Leeham News and Analysis
There's more to real news than a news release.
Widebody write-downs are coming – how much will asset values be affected?
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By Judson Rollins
Introduction
Air New Zealand 777-300ER stored at Victorville, CA (USA). Source: New Zealand Herald.
May 27, 2021, © Leeham News: As central banks pumped liquidity into the global economy over the past 15 months, aviation has attracted a steady stream of investor interest.
However, aircraft transactions have been few and far between apart from growth in sale-leasebacks. An expected wave of lessor consolidation has been limited to one major transaction, the AerCap/GECAS merger announced in March. Even this was likely driven by GECAS parent General Electric’s push to dismantle its finance business, GE Capital.
Fly Leasing, a lessor with just 84 aircraft, sold itself to private equity firm Carlyle Aviation Partners in March. These have been the only lessor mergers or acquisitions to date, despite wide speculation the COVID pandemic would spur many lessors to combine.
A lack of merger activity is likely because aircraft leasing is not a business with large economies of scale.
Widebody aircraft values have fallen 30%-40% since the start of 2020, according to the UK appraiser Ishka. Relatively few of these aircraft have been written down on lessor balance sheets, but more are expected to be so toward the end of this year.
Summary
- Equity investors looking for high returns are finding disappointment so far.
- Asset write-downs are unlikely to have much impact on lessor viability – but could open the door to distressed sales.
- Could a glut of unused widebodies lead to a wave of new airlines?
HOTR: Ryanair’s O’Leary pissed, but wants 737 MAX 10
By the Leeham News Team
May 25, 2021, © Leeham News: Michael O’Leary may be royally pissed as Boeing, but he’s nevertheless in negotiations for a large order of 737-10 MAXes.
In the year-end earnings call last week and in an appearance on CNBC, O’Leary unloaded on Boeing’s Seattle management team over delivery delays for the 737-8200.
O’Leary, the CEO of Ryanair, didn’t mince words—he never does. This is, after all, the guy who at a press conference talked about his potential trans-Atlantic low fare operation providing blow jobs to business class travelers. Sitting next to him was his female translator, who clearly was nonplussed. (You can look it up on YouTube.)
Boeing’s dilemma in the 125-170 seat sector
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By Scott Hamilton
Introduction
May 24, 2021, © Leeham News: NMA. 777X. The 200-270 seat sector.
While Boeing grapples about what to do in the 200-270 seat sector, the heart of the single-aisle market represented by the 737-8 and A320neo faces a replacement decision, too. Photo: Boeing.
A lot of attention goes to these two Boeing airplane programs and the +200 seat sector.
However, the single-aisle market below 170 seats is the next arena that needs updating.
Many expect Boeing to decide by 2023 whether to launch a new airplane program in the +200 market. Airbus is waiting to see what Boeing does before moving.
Boeing’s heart of the single-aisle market is, of course, the 737-8 and before it, the 737-800. There are thousands of the for former on order and in service of the latter.
Pontifications: Remembering an industry visionary
By Scott Hamilton
May 24, 2021, © Leeham News: In the 42 years I’ve in associated with commercial aviation, I’ve met lots of people. I became friends with some. Others were good business acquaintances.
Michael Chowdry fell into the former category. Jeff Cole fell into the second.
Both died in an airplane accident Jan. 24, 2001. Chowdry was CEO of Atlas Air, a pioneering ACMI operator.
Cole was the aviation reporter for the Wall Street Journal. Cole went to Denver to interview Chowdry about the ACMI operation. ACMI stood for Aircraft, Crew, Maintenance and Insurance. The concept is common today. It wasn’t then.
As part of the visit, Chowdry decided to give Cole a ride in a Czech-built L-39 jet trainer he owned. Almost immediately after take-off, the flight ran into trouble. Chowdry, piloting the plane, never got higher than some 400 feet. He couldn’t keep the plane airborne. It crashed, killing himself and Cole instantly.
Now, 20 years later, Chowdry’s widow, Linda, published a biography called No Man’s Son, A Flight from Obscurity to Fame.
Bjorn’s Corner: The challenges of airliner development. Part 4. How safe is safe?
By Bjorn Fehrm, Henry Tam, and Andrew Telesca
May 21, 2021, ©. Leeham News: After giving an overview of the types of certification rules last week we now describe why the rules can vary so much between projects.
We cover some general concepts around acceptable levels of safety that influence how the regulations get applied to specific projects.
Figure 1. Air vehicles and their classification. Source: Aviation & Flying.
Global airline recovery is patchy, driven by domestic traffic
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By Judson Rollins
Introduction
May 20, 2021, © Leeham News: Despite widespread hope, the global passenger travel recovery many expected in 2021 has proven elusive to date. Airline industry advocate International Air Transport Association (IATA) said that March global passenger traffic was still down more than two-thirds from 2019.
First-quarter airline earnings in most parts of the world have been lackluster or worse as borders remain closed and business travel continues to be deeply depressed, even within the few countries where vaccine rollouts have made the greatest progress. And jet fuel prices have rebounded to nearly where they were before the pandemic.
Aircraft parked in Alice Springs, Australia. Source: Bloomberg.
Traffic volumes are rapidly growing in the US and Chinese domestic markets, but US carriers are reporting average yields 20%-30% below pre-COVID levels. Chinese carriers don’t provide any visibility into their yields. Forward booking data from IATA shows the domestic-international divergence will only widen in the coming months.
Air cargo continues to cushion the fall in passenger revenue at many airlines, but to nowhere near the extent necessary to fully offset it.
Summary
- International travel continues to weigh on airline earnings globally.
- US carriers are optimistic about the strength of leisure recovery, less so on business.
- Asia and Australasia remain largely isolated due to strict border controls.
- EU internal borders are slowly reopening; vaccinated travelers likely to be admitted soon.
- Cargo provides a revenue offset to some regions, but not all.
HOTR: Porter confirmed as customer in E195-E2 deal
By the Leeham News Team
May 19, 2021, © Leeham News: Embraer got a big boost for its E-Jet E2 order book in April when it announced a firm deal for 30 E195 E2s.
“On April 23, the Company signed a firm order for 30 E195-E2 jets with an undisclosed customer, with deliveries starting in 2022. The 30 firm orders will be included in Embraer’s second quarter backlog,” Embraer said in its April 29 earnings release.
Embraer delayed E-Jet deliveries because of the COVID-19 pandemic. Thin backlogs for the E2 pre-date the pandemic. This order, with deliveries starting next year, illustrates Embraer’s thin skyline.
Airfinance Journal on May 13 first reported the customer is Canada’s Porter Airlines. Porter, pre-pandemic, operated De Havilland Dash 8-400s exclusively from Billy Bishop Airport, Toronto’s downtown in-city airport. AFJ cited multiple sources. Porter Airlines denied it ordered the airplane or that it had signed lease deals to acquire the E2. The carrier told the Toronto Globe and Mail it isn’t going to “switch” fleet types.
However, LNA confirmed this week that the airplanes are going to Porter. Porter declined to answer any questions from LNA.
“Our response to this speculation has been provided to others and published. We do not have anything further to add,” Porter said in an email.
Update (2): Boeing rehires aircraft inspectors
By Bryan Corliss
May 18, 2021 © Leeham News — The Boeing Co. has quietly recalled at least some of as many as 900 quality control inspectors who were laid off in 2019 as part of a drive to adopt car-industry manufacturing processes in aerospace manufacturing.
The move comes after the union for the inspectors – Machinists District Lodge 751 – pushed the company to prove that getting rid of inspectors could be done without risking quality issues and would actually improve production times.
“Our union’s goal is to save Boeing from making decisions that could be detrimental to (its) future and ours,” union leaders said in its monthly AeroMechanic newsletter. “A second set of eyes is a critical component of building Boeing airplanes and necessary for the long-term success of the company.”
A union spokeswoman said she was unable to say precisely how many of the inspectors were initially laid off, and how many have been brought back since the recalls started. Boeing’s media relations team did not respond to a written list of questions on the topic.
Updated: Boeing provided a written statement that said, in part, that there has been “no reduction in quality staffing related to changes in our inspection approach,” despite reports in 2019 that a new approach to quality control would lead to far fewer human inspections, and inspectors.
Update 2, May 24: Boeing provided additional information today about the reported layoffs of verification inspectors, first reported by The Seattle Times in 2019.
Boeing acknowledged that a former Boeing executive told The Times then that up to 900 inspectors could be laid off that year. It was this 2019 report that formed the basis of LNA’s introductory paragraph.
However, in response to a specific question by LNA, today Boeing said there were no cuts in quality inspectors in 2019.
There were layoffs in 2020, following the eruption of the COVID-19 global pandemic, which occurred during the extended grounding of the 737 MAX. Boeing declined to specify the number.
“We don’t provide details about employment in specific teams,” a spokesman wrote in an email to LNA. “As we’ve said throughout the past year, due to the pandemic’s impact on commercial aviation, we reduced production rates for some of our commercial programs, and our factory employment is directly related to production work statement.”
HOTR: Boeing’s “historic” production advance
By the Leeham News Team
May 18, 2021, © Leeham News: Boeing’s Defense unit last week said it joined the front fuselage of the first Boeing-SAAB T-7A Red Hawk trainer with the aft section “perfectly,” in less than 30 minutes.
It was, Boeing said, an “historical moment.”
It was “a testament to the digital heritage of the U.S. Air Force’s first ‘eSeries’ aircraft and witness to the benefits of model-based engineering and 3D design,” Boeing said. “The digital splice was completed in 95% less time than traditional splices and with substantial quality improvements.”
Why is this a big deal for Boeing Commercial Airplanes?
Because the T-7A, along with the MQ-25 unmanned aerial refueler for the Navy, are Boeing’s pilot programs, if you will, for production of the next Boeing commercial airliner.
This is in part what former Boeing Co. CEOs Jim McNerney and Dennis Muilenburg and current CEO David Calhoun alluded to each time they talked about advanced production.
The SpaceJet impact on MHI’s finances
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By Vincent Valery
Introduction
May 17, 2021, © Leeham News: Mitsubishi Heavy Industries (MHI) officially launched the Mitsubishi Regional Jet (MRJ) program on March 28, 2008, at the end of its 2007 fiscal year. The Japanese industrial conglomerate envisioned the maiden delivery in 2013.
Fast forward 13 years, and the now-called SpaceJet development has been “paused” indefinitely. Most believe MHI effectively canceled the program. There is a possibility MHI might never bring the SpaceJet into passenger service.
LNA investigated MHI’s financial statements since 2005 and annual reports since 2007 to understand the impact of the program on the Group. This article takes a deep dive into the sequence of events, from launch to the COVID-19 pandemic, that led to the current state of affairs for the SpaceJet program.
Summary
- Becoming an OEM at the peak of the commercial aviation cycle;
- Repeatedly shifting program timelines;
- Solid MHI balance sheet funds project;
- COVID-19 pandemic tips balance after significant investments;
- A SpaceJet in limbo.