Leeham website updated 4/29

Our Corporate Website has been updated with a new Commentary, News Articles and the Boeing Conference Call transcript.

This week we examine the pledge by Boeing CEO James McNerney to tone down the rhetoric in Boeing’s protest of the USAF tanker contract award to Northrop Grumman, and Northrop’s response to McNerney’s pledge. We also touch on the 747-8I, the close tie between GE and Boeing on the 787 program; and Boeing’s Shadow.

The Corporate Site is here.

Profile on Boeing’s McNerney

The Wall Street Journal’s Lynn Lunsford has a good piece on what Boeing’s CEO, Jim McNerney is doing about the 787 and KC-X and how McNerney views things at the moment. It’s a rare interview granted by the low-key McNerney.

Speaking of the tanker, Northrop Grumman, in one of its e-blasts, cites a National Journal story suggesting Boeing is willing to spend an eye-popping $250 million to overturn the tanker decision. Boeing denies the figure. The story may be found here.

News on the tanker, 787, Boeing earnings

The last 24 hours have been busy news days on the tanker and the 787.

Reuters published a story yesterday about the Air Force calling the CEOs of Boeing and Northrop Grumman on the carpet for the vitriolic nature of the protest. Boeing has been engaged in a high profile advertising campaign that many view as a scorched earth approach toward the Air Force. This was the subject of an in-depth column we did last week on our Corporate Website.

Although Boeing kicked off the latest round with its post-protest ad campaign, Northrop hasn’t distinguished itself, either. In e-blasts, Northrop’s language is as over-the-top as is Boeing’s rhetoric. Both companies, which by their nature fall into the “world class” category, ought to be embarrassed by their respective efforts.

Other tanker news in the last 24 hours: US Sen. John McCain, the GOP presidential candidate who killed the Boeing KC-767 tanker lease deal in 2004 and who has been blamed (unfairly, in our view) by Democrats for killing Boeing’s chances this time around, told the parties to “get on with it,” as outlined in this report by The Moble Press-Register.

The Citizens Against Government Waste awarded US Reps. Norm Dicks (D-WA) and Todd Tiahrt (R-KS) the “Porker of the Month” award (named for pork-barrel projects, a US term for wasteful government spending) for their efforts to kill the USAF tanker contract with Northrop Grumman. This makes a good sound bite, but The Washington Post previously reported that Northrop helps fund CAGW. Northrop did not confirm or deny the funding story when The Post inquired. So take this one with a grain of salt.

On the 787 front, Jon Ostrower last night obtained a memo to employees from Boeing CEO James McNerney, discussing the 787 program and the production model. Ostrower’s Flightblogger has the write-up and the memo. Dominic Gates at The Seattle Times followed with his story and copy of the memo in today’s paper.

Boeing’s first quarter earnings call is tomorrow at 10:30 EDT. The webcast may be found here. Boeing is expected to reaffirm its 2008 earnings guidance (as it did on the program update), but maybe there will be some information about penalties and lost/deferred revenue. We provided an analyst estimate recap in our own estimate on revenue lost through 2013 in our column last week on our Corporate website. The analyst estimates of penalties range from $800 million to $5 billion. Our guesstimate on revenue loss through 2013 is about $30 billion. Extra production costs are on top of these numbers.

Sorting out reports of new 787 delay

For anyone who has picked up the reports on Yahoo or Google News about the Focus magazine story of another potential round of 787 delays, and Boeing’s response Sunday denying the report, this all must be very confusing.

We don’t know if the report, which cites unidentified sources in the FAA, is correct or not. The report also says Boeing will announce another delay of three to six months in May, though the English-language reporting of the Focus story doesn’t say where this timing information comes from.

What we do know is that since before the 787 roll-out, the FAA has been concerned about a variety of issues relating to the ground-breaking technology of the 787 and has issued several “special condition” rules that Boeing has to meet. This is not anything to get exercised about.

We also have been told, however, on many occasions–also beginning before the roll-out–that the FAA is short on the technical expertise to assess some of the technology and that it’s had to rely on engineers at the US Air Force who have greater experience in composites and other areas than those at the FAA. This lack of technical expertise at the FAA may be what’s at work here, if the Focus report has any validity.

The New Delta

Here’s an attractive suggestion for the New Delta, combining Northwest and Delta liveries. This comes from the Modified Airliners photos website, an enthusiast board for people who like to play with designing liveries.

Ominous development for Northrop’s tanker

An ominous political development for the Northrop tanker award by the USAF may be developing in the US Senate.

An article today in The Washington Post discusses the future of Sen. Robert Byrd, chairman of the Senate Appropriations Committee. Byrd is 90 years old an ailing. He’s been frequently absent from his Senate duties, and here’s where this could become ominous for Northrop. According to The Post, Byrd at times last year turned to Sen. Patty Murray (D-WA) to assume the lead role in appropriations matters.

Murray, known within Washington State (and probably Washington, DC, too) as the Senator from Boeing, has made it her mission to kill the Northrop award. If Byrd’s ill health means turning over reigns, even on spot-issues, to Murray, this does not bode well for Northrop–which, along with partner EADS, has blithely dismissed Murray’s effectiveness as a Senator.

(As a constituent of Murray’s we can attest that she is far more effective than either Northrop or EADS give her credit for.)

Assuming the Democrats gain seats in the Senate in the November election, as conventional wisdom currently concludes, Murray could gain even more clout as a senior member of Appropriations. Regardless of the outcome of the Boeing protest to the GAO over the contract award, Murray’s increasing influence and stature on Senate Appropriations isn’t good news for Northrop.

Boeing Commercial plans for KC-767 protest rejection

Another in a series of cartoons from The Mobile Press-Register’s JD Crowe. The reference to flying tricycles is to a comment a Boeing official made about Northrop Grumman’s planned production model for the KC-30 was like building tricycles at Christmas.

Flight International reported today that Boeing may tap the 767-300ER to help fill the gap created by 787 delays. Writes Flight: “Boeing has yet to tell 787 customers exactly how their delivery schedules will be impacted by the latest delay, but it has floated the idea of producing brand new 767-300ERs to help fill the capacity gap.”

Boeing would gain the 767 capacity from the KC-767 program, which looks doubtful now that the Air Force has awarded the tanker contract to Northrop Grumman. Boeing protested the award, but has acknowledged the likelihood of prevailing is remote. Accordingly, supply-chain and production capacity that had essentially been reserved for the tanker could shift to the commercial 767-300ER.

Boeing should know by June 19 whether the protest will be upheld.

The company would not be able to boost the production all that much vis-a-vis 787 demand, and not immediately. The current production rate of the 767 is one a month; Boeing could double that, or go slightly more to perhaps an incremental 15 a year, or 24-27 a year, including current customers, but not before 2010. By then, Boeing originally planned to be delivering 120 787s a year.

Here’s a Boeing-oriented cartoon.

Boeing complains that a cost disadvantage is that it has to pay for health care costs while Airbus, which builds the A330 on which the KC-30 is based, is part of Europe’s social health care system and doesn’t have this burden. (One could argue the taxes paid by Airbus for the national health care system is their representative burden, but the point in the cartoon is on the mark nonetheless.)

A little humor in a humorless debate….

Northrop’s supplier distribution map.

Qantas again reveals penalties

When the Airbus A380 was delayed two years, everyone from airplane geeks to airlines and Boeing wondered what kind of penalties Airbus would have to pay. Australia’s Qantas, apparently from a regulatory filing, revealed at the time that it received A$104 million (about US$84 million at the exchange rate at the time).

Now comes a new piece of information from Qantas via The Herald Sun. In a story dated April 16 (it’s already tomorrow there), The Sun writes, “Qantas sources said only that the amount will be will in excess of the $200 million Airbus paid after it pushed back by two years the delivery to Qantas.”

Note the amount is double what originally was reported. The story goes on:

“‘If you look at the size of the Boeing order against the 12 planes that Airbus delayed, you get some idea of how much Boeing will have to pay,’ a senior airline source [said].”

At A$100m, this suggests Boeing’s penalty for the 65 contracted 787s is more than A$540 million. Double the Airbus penalty and this suggests Boeing’s penalty to Qantas alone is north of A$1 billion. At list prices, the Qantas order is worth more than $11 billion, but figure hefty discounts because Qantas was an early customer.

If the penalties are north of A$1 billion–and this may or may not be a big if–then the penalties suggested by a host of Wall Street aerospace analysts are way under the mark. Their estimates range from $800 million to a high of $1 billion (USD), as we reported in our Corporate website update this today.

The Qantas number, whatever it is, is food for thought, and the first tangible indication, however vague, of the penalties facing Boeing.

Comment on the Delta-Northwest merger

The AirInsight team comments on the Delta-Northwest merger in this 11 minute podcast.