Leeham News and Analysis
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Leeham News and Analysis
- How Boeing’s actions affect Products, Airbus: Analysis (Update) October 11, 2024
- Boeing Announces Preliminary Significant Q3 Loss: Cuts 767 Freighter Program, Delays 777X EIS, Major Layoffs October 11, 2024
- Bjorn’s Corner: New engine development. Part 28. Wrapup. October 11, 2024
- Boeing strike hits suppliers, Airbus steps in October 10, 2024
- Boeing-IAM contract talks fail, no new negotiations scheduled, no end in sight October 9, 2024
How good is a MAX 7X and why would it replace the original? Part 2
By Bjorn Fehrm
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Introduction
May 16, 2016, ©. Leeham Co:In Part 1 we described the driving forces behind Boeing’s investigations into changing the definition of the 737 MAX 7.
There are good reasons to make the -7 model larger. The passenger market is moving the average size of the cabins upwards by about 2-3 seats per year. Boeing therefore made the middle model, the -800 and later the MAX 8 larger than the 737-400. It went from 146 seats in two classes to 162 seats.
Figure 1. Boeing’s 737 MAX 7. Source: Boeing
But the -700 and therefore the MAX 7 stayed the same size as the predecessor, the -300 at 126 seats. As described in our last article, this is not an ideal size. You don’t amortize the cost of the aircraft’s crew over an optimal number of passengers at normal loadfactors and you have a smaller number of very specific 737-7 in your fleet. We now discuss what would be a more competitive definition for a 737 MAX 7.
Summary
- The 737-700 and MAX 7, as presently defined, is sized at 126 seats two class.
- A more competitive sizing would be closer to 150 seats in order to maximize the utilization of the regulatory mandated aircraft crew resources.
- The exact sizing will depend on how many seats the dominant customer, Southwest Airlines, wants to have in its one class economy seating, which uses a generous seat pitch of 31-32 inches.
Analysts skeptical going into Boeing investors day
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Introduction
May 12, 2016, © Leeham Co.: Boeing executives faced skeptical aerospace analysts at its annual investors day yesterday in Seattle.
Presentations by Dennis Muilenburg, CEO of The Boeing Co., Chairman, President and Chief Executive Officer, CFO Greg Smith, Ray Conner, CEO of Boeing Commercial Airplanes, and Leanne Caret, CEO of Boeing’s defense unit, didn’t appear to have any immediate impact on the stock price for those listening in on the webcast. Stock was flat during the day. Notes from the analysts attending in person won’t be issued for a day or two.
We met with seven analysts on Tuesday, before and after their tour of the Everett (WA) wide-body plant facility to gauge their points of interest going into the investors day yesterday. We also talked with some of them on Wednesday after the presentations.
Summary
- Skepticism was high over how Boeing believes it can recover the $29bn in deferred production costs on the 787 program. CFO Smith addressed this during his Wednesday presentation.
- Boeing finally conceded the 777 Classic production rate will come down, to 5.5/mo by 2018. Officials initially claimed the rate would remain at 8.3/mo to the entry-into-service of the 777X, later lowering to 7/mo from next year.
- There is a belief that Boeing’s product strategy is now on the defensive to Airbus. BCA CEO Conner believes otherwise.
How good is a MAX 7X and why would it replace the original?
By Bjorn Fehrm
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Introduction
May 9, 2016, © Leeham Co: Boeing is considering changing the 737 MAX 7 in a rather drastic way. The present model would be hitting the market as the last of the MAX models in 2019. It hasn’t been selling well. In fact, there are only two legacy airlines and a start-up that have ordered the MAX 7.
Right now, there are just 60 orders for an aircraft series which has garnered 3,100 orders in total.
Figure 1. Boeing’s 737 MAX 7 as presently defined. Source: Boeing
Sources have long told LNC that Boeing doesn’t really want to build the MAX 7. But Southwest Airlines needs the airplane for short-runway airports like Chicago Midway and Burbank (CA) and has resisted suggestions to up-gauge. The other airline that has ordered the MAX 7 is WestJet, which has thin markets in Canada that don’t justify a MAX 8. And there is a third customer, a start-up in Canada that has yet to begin operations.
With the C Series gaining momentum, the cancellation of the MAX 7 now seems off the table. Instead, Boeing is thinking about making it better, the MAX 7X project. What is it, and why would it be better than the original MAX 7? We use our aircraft model to answer the questions.
Summary
- The 737-700, and therefore MAX 7, was defined a continuation of the 737-300 at 126 passengers in a domestic two class configuration.
- Bombardier is offering 135 seats in a similar, but more comfortable, CS300 cabin with an aircraft which is lighter and more economical than the MAX 7.
- The already meager order book for the MAX 7 is therefore getting more pressure from a resurging C Series line.
- Boeing is now attempting to convince its customers that a larger MAX 7, based on MAX 8, would be a better aircraft for the customers (and for Boeing). We reveal why.
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.
Bombardier’s Delta deal looking good, but don’t celebrate yet
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Introduction
Air Baltic will be the first operator of the Bombardier CS300. Source: Bombardier.
April 18, 2016, © Leeham Co.: Bombardier, if it didn’t dominate the news cycle in commercial aviation last week, must have come close. Consider:
- The Wall Street Journal, and then Bloomberg, reported that BBD was near to winning a big order for 75+50 from Delta Air Lines for its C Series.
- Reuters reported that BBD rejected demands from the Canadian federal government in Ottawa as conditions for investing US$1bn in the company. (Officials tried to walk this back some, saying talks continue.)
- The head of corporate strategy for BBD came forward to forcefully argue for the investment as good for taxpayers, breaking what largely has been a cone of silence over the perceived merits of a deal
- The US$1bn the Quebec provincial government agreed to invest last year remains unfunded.
- BBD stock, which last year dropped to less than C$1, threatening the listings on the Canadian exchanges, jumped to C$1.75 at one point in anticipation of a Delta order.
While on balance, it seems likely Delta will order the C Series, Bombardier has been down this road before. Only a few months ago, the market and others were excited over the prospect that BBD was close to landing an order from United Airlines, only to see Boeing swoop in and grab the deal.
Summary
- This is the second try at a major contract with Delta Air Lines.
- The primary competition is against Embraer, not Airbus or Boeing.
- We revisit our Skyline Risk Assessment, dormant for the extended period in which BBD had no sales of the C Series.
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.
Why Boeing won’t take a charge on 787s
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Introduction
Boeing 787-9. Source: Boeing.
April 11, 2016, © Leeham Co.: Boeing has $29bn in deferred production costs and another $3bn in deferred tooling costs for its 787. The accounting block, for its program accounting, is a record 1,300 aircraft. Many Wall Street analysts are skeptical whether Boeing will ever recover the huge deferred numbers.
Boeing insists it will.
Still, taking a charge of some number—as it has done twice for the 747-8 and twice for the 767-based KC-46A—is something Boeing repeatedly insists it doesn’t need to do.
Why not?
There are a few key reasons, say Wall Street analysts who follow Boeing: revenue, cash flow and the stock price.
Summary
- Bank of America Merrill Lynch estimates Boeing needs to post a profit of $30m on each of the remaining 900 787s to be delivered to recover the deferred costs. LNC figures this number is higher.
- Pricing pressure from Airbus makes it difficult to obtain this profit.
- The deferred costs limit Boeing’s ability to price down to meet Airbus’ offers to customers.
- Credit Suisse figures Boeing can recover only some $22bn of $29bn in deferred production costs.
- Boeing warns in SEC filings a forward loss might be required.
- But no forward loss is likely unless revenue falls short.
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 than
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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Posted on May 5, 2016 by Scott Hamilton
Airbus, Boeing, Bombardier, Delta Air Lines, Leeham News and Comment, Premium
787, 787-9, A330ceo, A330neo, A350, A350-900, Air Baltic, Air Canada, Airbus, Bank of America Merrill Lynch, Credit Suisse, Delta Air Lines, Dominic Gates, program accounting, Rob Spingarn, Ron Epstein, Seattle Times, unit cost accounting