Airbus stock hammered on airplane news, Boeing caught in the downdraft

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Introduction

Dec. 10, 2014: As company investors’ days go, Day 1 of Airbus Group didn’t go well. Airbus stock traded off 10% on news that the A330 production rate, already to reduced from 10/mo to 9/mo in 4Q2015, will be further reduced in 2016. No number was given.

Leeham logo with Copyright message compactThen Airbus acknowledged it may decide by 2018 whether to terminate the A380 program. There were no sales this year.

And true to form, the CEO of Qatar Airways, Akbar Al-Baker, did another one of his famous U-Turns. Only a short time ago he was singing the praises of the A350, the first of which was to be handed over to his airline on Saturday. Today he announced delivery was postponed “until further notice,” with no explanation for the delay.

The stock reverberation didn’t end there; it migrated across the Atlantic, sending Boeing stock down on Wednesday at a rate twice that of the Dow Jones index.

Summary:

  • A330ceo sales have dried up in advance of the A330neo introduction. A large Chinese order appears to be going nowhere.
  • The A380 program is supposed to finally hit cash break-even in 2015, but no sales put this program in doubt.
  • The only way to boost the A380 is to do a neo and the business case is iffy.

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737 MAX 8 could be enabler for some LCC Long Haul

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By Scott Hamilton and Bjorn Fehrm

Introduction

737-8 range

Figure 1. Nominal range of 737 MAX 8 from Oslo Source: Great circle mapper, Boeing. Click on Image to enlarge

Dec, 8, 2014:The Boeing 737-8 MAX is the successor to the 737-800 and has largely been thought of in this context.

Our analysis, prompted by Norwegian Air Shuttle (NAS) plans to use Boeing 737-8 MAXes to begin trans-Atlantic service on long, thin routes, comes up with a conclusion that has gotten little understanding in the marketplace: the 8 MAX has enough range and seating to open a market niche below the larger, longer-legged 757, and the economics to support profitable operations for Low Cost Carriers interested in some trans-Atlantic routes or destinations beyond the range of the -800.

Summary

  • We based our analysis on our proprietary, economic modeling, assumed Norwegian cabin configuration standards.
  • We compared the operating costs of the 737-8 with Norwegian’s present long haul aircraft 787-8 in a similar cabin configuration.
  • The comparison range is the max endurance range for an LCC long haul 737-8, eight hours or 3,400nm air distance (no wind included).

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Assessment of Lessors in Airbus and Boeing backlogs, narrow- vs wide-body

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Introduction

Nov. 30, 2014: Airlines now lease about 50% of their aircraft under a variety of mechanisms: operating, finance, leveraged and Islamic leases, just to name a few.

There are operating leasing, special purpose and “house” companies. There are leasing units of investment banks, insurance companies and a host of others.

Ireland is a popular leasing venue because of favorable tax laws.

The Big Four airframe OEMs have long sold aircraft directly to lessors, and the emerging airframe OEMs, COMAC and Irkut, have seen orders placed by emerging lessors in their home countries. ATR, the turbo-prop OEM, also has received orders from lessors.

Today we look at the lessor relationships with Airbus and Boeing.

Summary

  • Lessors represent a significant, but still a minority, part of the Airbus and Boeing backlogs.
  • Widebody airplanes constitute a small portion of lessor orders.
  • Boeing has more widebody lessors orders than Airbus.
  • Airbus has a larger lessor order book than Boeing.

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Little progress on A330 production gap

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Introduction

Leeham logo with Copyright message compactWith the end of the year a mere five weeks away, Airbus appears to have made little progress in closing its production gap for the A330.

Summary

  • Airbus still has a gap of approaching 150 production slots at current and announced rates between now and the planned EIS of the A330neo in December 2017.
  • Launch of A330neo helps, but does not cure production gap–especially between now and 2018.
  • No Chinese order for A330 Regional after more than a year.
  • AirAsiaX deferring orders–and will some CEO orders be swapped for the NEO?

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Lufthansa to use A340s in “lower cost” operation; our analysis against the 787

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By Scott Hamilton and Bjorn Fehrm

Introduction
Low cost long haul service is gaining traction, but previous efforts proved difficult to be successful.

Dating all the way back to Laker Airways’ Skytrain and the original PeoplExpress across the Atlantic, airlines found it challenging to make money.

More recently, AirAsiaX retracted some of its long-haul service, withdrawing Airbus A340-300 aircraft when they proved too costly. The airline recast its model around Airbus A330-300s as an interim measure, unable to fly the same distances as the longer-legged A340. AirAsiaX ordered the Airbus A350-900 and now is a launch customer for the A330-900neo.

Leeham logo with Copyright message compactCebu Pacific of the Philippines is flying LCC A330-300 service to the Middle East. Norwegian Air Shuttle famously built its entire LCC long haul model around the Boeing 787, initiating service with the 787-8 and planning to move to the 787-9.

Canada’s WestJet is leasing in four used Boeing 767-300ERs to offer LCC service,

Legacy carrier Lufthansa Airlines plans to use fully depreciated A340-300s to begin “lower cost” (as opposed to “low cost”) long haul service. LH says the fully depreciated A340s come within 1%-2% of the cost per available seat mile of the new, high capital-cost 787s.

Summary

  • AirAsiaX’s A340 LCC long haul service proved unprofitable. Can Lufthansa’s similar service with fully depreciated A340s work?
  • Our analysis shows that it can. It can even support the lease rates that would be charged for a 10 year old A340 if the fuel price remains at the present level.
  • When doing the research for this article and going through the results of our proprietary model we started to ask ourselves, is the A340-300 the ugly duckling of the airline market?

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Boeing fails to assure on 777 production gap

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Introduction
Boeing’s ability—or inability—to bridge the production gap for the 777 Classic to the 777X entry-into-service in 2020 was a top concern of a series of Wall Street types during a recent series of meetings we had across the USA.

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There is a great deal of skepticism over whether Boeing can successfully maintain the current production rate of 100/yr (8.3/mo). People we talked with look at the number of orders Boeing needs to bridge the gap, the Boeing claims that it can obtain 40-50 or 40-60 a year, and, in a more recent development, the falling oil prices depressing the need for a new, more efficient 777-300ER compared with the 2004 model and the even older 777-200ER series.

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We have been telling our clients since March that Boeing will have to reduce the production rate of the 777 because of the large production gap. Aerospace analysts began waking up to this possibility by May and the broad consensus today is that Boeing will have to reduce the rate—the only questions remaining is by how much and how soon.

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As recently as the 3Q2014 earnings call, Boeing continues to assert it will be able to maintain rates with new sales. Boeing has booked 43 firm orders through October for the 777 Classic—39 for the 300ER and four for the freighter. This is as the low-end of the range Boeing says it needs.

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However, our Market Intelligences gathered over the summer and into the fall indicates sales efforts are struggling.

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Summary

  • Boeing clearly hasn’t been persuasive in its claims it will bridge the production gap at current rates;
  • Boeing has open delivery slots in the second half of 2016;
  • The big drop off in backlog begins in 2017 and gets worse going forward;
  • Key airlines that have been pitched have said “no;”
  • Emirates sends the industry’s first operational 777-300ER to scrap;
  • Bow wave of 777s coming to 12 years and off lease begins soon, creating cheap alternatives to new sales; and
  • Lessors will be compelled to offer -300ERs for low prices, depressing opportunities for Boeing.

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Boeing 737 MAX 8 as a long and thin aircraft and how it fares in general versus Airbus A320neo.

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By Bjorn Fehrm

Introduction

Over the last weeks we have looked at Boeing’s 757 replacement possibilities on its long and thin network niche, including a ground breaking launch interview for the A321neoLR with Airbus Head of Strategy and Leeham logo with Copyright message compactMarketing, Kiran Rao. In the series we have seen that the A321neo has the potential to replace the 757-200 on long and thin international routes. Boeing’s equivalent single aisle entry, 737 MAX 9, has problems to extend its range over 3,600nm. It is too limited in the weight increase necessary to cover the longer range.

Many have asked how the less- restricted Boeing 737 MAX 8 would fare, suitably equipped with the necessary extra tanks. This is the subject of this week’s sequel on the theme long and thin. At the same time we look at Airbus entry in this segment, the A320neo, to see how it stacks up to the 737 MAX 8, both in their normal 1,000 to 2,000nm operation and then also in a long and thin scenario.

Let’s first summarize what we found so far in our four articles around the Boeing 757 and its alternatives:

  • The Boeing 757-200 with winglets can serve international routes with city pairs up to 3,500nm. The rest of its range capability (about an additional 500nm) is needed for unfavorable winds and reserves.
  • The A321neo has the capabilities to be extended to cover the range of the 757-200. This was also announced by Airbus during our series. The improvements are an increase in range of 500nm by virtue of three extra center tanks and an increase in max takeoff weight of 3.5 tonnes ( 7,400 lb). The efficiency improvement over 757-200 would be 25% with a small decline in passenger capacity (162 vs. 169 seats) in a typical First, Premium economy and economy cabin.
  • Boeings 737 MAX 9 fares less well. While it has the wing to fly the range, the aircraft’s squat stance hinders the aircraft to cant the wing to generate the necessary lift for an increased takeoff weight. MAX 9 can’t rotate to more than 70% of the angle of an A321neo. Subsequently the take off distances get too long with any weight increase.
  • Boeing’s New Small Airplane study covers from 130 to 240 seats and evaluates both single and dual aisle alternatives. The big question mark is when an entry into service (EIS) is necessary and therefore when a launch decision has to be taken. We think after the 777X has entered flight test in 2018/19 for EIS 2025. Boeing’s CEO, Jim McNerney, says he sees EIS as 2030 for a new small airplane. We argue this risks missing the boat.

Summary

  • The 737 MAX 8 is 1.5m (5 feet) longer than A320 with a 2.5m (8.2 feet) longer cabin. This brings a 12 seat higher capacity, everything else being equal. The result is that the MAX 8 beats the A320neo on per seat efficiency while being worse on trip efficiency.
  • The MAX 8 has a range on internal fuel of 3,700nm. This makes it suitable for extending the range up to 4,000nm with smaller changes. It thereby is probably Boeing’s best bet of offering a long and thin aircraft before the New Small Aircraft (NSA) comes to market. Its major drawback is a 33 seats reduction in capacity compared to 757-200 when both are configured for long and thin.
  • A320neo is less ideal to extend to long and thin. It requires several extra fuel tanks to get to 4,000nm nominal range and then there is too little space left for luggage.

737 MAX8 overlaid with A320neo

Figure 1. Boeing 737 MAX 8 overlaid with Airbus A320neo. Source: Leeham Co.

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Airbus poised to overtake Boeing in wide-body sector, bracket Boeing at both ends

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Introduction
Airbus is poised to produce more medium twin-aisle airplanes than Boeing by the end of 2017 and maintain Leeham logo with Copyright message compactthe lead into the early 2020 decade, according to production rates that have been announced, unannounced and based on estimates according to production gaps; and other information, a Leeham News and Comment analysis shows.

The wide-body arena has traditionally been Boeing’s to dominate. Although Airbus has outsold Boeing in this sector in recent years, Boeing’s greater production capacity and earlier-to-market 787 vis-à-vis the A350, which will only deliver to its first operator next month, maintained the advantage for Boeing’s market share for years.

The A340 wasn’t a high-demand airplane, eclipsed as it was by emerging ETOPS authority and a highly desirable, very efficient 777 Series.

Airbus and Boeing each face challenges with their aging wide-bodies. The 777 Classic is now on its downward life cycle following the launch of the re-engined, re-winged 777X. Boeing claims it can maintain current production rates of the Classic, but the official line is about the only one that believes this.

Airbus’ A330 Classic, now called the ceo after the launch of the A330neo program, similarly was headed toward sharp declines in the production rates. Airbus quickly achieved 121 commitments for the neo, but first delivery isn’t planned until December 2017 (which probably means 1Q2018) and it still needs to bolster the backlog of the ceo, which drops sharply in 2016. Airbus has been far more transparent than Boeing about the risk to the production rate, and announced a reduction from 10/mo to 9/mo in 4Q2015. We don’t think this will be enough, and Airbus has talked about rates of 7-8/mo.

With this as a backdrop, we believe Airbus will begin out-producing Boeing in medium-wide-bodies within a few years. We leave out the Very Large Aircraft as highly niche. But inclusion would only make the case worse for Boeing. We expect the 747-8 production rate to be cut from 1.5/mo to 1/mo, with an announcement coming as early as next month. Airbus is currently producing the A380 at 2.5/mo.

Summary

  • We forecast the crossover point in production favoring Airbus in 2017.
    Airbus has notified the supply chain to plan for a higher-than-announced rate of 10/mo for the A350.
  • We expect the A330ceo rate to be further reduced, offset by the ramp-up of the A330neo.
  • We expect the 777 rate to begin falling in 2017 and continue to fall up to the EIS of the 777X in 2020.
  • Ramp up of the 777X rate will take several years, providing Airbus a production rate advantage from 2017 through at least 2022.
  • Airbus already has the advantage over Boeing in the single aisle sector. Gaining the advantage over Boeing in the twin aisle sector brackets Boeing in a way that has never been done before.

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Part 3: Boeing 757 replacement: 757 and Airbus A321neoLR versus clean sheet designs.

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By Bjorn Fehrm

Part 3 of 3

Introduction

In Part 2 of our three-part 757 Replacement analysis, we took a close look at Airbus’ new 97 tonne take-off weight A321neo, revealed in a world exclusive by Leeham logo with Copyright message compactLeeham News and Comment October 21. We analyzed the A321neoLR’s capabilities and limitations when compared to Boeing 757-200W and we saw that it could do the international flights that the 757-200 does with about 25% better efficiency. In this final Part 3, we will now compare the 757 and A321neoLR against what can be Boeing’s reaction, a clean sheet New Single Aisle, NSA, or New Light Twin Aisle, (NLT). First the conclusions from Part 2:

  • When using the United Airlines-configured 757-200W international as benchmark, we came within seven seats of the 757 capacity for an A321neoLR. It covered the same range and had trip fuel costs that were 25% lower.
  • The per seat fuel costs gave a 22% higher efficiency, which was within 2% of Airbus own figures.
  • 737 MAX9 is not suitable for stretch to an international version, not because the wing is not good enough but because the MAX9 cannot bring the wing to an angle at take-off where it can work efficiently; the landing gear is too short.

Summary
For Part 3 we can summarize:

  • A New Single Aisle (NSA) or New Light Twin (NLT) which would enter the market in 2025 would be sized at around 200 passengers with subsequent variants covering the 175-225 seat market, all numbers with OEM standard two-class seating. Figure 1 shows the fuselage cross sections we have used in our modelling of NSA and NLT to cover this market segment.

NSA and NLT cross sections

Figure 1. Fuselage cross sections of our models of NSA and NLT. Source: Leeham Co.

  • In order to cover the market segment of the 737, A320 and 757 it would have a range in excess of 4,100nm. We will use 4100nm for our modeling to maximize the comparative efficiency information.
  • Its efficiency would be higher than an A321neoLR, primarily due to better engines and a more modern wing.
  • The New Light Twin (NLT) wins on comfort and ground turn-around time but pays with a larger fuselage cross section due to the extra aisle. This causes more drag and structural weight, net effect is a reduction in efficiency of around 2.5%.

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CASM Paradigm: Lower Seat Mile Cost or Higher Yield; Evaluating the GOL competition

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Introduction

As Brazil’s budget airline GOL reportedly evaluates whether to acquire 20 Boeing 737-7s or Embraer E-195 E2s, the principal of the “CASM Paradigm” is a concept worth examining.

Leeham logo with Copyright message compactThis head-to-head evaluation of the E-195 E2 and the 737-7 MAX is a rarity. Typically the head-to-head involves the Bombardier CS300 and the Airbus A319neo. All three have the same seating capacities. The E-195 E2 has slightly fewer passengers than the 737-7 with similar seat pitch.

The competition is also what might be seen as a contrary competition. Airframers agree: the airline industry is upgauging. Capacity discipline, long elusive until after the global financial collapse of 2008, has been driving load factors higher. But lowering unit costs, or the Cost per Available Seat Miles (CASM) has long been the principal measure by which airlines, OEMs and aerospace analysts measure efficiency.

Although Trip Costs of aircraft operating over a route is important, the trend toward upgauging at all levels clearly is the driving force.

It's an age-old debate: the cost per available seat mile (CASM) vs trip cost. CASM typically wins, and the airline industry is migrating toward larger aircraft. Embraer, not surprisingly, thinks this has gone too far. Graphic: Embraer, reprinted with permission.

Figure 1. It’s an age-old debate: the cost per available seat mile (CASM) vs trip cost. CASM typically wins, and the airline industry is migrating toward larger aircraft. Embraer, not surprisingly, thinks this has gone too far. Graphic: Embraer, reprinted with permission. Click on image to enlarge.

Embraer takes a different view, arguing that trip costs and a smaller airplane should trump the CASM obsession. A smaller airplane will mean higher yields, EMB says. A larger airplane provides lower trip costs but drives yield lower.

We visited Embraer’s headquarters earlier this month and received a full briefing on what EMB calls the CASM Paradigm. In our report today, we detail the presentation and discuss other considerations beside CASM vs Trip Costs that drive the size of the aircraft acquired.

Summary

  • The CASM Paradigm becomes a vicious, circular cycle, driving airlines to larger aircraft but lower yields.
  • Extra seats on larger aircraft mean lower unit costs but at the cost of profits.
  • Scope Clauses remain an issue in the US.
  • Connecting traffic, pay scales also are issues.
  • We analyze the operating costs of the E-195 E2 vs the 737-7.
  • We discuss the GOL competition.

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