Lower interest rates, a tailwind for new orders

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By Vincent Valery

Introduction

Sep. 16, 2019, © Leeham News: Over the last few weeks, LNA outlined significant production gaps from 2022 onwards for the major widebody programs at Airbus and Boeing. The OEMs expect airlines to place large fleet renewal orders to fill those.

Aircraft deliveries need to be financed one way or another. Access to affordable financing is crucial for airlines and lessors to make good on their orders.

Interest rates in the world’s major currencies hit an all-time low a few weeks ago. The 30-year US Treasury yield dipped below 2%, while the 10Y German Bund was at -70 basis points.

Corporations duly took advantage of the lower rates to issue record amounts of debt in US dollars during the first week of September. United Airlines and Bank of China Aviation were among them.

We will analyze how lower interest rates could benefit the aviation industry.

Summary
  • Varying interest rate exposure for airlines and lessors.
  • Level of access to capital markets among airlines.
  • Hurdles to capitalize on low interest rates.
  • Unlikely beneficiaries if low rates persist in the near future.
  • Boosting new widebody order prospects.

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A321 accounts for 50%+ of future deliveries; few production gaps

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Introduction

Sept. 12, 2019, © Leeham News: More than half the Airbus A320 family scheduled for delivery over the next four years will be the A321neo, according to an analysis performed by LNA.

Airbus is sold out through 2024 the current production rate of 60/mo or 720 per year.

The production rate increases to 63/mo next year, although LNA doesn’t have a precise time when this occurs.

A variable is also whether a full 12 months of production is calculated, or only 11 ½ months to allow for the summer vacation shutdown.

Either way, the production gaps appear manageable through 2024.

Summary

  • Previous Airbus forecasts A321 would account for half of production were viewed skeptically.
  • A321 long-term future depends on Boeing’s decision over the New Midmarket Airplane.

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The struggling smaller European low cost carriers, Part 2.

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By Vincent Valery

Sep. 9, 2019, © Leeham News: In last week’s article, we discussed the context that led to the creation of numerous European low cost and leisure carriers. We also outlined the main reasons for their recent struggles.

Today we will look at the current situation for smaller carriers in various European countries. We will start with Germany.

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Opportunity and challenges of a 787-10ER, Part 3.

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By Bjorn Fehrm

Introduction

September 5, 2019, ©. Leeham News: Last week, we examined how a longer-range model of Boeing’s 787-10 would look like. We designed a 787-10ER version (ER for Extended Range) by increasing the Maximum TakeOff Weight of the aircraft. We also did some other adjustments to accommodate the increased weight.

We now compare the resulting aircraft with its nearest competitor, the Airbus A350-900. How would a 787-10ER stack up against an A350-900?

Summary:
  • A 787-10ER is a narrower aircraft with a smaller wing than an A350-900. This affects passenger comfort but it also gives a lighter aircraft with less wetted area.
  • The later generation engines on the A350-900 closes the difference in operating costs depending on how the aircraft is operated.

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Airbus holds the line on A350 production rate

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Introduction

Sept. 4, 2019, © Leeham News: Airbus’ decision a few months ago to keep the A350 production rate at 10/mo appears to be a wise one, considering that there is a small production gap in 2022 but increasingly large ones from 2023.

Boeing boosted rates this year of the 787, which competes with the A350-900 but not the -1000, to 14/mo. Boeing is sold out at this rate in 2020 and 2021, but has a big gap in 2022 and larger gaps thereafter.

Both companies bank on a splurge of orders early next decade to fill the production gaps. Each says there will be a retirement surge beginning in about 2022.

Airbus offers the A330neo and A350. Boeing pitches the 787 and 777X—with a combined production capacity of 35/mo or 389/yr at current rates.

Summary
  • Skyline quality is generally good, but weak spots and one blue-chip order bear watching.
  • Some significant production gaps emerge in 2023.
  • A330-900 competes with A350-900 for orders.

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The struggling smaller European low cost carriers

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By Vincent Valery 

Sep. 2, 2019, © Leeham News: Germania, flyBMI and Wow Air ceased operations this year. FlyBe was sold to a consortium that includes Virgin Atlantic for a symbolic amount. Norwegian Air Shuttle and Thomas Cook Airlines’ financial woes are well documented in the media.

Many lesser-known low-cost and leisure carriers are also struggling on the old continent. It is no secret that the airline industry is far more fragmented in Europe than the USA for historical reasons. Lufthansa CEO Carsten Spohr regularly mentions the need for further consolidation.

This calls into question whether smaller European airlines can survive as independent entities under current business models.

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Opportunity and challenges of a 787-10ER, Part 2.

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By Bjorn Fehrm

Introduction

August 29, 2019, ©. Leeham News: In last week’s article we went through the reasons for a longer range 787-10, a 787-10ER version (ER for Extended Range). We could conclude it would be an attractive aircraft for the market if it could get another 1,000nm in range.

We use our airliner performane model to analyze how this can be achieved and if Boeing would face large engineering challenges to get to this range.

Summary:
  • The 787 program would benefit from a longer range 787-10 as described in our first article
  • Now we analyze how to achieve the extra range and what trades will be necessary to convert the 787-10 to a 787-10ER.

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Airbus faces challenges for A330neo

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Aug. 26, 2019, © Leeham News: Airbus faces near-term challenges with its production skyline for the A330, even at a reduce rate of 4/mo, an analysis shows.

Looking forward from next year, when there are slightly more deliveries scheduled than production rates—a function of some leftover 2019 builds—Airbus faces an easily-filled gap in 2021 but huge production gaps beginning in 2022.

Even if Letters of Intent and options were fully converted to firm orders, big production gaps will exist.

A production rate cut seems inevitable in the near future.

Summary
  • Key Emirates order not yet firmed up.
  • Big, 200 unit A330-200R LOI no longer appears in data.
  • Why keep the A330neo in the product line?

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Opportunity and challenges of a 787-10ER

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By Vincent Valery

Introduction

Aug. 22, 2019, © Leeham News:  By 2024 the 777-300ER will have been in service for 20 years and the 777-200ER 27 years.

United Airlines 787-10. Credit: United Airlines.

LNA was the first to report the 777-8 entry-into-service will slip by at least two years. Boeing confirmed a delay in the 777-8 development, but not the timeline. Further delays (or an outright cancellation) for the passenger 777-8 are a real possibility. Boeing faces the prospect of not having a latest generation offering in the 330-370 seat market at a time demand for such aircraft is expected to pick up.

As part of the Air New Zealand commitment to purchase eight Boeing 787-10s, Boeing and General Electric are increasing the maximum takeoff weight to add more range.

In a similar fashion to the 777-300ER 20 years ago, Boeing might improve the 787-10 further to turn it into a fully-fledged ER variant. We will analyze the rationale for launching such variant and the challenges Boeing needs to overcome.

Summary
  • Remediate a product gap
  • Opportunities arising from surging 777 retirements
  • A mixed track record of previous stretches and range improvements
  • Target range for the 787-10
  • Challenges associated with achieving those targets
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Boeing’s Long Term Cash Flows

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By Vincent Valery

Introduction

Aug. 19, 2019, © Leeham News:Boeing’s long-time priorities, adopted after the 787 program finally was past its troubles, is shareholder value.

Boeing has spent tens of billions of dollars over the years in stock buybacks. It has regularly increased dividend payments.

In the context of a global aviation boom, the Commercial Airplanes division has generated the bulk of cash flow growth in recent years for the company. The creation of Boeing Global Services is a move toward achieving mid-teen margins for The Boeing Co.

Just like any aircraft OEM, the ability to generate cash flows rests on having an up-to-date and desirable product line up for customers.

Before the Ethiopian Airlines Boeing 737 MAX crash, things were looking good for Boeing. Assuming a successful resolution of the 737 MAX crisis, Boeing should return to generating strong operating cash flows afterward.

However, how long is the current product line up expected to sustain those cash flows and what could Boeing do about it?

Summary
  • Dreamliner: from costly delays to cash flow machine
  • Boeing 777 provided strong cash flows at critical time and 737 rode global aviation boom until grounding
  • Significant production gaps on 737, 777 and 787 appear from mid 2020s, potentially threatening cash flow generation
  • New variants, derivatives and clean sheet design would sustain cash flows longer.

 

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