Deferrals grow as airlines fight to keep bottom line

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Introduction

Jan. 09, 2017, © Leeham Co.: Airlines have deferred or are thinking about deferring more than 400 airplanes in the near term, a review of decisions and deliberations  that have been made during the last 12 months.

LNC tracked announcements last year of deferrals and statements by airlines that they are thinking about doing so.

We began identifying macro-level issues last week in our posts about emerging concerns for the 787 and LNC’s Outlook for 2017.

Reasons vary widely for the deferrals, these reports indicated. Low oil prices. Slowing economies. Declining financial results. Worries about two of the three top Middle Eastern carriers. A capital squeeze in China. Pressure on long-haul carriers from the emerging sector of low cost, long-haul airlines. Preserving capital expenditures to keep the bottom line in the black.

Today we detail the deferrals we tracked.

Summary
  • Deferrals of single aisle aircraft are less worrying than for wide-body aircraft
  • For wide-bodies, it depends on the program. For the Airbus A380, deferrals turns the program back into the red. For the A350, deferrals can help with delivery commitments.
  • For the Boeing 777, deferrals spells trouble, especially for the present generation.
  • The 787 is more resilient but the slow sales make the program sensitive longer term.

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Market, other factors emerging, creating Boeing 787 concern

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Introduction

Jan. 4, 2017, © Leeham Co.: Despite a rosy picture painted by Boeing about the future of the 787 and the ability to recover more than $29bn in deferred production

Boeing photo.

and tooling costs, there are signs that cause concerns over the next 3-5 years.

Summary
  • Near-term production outlook solid, weakness begins in 2020, big gap in 2021.
  • Boeing doesn’t see wide-body sales recovery until next decade.
  • Company foregoes increasing 787 accounting block; sales won’t support it.
  • Market talks about deferring 787s.

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2017: the year ahead

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Introduction

Jan. 3, 2017, © Leeham Co.: The New Year is here and it doesn’t look like a good one for commercial aerospace, if measured against previous outstanding years.

There are some troubling signs ahead, piling on to a slowdown in orders from last year that didn’t even reach a 1:1 book:bill.

This year looks to be worse than last. Airbus and Boeing will give their 2017 guidance on the earnings calls this month and next. Bombardier and Embraer earnings calls are a ways off, when each will provide its guidance.

But LNC believes the Big Two in particular will be hard pressed to hit a 1:1 book:bill this year and may even struggle to match 2016 sales.

Boeing’s year-end order tally comes Thursday. Airbus’ comes on Jan. 11.

Summary
  • Wide-body sales remain weak.
  • Narrow-body backlogs and low oil prices continue to inhibit sales.
  • China, Middle East concerns emerging.
  • United Aircraft MC-21 and COMAC C919 begin flight testing.
  • Airbus A330neo, Boeing 787-10, Embraer E195-E2 and Mitsubishi Aircraft MRJ-70 roll-out and begin flight testing.
  • Airbus A321neo and Boeing 737 MAX 8 EIS.

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Top 10 Leeham News stories of 2016

 Dec. 15, 2016, © Leeham Co.: The story about a Boeing official who asserted that the Airbus widebody strategy is a “mess” proved to be LNC’s most read story of 2016.

Our second most-read story is why the 787-8 is no longer favored by Boeing.

We list our Top 10 posts each year as we head for a wrap. LNC plans to finish 2016 on Dec. 23, returning Jan. 3, unless there is major, breaking news.

Here are the Top 10 LNC posts in 2016:

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Norwegian, others have vision; US airlines don’t

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Introduction

Dec. 5, 2016, © Leeham Co. Last weeks’ approval by the US Department of Transportation of a license for Norwegian Air Shuttle to operate long-haul, low-cost service to and from the US drew immediate fire from labor unions over anticipated US job losses.

Iceland's Loftleider Airlines, one of the first trans-Atlantic low-cost carriers. Photo via Google images.

Iceland’s Loftleider Airlines, one of the first trans-Atlantic low-cost carriers. Photo via Google images.

But their view is too narrow.

It means more jobs for Boeing and its supply chain, which are also heavily unionized. It means benefits to US exports.

But overlooked is the next evolution in long haul travel that starts next year.

Summary
  • Legacy airlines always object to new competition. It doesn’t matter when or from where.
  • Open skies and free market is a great concept—until someone actually takes advantage of it.
  • The 737 MAX and A321neo present new threats to US airlines.
  • Lack of vision and foresight are the US airlines’ own worst enemy.

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Pontifications: Getting there from here on Boeing’s deferred production costs

Hamilton ATR

By Scott Hamilton

Aug. 22, 2016, © Leeham Co.: Boeing’s deferred production and tooling costs for the 787 program continue to be a focus-item by some

Boeing 787-9

Boeing 787-9. Photo: Boeing.

aerospace analysts, media and observers: will the company be able to recover these costs, or will it inevitably have to take a write down.

Some Wall Street aerospace analysts believe Boeing can’t recover all the costs.

For example, Ron Epstein of Bank of America Merrill Lynch concluded Boeing will only recover about $14bn of the $29bn in deferred production costs.

Rob Spingarn of Credit Suisse pegs the recovery number at about $22bn.

These figures are before Boeing took a $1bn pre-tax “reallocation” to research and development for costs related to two more of the first six test airplanes last month in advance of the July 27 earnings call.

Boeing officials are confident they will recover the costs. LNC spoke with Wall Street analysts and Boeing to paint a picture of how Boeing expects to accomplish this.

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Air Lease sounds caution note for Airbus, Boeing

Aug. 10, 2016, © Leeham Co.: Executives of one of the world’s most influential leasing companies said Friday they doubt Boeing will increase production of the 787 from 12 to 14/mo.

Air Lease Corp. made the predictions on its 2Q2016 earnings call Friday.

ALC also predicted Boeing will further lower the production rate of the 777 Classic from the announced 5.5/mo in 2018. ALC did not specify a rate, but some aerospace analysts believe a rate of 4/mo is coming.

They also believe neither Boeing nor Airbus will increase production rates of the 737 to 57/mo or A320s to 60/mo. Boeing announced previously that it is considering increasing the 737 rate from the announced 52/mo, effective 2018, to 57/mo. Airbus previously announced it will increase the production rate of the A320 to 60/mo and is considering a rate of 63/mo.

Airbus is bringing the rate up from 44/mo to 60 by 2018.

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Dearth of wide-body order hang over Airbus, Boeing

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Introduction

July 25, 2016, © Leeham Co.: It wasn’t a good two weeks for wide-body airplanes.

AirbusNewWeek 1: Virtually no new orders for wide-bodies were announced at the Farnborough Air Show.

Airbus, responding to a leak to the Paris newspaper La Tribune, confirmed it will reduce production for the A380 from 20/yr in 2017 to 12/yr in 2018—returning the program to a loss.

Boeing firmed up an MOU announced at the Paris Air Show with Volga Dnepr for 20 747-8Fs, but wouldn’t say how many are firm orders and how many are options.

Week 2: Boeing took nearly $1.7bn in after-tax write downs for the 787 and 747-8 programs.

Boeing LogoAmerican Airlines rescheduled all of its Airbus A350 XWB orders for two years to preserve cash.

And, while not directly tied to wide-bodies per se, Delta Air Lines announced it will reduce its trans-Atlantic services for a variety of reasons. Most of these services are performed with wide-body aircraft.

Summary
  • Boeing has just 34 wide-body orders through July 19.
  • Airbus has 56 wide-body orders through June 30.
  • Farnborough orders not yet included.
  • A “bubble burst” or just part of a normal cycle?

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Boeing launches PFS 2.0

Update, 0815 PDT July 7: Boeing Corporate Headquarters responded to our questions. The transcript has been added to the article below.

Boeing LogoJuly 7, 2016, © Leeham Co.: Boeing’s controversial Partnering for Success (PFS) drew ire from its suppliers and scorn from observers for its heavy-handed, threatening cost-cutting demands: shave your costs to Boeing 15%-25% or be put on our own no-fly list of companies that we won’t do business with.

Boeing wasn’t shy about who it targeted, or punished. Even supply-chain giant United Technologies was placed on Boeing’s no-fly list when it balked at the onerous demand.

Now Boeing is moving forward with PFS 2.0, a second round of demands.

Summary
  • PFS 1.0 focused on price.
  • PFS 2.0 focuses on terms and conditions.
  • Boeing wants to stretch accounts payables; some suppliers balking.
  • Suppliers get credit for investing in technology.
  • Threats cease in PFS 2.0.

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C Series charge spotlights 787 deferred costs

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May 4, 2016: (c) Leeham Co.: The $500m charge reported last week by Bombardier for 127 recent orders for its C Series resulted in shining the spotlight on Boeing’s deferred production costs for the 787.

As LNC wrote this week, interpretation of the BBD charge was misunderstood. Some press reports yesterday demonstrate it continues to be. We won’t restate what we’ve already written about the true nature of the charge and how it differs from program accounting used by Boeing–this has been well covered by now. The Seattle Times suggested that the per-plane profit required to pay off the $29bn in deferred production and $3bn in tooling costs for the Boeing 787 was greater thanBoeing Logo generally recognized. The average figure is about 20% higher than the number widely cited by Wall Street.

The most commonly accepted figure to recapture the record-setting deferred production costs and tooling has been $30m per airplane, a figure most Wall Street analysts believe is too high to achieve. But this number appears understated, according to an analysis by The Seattle Times in the wake of Boeing’s first quarter earnings call.

Boeing’s 10Q contains language that appears to confuse the issue somewhat.

“At March 31, 2016, $23,661 [million] of 787 deferred production costs, unamortized tooling and other non- recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $8,757 [million] is expected to be recovered from units included in the program accounting quantity that represent expected future orders.”

This appears to suggest the first tranche of these airplanes results in a need for a $36m per-plane profit and the second tranche requires a per-plane profit of $54m. Charles Bickers, a spokesman for Boeing’s corporate headquarters in Chicago, told LNC that segmenting out the ordered but undelivered aircraft from orders yet to be received but assumed is not the way to look at the issue.

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