Only a few days ago, President Obama’s Office of the Management and Budget suggested delaying the tanker competition for five years. Now the Wall Street Journal reports that another House Member wants to split the tanker acquisition. You can see the report here, and in this case it’s free. Meantime, the conspriracy theorists actually have a pretty good one. A commenter on the DODBuzz blog thinks the delay is designed to give Boeing the opportunity to develop the 777 into a tanker. See the March 11, 9:28am posting. As conspiracy theories go, we like this one. No clue if there’s any validity to it, but the timing does work.
Update, March 12: George Talbot has this long item that the White House denies it wants to delay the tanker program.
The Hill has this piece that House Member John Murtha is preparing legislation for a split buy, with the winner getting a larger piece of the pie, and a production rate of 24 a year rather than the 12-18 originally proposed.
Update, March 13: George Talbot of The Mobile Press-Register has this piece about Boeing, Northrop and their respective supporters banding together to kill any Obama Administration proposal to delay the tanker procurement for five years, as suggested by OMB. The White House denies it has any plans to do so, but the stakeholders aren’t convinced.
Reuters reports more about John Murtha’s plan to kick-start the procurement in this item.
CQ Politics reported late Monday night that the White House has told the Pentagon to delay procurement of the KC-X tanker. See the story here.
Update, March 10: DOD Buzz has this item speculating the suggestion to cut the tanker program is nothing more than a budgetary ploy.
The Department of Defense’s JROC (a joint requirement group) met to consider what to do about the next round of the KC-X tanker competition, and US Sen. John McCain threw cold water on the idea promoted by US Rep. John Murtha about a split buy between Northrop Grumman and Boeing.
Boeing has yet to deliver its first KC-767I to the Italians.
The head of the Boeing Tanker Program call this the ‘Year of the Tanker,” according to a news release from the company.
In the news release, Dave Bowman, VP and GM of the program, vows to win the KC-X competition that is to be resumed this year. It’s unclear yet whether the Pentagon will simply pick up where it left off last September when suspending the competition or whether an entirely new process will be started.
Boeing claims 44,000 jobs will be supported by its KC-767 tanker. Northrop claims 48,000 jobs for its KC-30. Boeing claims its tanker is 85% American content by value; Northrop claims its tanker is 60% US content (and that the KC-767 is 69% US content). Boeing’s supporters, notably Sen. Murray, challenge Northrop’s jobs claims but have nothing concrete to back up the challenge. (We’re highly skeptical of both claims, for reasons we’ve written about many times.)
But what is truly “American built?” The Wall Street Journal today (Jan. 26) has a very interesting article asking this question of the automotive industry. The parallels to aerospace are apt.
Boeing’s internal press release on the tanker follows.
The controversial KC-X aerial tanker procurement will likely be deferred, predicts Goldman Sachs. So will several other Boeing programs, according to Goldman: the Airborne Laser, the Ground-Based MidCourse Missile Defense System and the Boeing/SAI Future Combat Systems.
Goldman made the predictions during an investor’s conference call today (Jan. 12). The company believes the incoming Obama administration will defer these and other defense programs as it adjusts priorities within the Defense Department and as part of its overall economic recovery plan.
Goldman does not predict that overall defense spending will fall; on the contrary, the firm believes that defense spending will be maintained or increased.
President-elect Obama said during the presidential campaign that the Armed Services need to be modernized and replenished after years of spending on the Iraq War, and that troops need to be redeployed to Afghanistan to continue the fight against terrorists and to get Osama Bin Laden.
The Orlando Sentinel quotes an analyst with Global Security as saying the KC-X isn’t needed at all.
Update, January 10:
Bloomberg News reports EADS says it will be three years after the A400M’s first test flight–which remains unscheduled–before Airbus will ship the airplane to customers. This is hardly good news.
Commercial Aviation enters 2009 with a high level of uncertainty. Boeing’s headlining 787 program and the lower profile but increasingly costly 747-8 development face critical milestones this year. Airbus’ A350 does, too. The global financial market meltdown last year hopes for recovery this year but the global economy is questionable.
These are just a few of the issues facing Airbus and Boeing this year.
Boeing continues to dominate the headlines with its troubled 787 program, so we’ll look at the US aerospace company first.
Year for Recovery
This has the makings for being a year of recovery in new airplane programs. No new joint BCA-IDS program is without significant issues and two of BCA’s three new airplane projects have significant delays.
The 787 program needs little review here; its issues are well known. The question is when the first flight and flight testing will begin.
Boeing says the first flight will be in the second quarter; Air Transport World first reported that April 20 is now the schedule for first flight and Flightblogger followed with its own reporting on a timeline leading to this date. Our own checks suggest that a new development and testing timeline for the critical software systems is aimed for a sooner-than-later second quarter first flight (the old timeline suggested a June-August timeline for first flight). Our checks also report, however, that April 20 is thought to be aggressive and our sources are unsure this date can be met.
What is important to emphasize here is that this date is an internal timeline and Boeing is only saying first flight will be in the second quarter. This means it could take place on June 30 and still meet the publicly stated goal.
At long last, we expect that the first flight and the flight testing will get underway this year. These are obviously critical milestones in the recovery of the 787 program and Boeing’s operations.
Delta Air Lines may cancel the 787 ordered by Northwest Airlines now that NWA is a subsidiary of Delta. NWA ordered 18, but Delta’s CEO Richard Anderson is unhappy with the delays and performance issues (the 787 is overweight and has a shorter range than originally advertised, though the extent of the latter is in dispute). Anderson likes the 777LR and it’s possible there could be a deal for more 777LRs to replace the 787-8s ordered by NWA.
A cancellation will be nothing but a minor embarrassment for Boeing—with 900 orders, losing 18 won’t matter much and it’s possible others will come forward to grab these in any event. Read more
Update, 08:15 AM PST Tuesday: Turns out Gregoire is on a sight-seeing visit to Iraq to see Washington National Guard troops. With a $6bn budget deficit in the state, we wonder how much this is costing Washington taxpayers. We also wonder why all the secrecy. After all, things are so much better in Iraq now, aren’t they?
10 PM Monday Updates at the end of this article.
With the sudden departure of Gov. Bill Richardson as Commerce nominee by President-elect Barak Obama, there is a need to move quickly for a new nominee.
A report (a rumor, really) from an alternative weekly paper in Seattle, The Stranger, suggests Gov. Christine Gregoire of Washington may be that replacement.
The intriguing report is here. An announcement of some kind is expected Tuesday morning (Jan. 6).
Gregoire just got elected to her second term, defeating for the second time former State Sen. Dino Rossi, a conservative Republican who very nearly won election in 2004 in this liberal state.
As governor, Gregoire has been a vociferous proponent for Boeing (as you would expect), supporting the $3,2bn tax breaks (which are now subject to an Airbus/EU complaint before the World Trade Organization) for enticing Boeing to build the 787 in Everett (WA). (Gregoire was state attorney general at the time.) Read more
As the year trickles down to a close, we’re going to post some news items in one post with any commentary we see fit to add. We don’t expect to be posting at all (unless some huge happens) between Christmas and New Year’s.
Air Transport World reports that Boeing has set the end of April for the first flight of the 787. We hope that works, but there is still risk of unknown-unknowns that could delay this until the third quarter. Boeing has previously announced first flight will be in the second quarter, which could be any time from April 1 to June 30.
The Seattle Times has this year-end story, looking at Airbus and Boeing.
The tanker competition is back in the news, with this editorial and this news story, both from The Mobile Press-Register, and these items quoting Boeing IDS president James Albaugh and Northrop Grumman president Ron Sugar that kick off the latest controversy.
From: Schaeffers Research comes this item:
The Boeing Company
Dow component The Boeing Company (BA: sentiment, chart, options) was slapped with a “sell” rating today by Societe Generale, as the French firm made its way through the aerospace-and-defense sector. Also in today’s note, B/E Aerospace (BEAV) was initiated at “hold,” General Dynamics (GD) was started with a “hold” rating, and Lockheed Martin (LMT) was started at “buy.”
The downbeat initiation today comes on the heels of Boeing’s warning last week that the launch of its 787 Dreamliner would be delayed by yet another 6 months, due to issues caused by a machinists’ strike and improperly installed fasteners.
As its Dreamliner drama drags on, analysts have grown increasingly skeptical of BA. Zacks reports 9 “holds” and 1 “strong sell,” compared to 8 “buy” or better ratings. As today’s note from Societe Generale reveals, there’s still plenty of room for more negative brokerage notes to hit the shares. Any additional skeptical notes could extend the stock’s year-to-date drop of 55%.
Schaffers also has this related item:
The Boeing Company (BA: sentiment, chart, options) was broadsided with another bearish brokerage note this morning, marking the second straight session of negative news from the analyst community. Yesterday, Societe Generale initiated coverage on BA with a “sell” rating following yet another delay in the company’s much anticipated 787 Dreamliner. This morning, Deutsche Bank cut its price target on the shares to $39 from $48. The brokerage firm also reiterated a “hold” rating on the equity.
There is room for the situation to deteriorate further on Wall Street, as 8 of the 17 analysts following BA rate the shares a “buy” or better, according to Zacks.com. Meanwhile, Thomson Financial reports that the stock’s average 12-month price target rests at $57.11 per share – a 47% premium to the stock’s Monday close at $38.74.
Our comment: Societe Generale, or SocGen to those of us in the business, is awfully late to the party. We agree (unfortunately, since we have a long position in Boeing stock) that there is more downside left in the price. Until Boeing clearly is positioned to achieve first flight with the 787, doubts remain and the company’s credibility is shot. “Performance” is now the only thing that will count–not predictions and projections by Boeing.
Many brokerage firms consider a “Hold” rating a negative recommendation.
Back to the Tanker
Reuters has this story about the debate between Northrop Grumman supporting a “best value” approach to the re-compete for the KC-X contract and Boeing supporting a “low price” selection.
Northrop’s “best value” combines the most-capable concept that won it the contract last year. Boeing’s “low price” relies on the total life cycle analysis that favors its airplane. Northrop says the lowest price might not be the best product. (An interesting position to take since its price was $3bn less than Boeing, but Northrop fears that Boeing–knowing Northrop’s price–can now low-ball the next round of bidding.)
We’re reminded of the story when former astronaut Frank Borman became CEO of Eastern Airlines. Borman, commander of the first Apollo mission around the moon, was facing the notoriously militant IAM during one of his early meetings at the new chief of Eastern. A grizzled machinist finally asked Borman, “Why should we follow the advice of someone dumb enough to sit on top of a rocket built by the lowest bidder?”
Borman found the humor in the question as the entire crowd cracked up.
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.
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.