016 and Boeing pleads poverty again (as it inevitably will).
We’d much rather see the money invested in new airplane programs rather than derivatives like the 737 MAX and 777X.
Boeing charges royalties to suppliers: Mary Kirby has this interesting story about Boeing charging suppliers for the price of doing business with the company.
American and US Airways: The Ft. Worth Star-Telegram has this column discussing the case for a merger between American Airlines and US Airways.
Pegasus Buys Airbus: Turkey’s Pegasus Airlines ordered 75 A320neo family and optioned 25 more. The carrier was previously a Boeing 737 operator. Deliveries are from 2015, which means the Pratt & Whitney GTF has to be the engine choice, which is as yet unannounced. CFM’s LEAP-1A won’t be ready until later in 2016.
Before this order, Airbus had a 61% market share of the re-engine order race vs the 737 MAX (firm orders only).
Photo Montage: The Everett Herald has this photo montage of the Flying Heritage Museum’s aircraft. The Museum is owned by Microsoft co-founder Paul Allen.
Freighter Market Softens: Cargo Facts has this analysis of the freighter market.
Odds and Ends: SPEEA says strike is likely; CFM LEAP update
SPEEA v Boeing: The Seattle Times reported that there is a very high chance of a strike by SPEEA against Boeing come February. This is, of course, bad news for all concerned.
SPEEA is already talking about a 60 day strike and says this would cost Boeing $400m a day. In 2000, when SPEEA struck for 60 days, Boeing deivered 50 fewer aircraft for the year. IAM 751’s 57 day strike in 2009 depressed sales and cost Boeing billions (though nothing like the $400m SPEEA forecasts, which is a puzzle).
Customers, who were ticked off by the IAM strike, will once again be the innocent bystanders in this potential strike. A strike will also redouble Boeing’s drive to diversify to non-union states, though hopefully this time it won’t be so stupid as to connect the dots again as it did with the 751. It’s our belief Boeing can’t fulfill the demand for engineers in Washington State anyway so it has to locate work elsewhere. Although as a Washington State resident we don’t want to see this happen, this is, we believe, reality.
SPEEA has the power to truly disrupt things at Boeing, not only for deliveries but also for future engineering projects, but nobody will win and everybody will lose if Boeing and SPEEA don’t reach an agreement.
CFM LEAP Update: The Seattle Times also has this update on the CFM LEAP-1B, the version for the Boeing 737 MAX.
Noteworthy in the article is the revelation of the contractual commitment for CFM to reduce fuel burn for the LEAP-1B by 15% compared with today’s 737 CFM engine. This is a key piece of information and well beyond the Airbus assumption in the continuing war of words between the two companies.
It also is key to Boeing’s previously advertised target of the 737 MAX being 13% better than today’s 737NG. What strikes us, however, is whether 13% is still an operative figure.
All other things being equal, installation typically costs 1%-2%, which means the MAX on engine installation alone should be 13%-14% better than the NG. We know that Boeing is working hard on airframe improvements. Shouldn’t the 13% actually be better? We know the advanced winglets are supposed to add 1.5% to fuel reduction, for example. Boeing has also cleaned up the tailcone and undertaken other aerodynamic improvements.
We’ve asked Boeing and will post its response when received.
Update, 2pm PST: We have an answer of sorts from Boeing, though we’ve asked for further clarification.
“CFM’s number is in SFC or specific fuel consumption for a given thrust which when you apply it to a specific mission gives you the fuel-burn reduction for that trip. The attached shows a 500-nmi trip comparison which gives the MAX engine 14% fuel-burn reduction compared to the NG engine, next we factor in engine integration and aero improvements ending up with a total 13% reduction for a 500-nmi trip compared to the NG).
“You will see in the chart that we credit the AT winglet with approximately 1 percent improvement (again this is at a 500-nmi trip). However, at longer ranges customers will experience even more improvement from the AT winglets, up to 1.5%.”
This chart (click to enlarge) is extracted from Boeing’s Farnborough presentation. It starts with a 14% improvement for the engine, while the news article says 15% is required in the CFM contract. The Boeing spokesperson said this is for a 500nm mission at a “specific thrust” level. We’re trying to clarify the difference between the 15% contract number and the 14% above. If we get this clarity, we’ll update again.
Update, 545pm PST: Here’s the final answer from Boeing:
“CFM’s number is in pure SFC and our numbers are in fuel-burn per trip so they are not equivalent. It’s like comparing apples to oranges. In our case – we are using a 500-nmi trip which is our standard comparison. This includes then in our calculations the fuel-burn cost of lifting the airplane empty weight off the ground since takeoff is part of the trip. CFM’s number is an engine in a test stand compared to another engine in a test stand so the two comparisons are not equivalent.”
Meanwhile…
Not revealed in the article but we learned that there will be a thrust bump for the LEAP engine. Right now CFM lists on its website the LEAP-1B thrust at a maximum of 28,000 lbs, the same as the current engine. Because of the higher weights for the MAX, runway performance has been assessed as poorer than the NG by customers we’ve talked with. A thrust bump, and airframe improvements, are aimed at fixing this issue, we’re told.
Boeing wants to outsource more work to Mexico; updated MAX v NEO orders
Boeing outsourcing: In an election where outsourcing is a major political campaign issue, The Seattle Times reports Boeing wants to outsource more work to Mexico. Here is Boeing’s letter, via The Times.
MAX v NEO: Here is an excellent set of tables updating the orders between the 737 MAX and the A320 NEO. According to the analysis, Airbus right now has a 63% market share for the airframe. On the NEO, where two engines are offered, CFM has a 41% share vs PW’s 39% share with the remainder undecided.
ISTAT Europe: a tough review by Aeroturbopower, and our thoughts
ISTAT Europe: Aeroturbopower has this recap of last week’s ISTAT Europe conference and he takes a devastating hit at the Boeing presentation. We weren’t at the event this year but we’ve seen plenty of Boeing presentations and agree with Aeroturbopower’s assessment that Boeing takes liberties…something we’ve written about and something we’ve also expressed to Boeing directly. Comparing apples to oranges seems to be a common tactic.
But in fairness, Airbus also selectively chooses numbers that boost its case. We dissected one such instance in this column on AirInsight. Both companies play around with the seating configuration of their airplanes and the opposition to come up with numbers for seat-mile costs. We’ve seen Boeing compare ranges of the 737 NG and MAX vs the A320ceo/neo families by including the auxiliary fuel tank for the 737 but not for the A320, completely distorting the comparisons. Boeing relies on DOT Form 41 data and a study from 2006-2009 in Europe when comparing maintenance costs of the two families to argue the 737 costs up to 27% less to maintain. The figure, on its face, defies logic. If the A320 cost this much more to maintain, airlines would be hard-pressed to buy it. But more to the point, the methodology for the DOT Form 41 data is thoroughly discredited as a reliable source of information. Relying on a study that uses data up to six years old is also questionable.
All these manipulations of data is why we view numbers from both companies with a high degree of skepticism. In this column, we discuss this at the very end.
Manipulation of data like this harms the credibility of both companies.
As for Aeroturbopower’s report on the 737 MAX design not being frozen, this is true and it’s not news. Boeing said it won’t be until next year and this is what we are also hearing from customers. We’re hearing from a variety of sources that there are still challenges in achieving the advertised 13% fuel burn improvement over today’s 737 NG. We believe Boeing and CFM will get there, but it remains tough. We would not be surprised to see the 69.4 inch fan diameter increase yet again.
WTO Compliance?
The Washington Post reports that the US has complied with the WTO ruling on Boeing illegal subsidies. Boeing didn’t announce whether it has repaid the illegal subsidies, as it pledged to do if it was found guilty of receiving them.
Air France A350 contract stalled; here’s the way forward
Bloomberg News has this report that the Air France-KLM talks for 25 Airbus A350s remain stalled over the long-running dispute between the company and Rolls-Royce over AF’s desire to overhaul the Trent XWB engines.
The Air France-KLM group offers its own maintenance, repair and overhaul services and wants the ability to provide MRO to others as well as perform the work itself.
Engine suppliers are loath to grant MRO rights to others. Engines are often sold at deep discounts, and in extreme cases, even given to airlines in exchange for the exclusive parts and MRO contracts. This is where the engine makers truly make their profits.
Rolls-Royce is known to be particularly hard-nosed in this regard.
So how will the log-jam be broken?
Rolls wants Air France to order the Trent 1000 for the 25 Boeing 787 orders announced last year. Given the long relationship between Air France and GE, the supplier on AF’s current fleet of a variety of aircraft, this will be a tough pill to swallow. But don’t count it out.
Boeing rolls out Ray Conner to analysts
Boeing rolled out Ray Conner, the new CEO of Boeing Commercial Airplanes, to analysts in New York yesterday. The first research note we’ve received, from Imperial Capital’s Ken Herbert, portrayed a positive meeting. Below is a synopsis. As we receive more notes, we’ll add those comments.
We don’t like the resumed policy of using cash to repurchase stock, instead of putting it into new airplane programs (something Richard Aboulafia of the Teal Group, normally a pro-Boeing consultant, has roundly criticized for years).
Imperial Capital
We believe BA is benefitting from several tailwinds, and is demonstrating increased confidence regarding its 787 execution and the ability to take further costs out of the supply chain. However, we believe much of the good news is reflected in BA stock, and we see slowingorders in 2013 as limiting the multiple; therefore, we are maintaining our In-Line rating. Investors areexpecting a significant dividend increase or share repurchase program, which could be a positive catalyst, but we see the new program developments, which include the 737MAX, the 777X and 787-10, as potential competing cash pulls.
Regarding the 787, Boeing confirmed that Charleston is ahead of plan, but that it has been staffed to over deliver. Boeing also made a point of stressing that its movement down the cost curveon the 787 will be similar to that of the 777. We believe that there is an opportunity for Boeing toexceed expectations on the 787.
We continue to believe, however, the much of the execution upside is priced into Boeing stock. We believe that in order for the stock to see material upside, Boeing needs to demonstrate a very bold use of the expected free cash flow, in the form of both increased dividend and share repurchases, that will attract new investor interest and accelerate the EPS growth. However, this will limit the new product development options, considering the potentially competing development requirements of the 737MAX, the 787-10, and the 777X. We believe current BCA leadership wants to do both the 777X and the 787-10, and believes that there is significant pent-up order demand for both new aircraft, but we believe the focus on share repurchases and/or the dividend, reiterated at the 8/28/12 reception, could push some development effort to the right.
Separately:
- A reader posted this link on NEO vs MAX orders and options and we think it so good we’re elevating it to a primary post. This website also recaps which airlines have switched allegiance. Thanks to Dave O’Flynn for the link.
- China ordered 50 A320s instead of the expected 100.