Leeham News and Analysis
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Leeham News and Analysis
- Bjorn’s Corner: Air Transport’s route to 2050. Part 19. April 25, 2025
- How good is the C929? Part 2. April 24, 2025
- Boeing First Quarter Results Update: China is 10% of the backlog, with 500 in “Unidentified” April 24, 2025
- Boeing First Quarter Results: Tariffs, Return flights, $10.55bn asset sale April 23, 2025
- RTX Q1 2025 Earnings: GTF Talk Takes A Back Seat To Tariffs April 22, 2025
Dissecting Wide-Body deliveries through 2030
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Introduction
May 26, 2016, © Leeham Co.: A softening of trans-Atlantic air traffic, with declining yields and passenger demand, raises anew concerns that there is an oversupply and over-ordering of twin-aisle aircraft.
Air Lease Corp. addressed this concern at its May 19 investors day, arguing that growth plus retirements over the next 25 years more than supports the orders.
ALC, which is headed by Steve Udvar-Hazy and John Plueger, considered two of the leaders of the lessor industry, note that there is an average of about 150 wide-bodies approaching 25 years in age each year for the next 20 years. Coupled with long-haul traffic growth, ALC—which has a modest number of wide-body orders—is comfortable with the future supply-demand.
We’ve dissected the known delivery dates of wide-bodies at Airbus and Boeing, using the Ascend data base as of January. Wide-body orders have been announced subsequently, but not all have been firmed up and the total number won’t materially affect the trend lines.
Figure 1. Source: Air Lease Corp. Click on image to enlarge.
Summary
- We look at announced production rates by 2020 of Airbus and Boeing. We don’t include our own forecasts.
- We look at the defined delivery dates of the A330, A350, A380, 747-8, 777 and 787. These are all models, including ceo/neo and Classic/X.
- We look at factors that indicate a softening of wide-body demand across the Atlantic.
How good is a MAX 7X and why would it replace the original? Part 4
By Bjorn Fehrm
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Introduction
May 23, 2016, ©. Leeham Co:In Part 1 to Part 3 of this article series,we looked into the reasons behind that Boeing is considering changing the 737-7 MAX into a slightly larger 737-7X.
Figure 1. Boeing’s 737 MAX 7. Source: Boeing.
When an aircraft gets larger, its operating costs increase, everything else being equal. At the same time, it can take more passengers. This will increase the aircraft’s revenue generating capability, assuming the network can generate the traffic level needed.
To understand the difference in revenue capability for the 7 and 7X we will now develop their Direct Operating Cost (DOC) and compare these with the revenue generation capability of the aircraft. This gives the margin capability and one can establish where the cross over point would be between 737-7 and 7X with respect to margin for the airline.
Summary
- We develop the Direct Operating Costs (DOC) for the 737-7 and -7X.
- We also develop the revenue streams of the aircraft over typical missions.
- When compared, the margin of the aircraft will result and it will be possible to define the extra passenger count needed for the 7X to deliver the same margin as the presently defined 7 MAX.
- We then can establish the revenue upside potential for a 737-7X over the 7.
How good is a MAX 7X and why would it replace the original? Part 3
By Bjorn Fehrm
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Introduction
May 16, 2016, ©. Leeham Co: In Part 1 and Part 2 of the article series we have described the rational for Boeing to change the definition of the 737-7 MAX into something that has the working name of 737-7X. This is a 737-7 variant that is based on a shortened 737-8.
Figure 1. Boeing’s 737 MAX 7. Source: Boeing
In the previous articles we defined a probable size for such a cut down 737-8. The size is determined by economical criteria where the second most dominant cost in an airlines operation, the crewing cost, is the sizing criteria. These costs have a step increase if the aircraft’s seating go beyond 150 seats.
We sized the 737-7X cabin size (and therefore fuselage length) to avoid such cost increases. In this article, we will compare the resulting main data for a 7X to the original 7 and compare their fuel efficiencies.
Summary
- A 737-7X will be a larger and heavier aircraft than the original MAX 7.
- As such it will consume more fuel per mission; its aircraft fuel mile costs will be higher.
- The key comparison for an airline is the fuel consumption per seat mile for its missions. It would be vital that this is lower for a 7X than the presently defined 7.
- We check if this is the case with our proprietary performance model.
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.
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
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