Rolls-Royce, short and long term outlook

By Bjorn Fehrm

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Introduction

Feb. 18, 2016, ©. Leeham Co: Rolls-Royce reported earnings for the full year results for 2015 Friday. The share price took a hike after more than one and a half years of being pressed down by bad news.

There was nothing really new that was presented last Friday, with revenue of £13.4bn and profits before tax of £1.4bn. Both results were within the market’s expectations. It was rather the lack of more bad news that made the stock soar to a new high.

We now go behind the scenes to analyze why the stock is depressed and if this is a long term state for Rolls-Royce.

Summary:

  • Rolls-Royce has delivered one bad news after the other since May 2014.
  • The causes behind the bad news have varied between challenges in its Marine business to more competition and lower deliveries for its best-selling Civil Aerospace engine, the Trent 700.
  • Rolls-Royce has also been criticized for boxing in of customers with its after-market TotalCare maintenance program. We describe what has changed and how this affects the situation.
  • The company is also facing some accounting standard changes with the introduction of IFRS 15 for 2018. We discuss what consequences this might have.

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PNAA Day 2: Cautionary note raised

  • Feb. 10, 2016: Today is the second of three days of conference meetings organized by PNAAthe Pacific Northwest Aerospace Alliance (PNAA), in Lynnwood (WA). We’re providing live reporting throughout the three days.

Feb. 10, 2016: Large commercial aircraft deliveries hit just under $104bn in 2015, a 4.9% gain over 2014. Regional aircraft values, however, were just $7.1bn, a decline of 10.5% year-over-year, said Richard Aboulafia, a consultant with the Teal Group.

Deliveries of all aircraft types, including military, rotocraft, etc., saw only a 0.6% increase YOY. Jetliners account for 60% of the total values.

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IAG is looking at leasing used A380s

By Bjorn Fehrm

18 January 2016, ©. Leeham Co in Dublin: Willie Walsh, the CEO of IAG (which is the holding of Brittish Airways, IBERIA, Vueling and Air Lingus) spoke at the Growth Frontiers 2016 conference in Dublin about how the new IAG has become more agile in following market changes to opportunistically increase its operational efficiency.

BA A380

Walsh gave the example of IAG’s aircraft fleets where he announced that it is looking to lease five to six used Airbus A380s in addition to the ones that British Airways (BA) already have on order. These could be aircraft for BA only use but also for a joint BA and IBERIA operation.

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Bjorn’s Corner: What did we learn in 2015; engines

By Bjorn Fehrm

By Bjorn Fehrm

15 January 2016, ©. Leeham Co: Last week we looked back on what happened in 2015 on the airframe front. We finish the retrospective by looking at what turbofan engine technology came to market in 2015. New engine technology is vital, as it is on the engine side that the quest for higher fuel efficiency has the largest successes.

While advances on the airframe side might bring an additional 5% per generation, the engines typically increase their efficiency per new generation with up to three times that value. Fuel efficiency per delivered thrust unit was improved with a whopping 15% over the engine it replaces for the Pratt & Whitney Geared Turbofan (PW GTF). It was certified for use on the Airbus A320neo in Q4 2015

The competing CFM LEAP-1A shall deliver the same improvement level to the A320neo once it is certified in the summer of this year. This engine has a smaller sister that started ground tests last year, the LEAP-1B, which is developed for the Boeing 737 MAX series.

The engine that is easily forgotten is the Rolls Royce Trent XWB. It entered service on the Airbus A350-900 during the year. It brings an improvement level of around 10% compared to the engines of the aircraft that the A350 replaces (Airbus A340/A330ceo and Boeing’s 777-200 range).

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How good is a used 767-300ER? Part 4

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By Bjorn Fehrm

Introduction

Jan. 6 2016, ©. Leeham Co: We now finish our series of acquiring a used Boeing 767 aircraft to upgrade a Boeing 757-based long haul service. The 767 went out of favor recently as it has higher fuel consumption per seat than competing aircraft like Airbus A330-200.

With today’s low fuel prices and favorable used prices, a well kept 767-300ER is once again an interesting long haul aircraft. In previous articles, we looked at different aspects of the 767-300ER compared with the A330-200. First we compared the aircraft’s characteristics (Part one), then Cash Operating Costs (Part two) and finally Direct Operating Costs (Part three).

We now finish the series with a revenue and margin analysis. First we establish the competitor’s payload carrying capabilities over a trans-Atlantic network. Then we calculate their revenue capabilities using standard yields (revenue per load unit). The revenue and cost data then gives us the operating margins for the aircraft.

Summary

  • The 757 has the lowest costs but is considerably more limited in its payload and range capability than the 767 and A330. Its lack in capacity is augmented by a lack of cargo handling facilities.
  • The 767 has a cargo handling concept, unfortunately with the wrong container standard, LD2. The alternative is pallet based freight, which works well for the 767.
  • The A330-200 has the best passenger and cargo transporting capability. This compensates for its higher Direct Operating Costs but the low fuel prices keeps the 767 in the hunt.

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How good is a used 767-300ER? Part 3

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By Bjorn Fehrm

Introduction

Jan. 4 2016, ©. Leeham Co: Before Christmas we started our Boeing 767-300ER article series around acquiring used twin-aisle 767 aircraft to upgrade Boeing 757-based long haul services. We compared the aircraft’s base characteristics in Part One and then their Cash Operating Cost (COC) in Part Two.

Now we continue by analyzing the Direct Operating Cost (DOC) of the aircraft. This adds capital costs to the other operating costs for the aircraft. As the reason for our renewed interest in the 767-300ER is the attractive prices on the used market combined with low fuel prices, the capital costs are an important part of the overall understanding of the costs for the aircraft.

In our assumptions, the 767 is bought as a 10 year old aircraft and then refurbished. It is then operated on a six year financial lease, as is our 757 that we replace. Our benchmark aircraft, the Airbus A330-200 flying in a mainline airline, was bought new in 2009 and is operated on a 10 year financial lease.

Summary

  • The low capital costs of the 767-300ER makes it cost competitive in the fuel scenarios that are likely within its six year lease period.
  • The 757-200W has fractionally lower direct seat mile costs than the 767, but it has lower capacity and its more limited range reduce its operational usefulness.
  • The A330-200 has the best operational flexibility but its higher capital costs makes it the most expensive aircraft to operate in the period of interest.
  • In a final article, we will add the revenue capability of the aircraft. This is where the A330-200 gets the chance to show if it can cover its higher direct costs with its higher earnings capability, thereby generating more value for the airline.

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How good is a used 767-300ER, Part 2

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Introduction

By Bjorn Fehrm

Dec. 21 2015, ©. Leeham Co: Last week we started our Boeing 767-300ER article series around acquiring used twin-aisle 767 aircraft to upgrade 757-based long haul services, like Canada’s WestJet has done. We compared the aircraft and looked at the base data for the aircraft in article one.

Now we continue by analyzing the Cash Operating Cost (COC) of the aircraft in a typical long haul configuration, using our normalized seating. We are assuming that the 767 and the 757 are a half-life state between overhauls of engines and airframe.

Our benchmark aircraft is an Airbus A330-200 which is flying in a mainline airline. Here we assume that it is 25% deteriorated since new for engines and airframe.

Summary

  • The 767-300ER and A330-200 differ in fuel and crew costs per seat mile but are close in most other cost items for COC.
  • The 757-200W has lower fuel operating and crew costs than a 767 for the sectors it can perform. It is more expensive in maintenance and landing/underway fees on a per-seat basis.
  • Overall the 767 is sufficiently within range of the A330-200 for cash operating costs so that when we add capital costs, it could be close to a draw.
  • Finally, we will look at the earnings capabilities of the aircraft by adding standard yields for the payloads the aircraft can carry.

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Bjorn’s Corner: Twins or quads?

By Bjorn Fehrm

By Bjorn Fehrm

11 December 2015, ©. Leeham Co: The debate over two or four engines for long range aircraft is as old as the jet airliner. A number of myths have been pedaled over the years over the virtues of the one over the other. The myths have even been presented by airline CEOs as “facts that are known in the industry.”

Having done several in-depth comparisons of two-vs-four engined long range aircraft, we can’t find the patterns that these myths propel: that a quad is less efficient than a twin and should have higher maintenance costs. What we see is that it is all dependent on what one compares and to what technology generation the one or the other aircraft belong.

When we didn’t get the same results as the myths on a number of areas, we started to wonder what could have created the myths in the first place. Looking at what four engined airliners could have been the source of the rumours, we started to see a pattern. It was a pattern of apple-and-oranges being compared and wide ranging conclusions being drawn.

Here is what we found. Read more

Used B777-200ER or A340-300, Part 3

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Introduction

By Bjorn Fehrm

Dec. 9 2015, ©. Leeham Co: We have now covered the Cash and Direct Operating Costs (COC, DOC) for our acquired and refurbished Airbus A340-300E and Boeing 777-200ER. We will now finish the article series by looking at the earnings capability of the aircraft and compare these to the cost.

We will start by examining the payload carrying capability of the aircraft over different stage lengths by means of the aircraft’s payload-range diagram. Any excess payload capability over a cabin filled to a normal load-factor will be used to add cargo to the revenue stream.

Finally, we will value the payload according to the market’s standard yields for Business, Economy and Cargo payload. With the revenue from our long range mission, we can then establish mission margins and see which aircraft is suitable for what mission type.

Summary

  • The 777-200ER and A340-300 are very close in operating costs in their base versions.
  • With the use of payload-range curves for the aircraft we can see that the 777-200ER not only has a higher passenger capacity (six seats, stretched to 30 with the refurbishment), it can also take more payload weight.
  • Excess weight capability can be used to load cargo but only if there is space available for the cargo modules when passenger bags has been loaded. We check if this is the case.
  • Finally, we check if the higher purchase price and conversion cost for the 777-200ER can be covered by its earnings advantage.

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Used B777-200ER or A340-300, Part 2

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Introduction

By Bjorn Fehrm

Dec. 3 2015, ©. Leeham Co: Last week we started our article series around acquiring used twin-aisle aircraft to start new long haul services or boost an existing network. We focused on Airbus’ A340-300 and Boeing’s 777-200ER, two capable long haulers, both with a capacity of around 290 seats, using our normalized two class cabin. We wanted to understand which one would have the lowest operating costs over a network which has flights up to 12-13 hours.

We analyzed the Cash Operating Cost (COC) of the aircraft in their standard configuration in Part 1. We could see that their COCs are similar. We now study the aircraft’s capital costs. These will include a necessary cabin makeover where we will use the chance for the 777-200ER to convert it to a 10 abreast aircraft in economy. We aim to amortize its higher acquisition cost by spreading these over more passenger seats.

Summary

  • The 777-200ER and A340-300 are very close in Cash Operating Costs in their base versions.
  • The 777-200ER has a market valuation which is more than double that of the A340-300. Recently this level has declined but the acquisition cost of a -200ER is still higher than the A340-300.
  • We use the potential of 10 abreast in economy to see if we can even the per seat cost of the two by spreading the higher costs of the -200ER over more seats.

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