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By Chris Sloan
Sept. 30, 2024, © Leeham News: Southwest Airlines outlined significant moves in its quest to return to sustained profitability at its investor day on September 26 in Dallas. Widely reported revenue and financial initiatives include assigned and premium seating, network realignment, capacity growth cuts, and staffing reductions.
Billed as Southwest Even Better, the plan is the most transformational program in the company’s 53-year history, according to Chief Executive Officer Bob Jordan. “The plan includes a robust set of tactical and strategic initiatives and elements uniquely available only to Southwest Airlines. The plan is capital efficient and supports achieving our financial goal of ROIC [Return on Invested Capital], well above our cost of capital,” he said. Yet, he acknowledged that recent financial performance is not up to anyone’s expectations. “Our model is not broken, but it needs continued calibration and enhancement.” By 2027, the plan is expected to add approximately $4 bn in cumulative incremental earnings before interest and taxes (EBIT).
Jordan pointed to external factors as a significant culprit, notably Boeing. “It’s no secret that Boeing’s delivery delays have created significant issues for us, making it very difficult for us to run a business. Boeing has delivered very few MAX aircraft on time, and we are still waiting on the MAX 7 certification.” Though compensation agreements remain confidential, “Past financial issues caused by Boeing delivery delays and other Boeing issues have largely been resolved through the application of credits on future deliveries,” said Jordan.
Southwest is taking dramatic steps to mitigate “operational risk” by reducing hiring and cutting annual capacity growth to 1-2 percent through 2027. “We expect production issues at Boeing and issues related to the (Pratt & Whitney) Geared Turbofan engine to continue to constrain industry growth for years to come,” Jordan noted.
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By Bjorn Fehrm
September 26, 2024, © Leeham News: Heart Aerospace has revised its environmentally friendly aircraft for the third time. The variants started in September 2020, when Heart presented an all-electric, battery-based 19-seat airliner that should test fly by now and be available in 2026, Figure 1, top aircraft.
Two years later, in September 2022, it all changed. The aircraft was changed to a 30-seater with a serial hybrid propulsion system using turboextenders to increase the operational range, Figure 1, aircraft two.
After another 20 months, the configuration changed again to the third iteration in Figure 1, which will fly in prototype in 2026 and be available to airlines in 2029.
In an article series, we explain the reasons for these changes and analyze whether the changes in the aircraft have increased the likelihood of the ES-30 entering the market in 2029.
Figure 1. The Heart Aerospace regional airliner series. Top, the ES-19, then the ES-30, and finally, the revised ES-30. Source: Heart Aerospace.
By Scott Hamilton
Sept. 23, 2024, © Leeham News: A Wells Fargo analyst calculated The Boeing Co. might have to issue 190 million shares of stock to get itself out of the financial mess it’s in.
At the $155 range Boeing’s stock has been recently trading, which would be just shy of $30bn.
Last week, Barron’s (a financial publication) wrote that Boeing has too much debt and perhaps a $10bn equity offering would suffice.
The Wells Fargo analyst and Barron’s complained that issuing stock would hurt shareholders due to the dilution.
On Sept. 12, the day Boeing’s IAM 751 union rejected the Tentative Agreement for a new labor contract and voted to strike at midnight, LNA did a deep dive analysis of the Wells Fargo equity speculation and the increasing speculation that Boeing might be forced into bankruptcy if the strike lasts a long time.
Before that, LNA analyzed the net debt levels, how long it would take to pay it down, and the annual interest to be paid.
Boeing’s financial position is precarious. It needs $10bn in cash to run the company; on June 30, the end of the second quarter, it had $12bn in cash. It’s losing an estimated $100m a day during the strike.
Wall Street types wring their hands over the dilution of a possible stock offering. This begs the question: would they prefer dilution or bankruptcy, which typically wipes out shareholders?
Or would they prefer at least a decade of stagnation while Boeing tries to operationally repair its balance sheet?
LNA welcomes the idea of a $30bn equity offering.
Boeing won’t fully recover without drastic action. And a massive equity offering best fits this need.
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By Bjorn Fehrm
September 19, 2024, © Leeham News: We examine the high-volume short-to-medium-range market and check whether a route previously reserved for the Airbus A330 can be flown with a fleet of A321XLRs. At equal per-passenger operational costs, doubling the frequency is advantageous and can drive market growth, revenue, and margin.
After comparing passenger only operating costs, such as per seat mile Cash Operating Costs (COC), we add cargo to the mix. To compare efficiency, we then need to do a route margin comparison.
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By the Leeham News Team
Analysis
Sept. 16, 2024, © Leeham News — The lopsided outcome of last week’s vote by the International Association of Machinists District 751 union members to resoundingly reject Boeing’s four-year contract offer caught a lot of observers by surprise, including us.
Not that we didn’t expect the offer would be rejected. That seemed a reasonable bet. But if anyone tells you their Magic 8 ball had predicted a 94.6% vote to reject the contract and a 96% vote to strike, they’re overstating.
Our industry sources tell us that Boeing management was utterly gobsmacked by the result. Even the union staffers and officers we talked to on the night of the vote were surprised.
The result is now that some 33,000 751 members spent the weekend on picket lines surrounding Boeing facilities in Washington state, Oregon, and Edwards Air Force Base in California.
And Boeing management, which had very little leverage going into these contract talks, has approximately zero leverage now.
The problem, for everyone in our industry hoping for a quick resolution of this strike, is that Boeing has been acting since intensive talks started in August like it doesn’t understand how little leverage it has over the union this year. Despite new CEO Kelly Ortberg’s factory floor visits and talk about a “reset” with the unions at Boeing, Boeing acted like it believes it’s still 2014 when it won a bitter fight for a contract amendment granting concessions in exchange for locating the 777X final assembly line in Everett (WA).
Maybe Thursday night’s results will be the moment Boeing’s labor relations strategy needs if it’s ever going to solve its interconnected safety, quality, reputational, and cash-flow problems.
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By Karl Sinclair
Sept. 12, 2024, © Leeham News: Boeing’s largest union today rejected a four-year contract and approved a walk-out beginning at midnight tonight.
The vote to reject the contract and go on strike were overwhelming: 94.6% to reject the contract, 96% for the strike.
For financially ailing Boeing, a strike is the last thing it needs. When the union, IAM 751, last struck in 2008, the walk-out lasted 57 days and set the foundation for labor wars that continued to this day. Then-CEO Jim McNerney the following year located the second 787 assembly line in South Carolina. (The first line, in Everett, was closed during the COVID pandemic.) In 2011, McNerney threatened to build the 737 MAX elsewhere if 751 members didn’t approve a contract amendment with concessions. He repeated the process in 2013 and 2014 with the 777X development. The latter was the second amendment to the 2008 labor contract that governed wages and benefits for the huge union, which represents workers at Boeing’s factories in Renton and Everett, home to the 737 and 767/KC-46A and 777, respectively. The IAM 751 also represents workers at other Boeing locations.
Union leadership want to recover benefit concessions and sharply increase wages that failed to keep up with inflation. They wanted a guarantee that the next Boeing airplane will be assembled in Puget Sound (the greater Seattle area). They wanted a seat on the Board of Directors and a role in changing Boeing’s failed safety culture.
Management wanted to hold the line. The company remains in a loss-making position, led by the continuing turmoil at Boeing Commercial Airplanes. The defense unit, which is not represented by 751, also is bleeding profits. The two units caused Boeing to burn through nearly $10bn in cash in the first half of this year alone. Only the services unit is making money, but not nearly enough to offset the losses and negative cash flows at the other two units.
More losses and negative cash flow is expected for the quarter ending this month. Company CFO Brian West speaks at a Morgan Stanley investors conference tomorrow. His will be the first detailed response to the union vote, whatever the outcome.
Internally, Boeing prepared for a 2-12 week strike.
Some observers fear that a long strike could shove Boeing into bankruptcy. LNA doesn’t agree, but we’ve nevertheless analyzed the prospect.
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By Bjorn Fehrm
September 12, 2024, © Leeham News: We examine the high-volume short-to-medium-range market and check whether a route previously reserved for the Airbus A330neo can be flown with a fleet of A321XLRs. At equal per-passenger operational costs, doubling the frequency is advantageous and can drive market growth, revenue, and margin.
After comparing the aircraft and their seating, we now use our Airliner Performance and Cost Model (APCM) to fly them on a Southeast Asia route and compare the operating costs.
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By the Leeham News Team
Analysis
Sept. 5, 2024, © Leeham News: There seems to be quite an expectation that there will be a strike by Boeing’s touch labor union, the IAM walkout at Boeing this contract cycle. The costs associated with a strike are well understood. Crippled cash flow, upset customers, and stock price losses not counting the damage to the companies in Puget Sound that built much of their business models on Boeing worker’s paychecks. It’s never a good thing to sustain a strike of any duration because the disruptive effects can last for years.
The last time the IAM struck was in 2008, for 57 days. The strike cost Boeing billions of dollars in lost revenue, much of which was made up in the following years. The ill-will generated by the strike affected customers. Management-labor relations remain strained to this day. Union leadership is determined to recover previous givebacks in wages and benefits. They want a seat on the Board of Directors, a role in improving Boeing’s safety culture, and a guarantee that the next airplane will be assembled in Puget Sound.
Talks remain far apart, according to the union. Boeing says progress is being made. A strike seems likely at this stage.
Boeing is clear about a strike potential. In a message last week to employees, Boeing said:
Does Boeing want a strike so it can stabilize production or allow time for the supply chain to recover?
Absolutely not. Any work stoppage, whether days, weeks or months, would disrupt our production system, supply chain and most importantly, our customers. When Boeing cannot deliver airplanes as scheduled, customers question our reliability. A strike would only help the competition and hurt our suppliers.
What is Boeing supposed to do if the IAM walks out? The usual answer is sweeping and cleaning and trying to deliver whatever you can sneak out the door to keep the money coming in. It is never a very effective way to operate.
Here are some points to ponder if the strike occurs and Boeing production shuts down.
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By Scott Hamilton
Sept. 2, 2024, © Leeham News: Airbus and Boeing see China doubling its airliner fleet over the next 20 years. The numbers vary between the two companies. But the underlying data points to how challenging it will be for China to meet this demand without letting Boeing back into the mix.
Boeing has largely been frozen out of China since 2017 when then-President Donald Trump initiated a trade war with one of the world’s largest economies. Then, Boeing’s self-inflicted wounds came in the form of the 21-month grounding of the 737 MAX, a 20-month suspension of deliveries of the 787, and major, slow rework required for each model.
On top of this, after Russia invaded Ukraine, the Biden Administration—which kept Trump’s tariffs upon taking office in 2021—ramped up the pressure on China, which initially covertly supported Russia’s war on Ukraine. This support became more open as the war dragged on.
Few Boeing airplanes have been delivered to China since 2017 and fewer orders have been placed.
Boeing predicts that China will need 6,720 single-aisle aircraft through 2043. Airbus sees a need for 7,950 single aisles for the same period. On the widebody side, Boeing forecasts a requirement for 1,575 aircraft; Airbus forecasts a need for 1,380. Widebody freighter forecasts for China are 170 and 190 by Boeing and Airbus, respectively.
Let’s compare these numbers with production rates. China still needs Boeing.