Leeham News and Analysis
There's more to real news than a news release.
Pontifications: Derivatives at Boeing
By Scott Hamilton
May 9, 2016, © Leeham Co.: Last week proved to be significant when the CEO of The Boeing Co. and the head of the 737 MAX program each said the company is looking at revising its smallest member of the family, the MAX 7, and potentially enlarging the biggest member, the MAX 9.
Neither prospect was news. Jon Ostrower of The Wall Street Journal revealed the prospect of what he called the MAX 7.5, a slightly larger airplane than the current MAX 7. The idea of an airplane larger than the MAX 9, based on the MAX 9, was floated when Jim McNerney was still CEO.
What was news is that for the first time, the Boeing CEO and the head of the MAX program went on record essentially admitting the MAX line isn’t well positioned against Airbus after all. Or, on the lower end, to Bombardier.
Embraer 1Q2016 results: Strong start to the year
By Bjorn Fehrm
3 May 2016, ©. Leeham Co: Embraer has made a good start to 2016. Group revenue for 1Q2016 was $1,309m compared to $1,056m 1Q2015, up 24% year on year. EBIT was $86m compared with $80m a year ago, giving a margin of 7.5%.
The major increase in revenue was for the Business jet side which delivered 23 aircraft compared to 11 1Q2015. Commercial aircraft increased with one aircraft to 21 deliveries.
Embraer’s commercial aircraft best seller, the E175 being delivered to United Express. Source: Embraer.
The commercial aircraft side sold 23 E175-E2 in the quarter giving a Book-to-Bill of 1.1. Sales for the Business Jets side was not publicized. Group order backlog was $21.9b compared to $20.4b for 1Q2015. The balance sheet is strong with $1,854m in cash and total debt of $2,389m.
The group’s only problem area is domestic state demand. Its KC-390 military transport program has stopped once for lack of Government payments and it risks being caught again in the problems of the Brazilian state economy.
Here the details of the financial results for the divisions and their aircraft programs. Read more
Bombardier’s onerous $500m loss demystified
By Bjorn Fehrm
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Introduction
May 2, 2016, © Leeham Co: Bombardier announced a game-changing order from Delta Air Lines for its C Series program last week. In the midst of the celebration and well wishing came the news that this order, one to Air Canada and seven firmed up options to airBaltic, would result in a charge of $500m next quarter.
Figure 1. C Series in the livery from Delta Air Lines. Source: Bombardier.
One analyst wrote in the wake of the Delta deal that “I understand that to get Delta and Air Canada you need to give attractive pricing, but that it would cost Bombardier $500m is a bit stiff.”
The comment shows that at least this analyst had no idea about the realities of aircraft programs financials. The announced onerous loss is nothing special; it is business as usual.
Summary
- Bombardier’s accounting is according to International Financial Reporting Standards (IFRS) rules. These say that one must announce the results of a contract on the company’s financials at the time of contract closure.
- Consequently, BBD informed in the 1Q2016 report that: “In conjunction with the closing of these firm purchase agreements, we expect to record an onerous contract provision of approximately $500 million as a special item in the second quarter of 2016.“
- Note that it says “provision” and not loss. Further, the provision will have no effect on 2016 profits or cash flow. This is a non-cash charge.
- In fact, the $500m provision is nothing special; it’s part of business as usual. We explain why.
Airbus Group 1Q 2016 results: Slow start to the year, guidance maintained.
By Bjorn Fehrm
28 April 2016, ©. Leeham Co: Airbus Group has had a slow start to 2016. Deliveries of A320neo, A350 and A400M are slowed by problems with engine and cabin suppliers. Only 127 aircraft were delivered out of a total guidance of 670 deliveries for 2016, a mere 18%. Group 1Q 2016 (1Q 2015) revenue were €12.2b (€12.1b) with EBIT of €501m (€651m), down 23% year on year.
The group expects to recover the shortfall in deliveries during the year and to reach guidance levels for revenue and EBIT, except for the troublesome A400M. This time it’s a engine gearbox item which is the culprit. Airbus CFO, Harald Wilhelm, gave a clear warning during the quarterly conference call: the A400M program “risks a significant charge” during the year.
The financial results for the divisions for the quarter were:
- The commercial aircraft division delivered 125 (134) aircraft with revenues €8,668m (€8,565m) and EBIT €407m (€569m).
- Airbus Helicopters delivered 56 (62) helicopters with revenues €1,158m (€1,285m) and EBIT €33m (€52m).
- Airbus Defence and Space revenues were €2,534m (€2,603m) with EBIT €109m (€90m).
Details of the Airbus Group 1Q 2016 results are below.
Pontifications: Earnings week for Airbus, Boeing, Bombardier and Embraer
By Scott Hamilton
April 25, 2016, © Leeham Co.: Airbus, Boeing, Bombardier and Embraer having their first quarter earnings call this week. Bombardier also has its Annual General Meeting concurrent with its 1Q earnings on Friday.
The big anticipation will be with Bombardier.
Earlier this month, The Wall Street Journal reported Delta Air Lines was going to order 75+50 C Series from BBD. Delta, on its 1Q earnings call, said it had nothing to announce but would have more to say at its investors day. This is May 16.
But at the same time, BBD postponed its AGM and 1Q call from the 28th to the 29th. Delta’s board of directors meets on the 28th. Previously, BBD postponed by one day its year-end earnings call to coincide with Air Canada, which announced an order for 45 C Series, plus options.
Is Bombardier’s rescheduling another harbinger of the Delta order, or will Delta hold off any announcement until that May 16 investors day?
Or could Delta announce the Bombardier order Friday and the widely reported, expected order for 30-37 Airbus A321ceos?
The world aviation geeks wonder.
Can Bombardier extend CS300 to a CS500?
By Bjorn Fehrm
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Introduction
April 14, 2016, ©. Leeham Co: Bombardier is working hard to get additional mainline airline customers for its C Series project. The latest discussion is whether Delta Air Lines would replace its fleet of Boeing MD-88s with the C Series.
Figure 1. C Series largest model, CS300. Source: Bombardier.
In this context, it’s also discussed if the largest model, the CS300, Figure 1, is large enough for Delta. This aircraft seats 135 passengers in a two class configuration and up to 160 passengers in an all economy high density version.
The question is whether this is sufficient for Delta and other mainline customers, or if a still larger version is needed in the program, the oft-discussed CS500. We decided to use our proprietary aircraft model to see if a CS500 would be straight forward for Bombardier to develop, should Delta or any other customer ask for a three model C Series program.
Summary
- The C Series aircraft program was developed with the CS300 as the main model. The wing, engine and landing gear were dimensioned with the CS300 in mind.
- The CS100 is a shrink of the CS300, and not vice versa (the CS300 a stretch of the CS100).
- A tentative CS500 stretch if therefore a first stretch of the program’s main model and not a double stretch of a CS100.
- This is evident when one starts to analyze how a CS500 would be designed. There are rather modest changes that need to be done to create an extended model that seat up to 180 passengers.
Alcoa lowers guidance, cites slowing jet sales, production ramp up
April 13, 2016, © Leeham Co.: Alcoa, a major supplier to Airbus and Boeing, lowered its 2016 guidance on anticipated lower demand for aluminum on lower orders for legacy commercial airliners and a slower than expected transition to new airplanes.
In a first quarter earnings call Monday, Alcoa didn’t specify which of the Big Two OEMs it was thinking of, or whether these might have been Bomabrdier and Embraer, for which it also is a supplier. But Sam Pearlstein, the aerospace analyst for Wells Fargo, believes it is Airbus and the A320/A350 programs.
“Alcoa reduced 2016 aerospace global sales growth guidance to 6-8% from 8-9% with large commercial aircraft growth now expected to be about 9% (vs. 15% previous forecast) largely due to lower orders for legacy models and a ”more careful” ramp-up of new models (which we presume means A320NEO and A350),” Pearlstein wrote in a note published yesterday.
Virgin America does have some attractive attributes
March 29, 2016, © Leeham Co.: A report that JetBlue and Alaska Airlines submitted bids to buy Virgin America spurs the thought: this isn’t as wacky as it appears on
Virgin America route map. Click on image to enlarge.
the surface.
When news emerged last week that VA was shopping itself after interest was expressed, many thought, quite naturally, why?
Dan Reed neatly summarizes this argument in his column at Forbes.
Virgin America has few tangible assets. It leases all but about seven of its 10 Airbus A319s and 50 A320s. It’s not dominant in any city or route it serves. The leases are probably, on a relative basis, rather costly.
It has few slots at the few slot-controlled airports it serves (Chicago O’Hare, New York La Guardia and JFK airports and Washington Reagan National Airport), and only a few gates at any given airport—hardly enough to really boost presence of either Alaska or JetBlue.
Why should either airline want Virgin America?
Here’s why.