Analysts hone in on Boeing Free Cash Flow

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Introduction

April 22, 2015: c. Leeham Co. Boeing may have reported solid earnings for the first quarter, but aerospace analysts focused on free cash flow (FCF) and gave the company a raspberry.

Analysts have been increasingly pinpointing and asking questions about FCF since the third quarter call, when Boeing stock got pummeled over the issue. Boeing surprised Wall Street with the fourth quarter numbers in which FCF was sharply higher and greater than expected.

Last week, we reported UBS’ analysis of FCF and how it was driven up by more advanced (pre-delivery payments, or PDPs) than usual.

On the 1Q earnings call, Ron Epstein, the aerospace analyst doe Bank of America Merrill Lynch, honed in on the issue.

Summary

  • Our Market Intelligence since January has identified hundreds of millions of dollars in accelerated advances from customers to bolster cash flow.
  • Money needed to meet promises of shareholder buybacks, say sources on and off Wall Street.
  • Accelerated cash advances required throughout this year and into next, say sources.
  • Boeing declines further comment.

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Boeing 1Q15 earnings: EPS beats consensus but cash flow concerns dominate analyst reaction

April 22, 2015: Boeing reported its first quarter earnings today, with earnings per share well ahead of analyst expectations. Of the analyst reports we see, only Bernstein was pleased with the cash flow, with others concluding free cash flow was below expectations. Increasingly analysts believe Boeing has been accelerating aircraft deposits (advances) to improve cash flow and to meet share buyback promises.

A summary of the earnings call follows the initial analyst reaction.

Analyst reaction:

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Pontifications: Remaking the Armed Services

Hamilton (5)

By Scott Hamilton

April 20, 2015, c. Leeham Co. A news item last week caught my eye about the Defense Department, defense spending and recapitalizing the US Armed Forces.

I don’t normally follow defense items at Leeham News and Comment. LNC is pretty much all-commercial, all the time. I’ve stepped outside this to follow commercially-derived air force tankers (Boeing 767, Airbus A330) and the P-8 Poseidon (the Boeing 737). I took rides on Trident nuclear ballistic missile subs and reported thusly. But this news article, which came about two weeks after my visit to Wall Street where some defense programs were discussed, prompts me to ask: Since we can’t afford the monies required to recapitalize the Armed Forces, what do we do?

I’m going to throw some ideas out and see where they land. I have no doubt some will be blasphemy. But here goes. Read more

IAM vote delay at Boeing SC shows weakness

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Introduction

April 19, 2015, c. Leeham Co. The withdrawal by the International Association of Machinists of the planned April 22 unionization vote at the Boeing 787 plant in Charleston (SC) appears to answer a question that was lingering ever since the January 2014 IAM 751 vote at Boeing’s Puget Sound operations:

Was there a quid-pro-quo between IAM International headquarters and Boeing for Boeing to stand by and allow unionization of BSC is exchange for the International to “sell out” for a Boeing contract package at Puget Sound?

It seems the answer is “no.”

The vote withdrawal also seems to answer another question: Has the IAM become increasingly impotent?

The answer to this seems to be “yes.”

Summary

  • Obviously the IAM didn’t have enough votes to pass unionization.
  • Vote delay shows weakness and continued SC predilection against unions.
  • McNerney’s legacy includes largely busting the IAM.

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Bjorn’s Corner: Training for airline flying

 

Bjorn Fehrm has an aeronautical engineering background with patented devices on several aircraft.

By Bjorn Ferhm

Introduction

16 April 2015, C. Leeham Co: As described last week, I was asked if I wanted to fly an modern airliner later in the spring and you can guess my answer! Having accepted the challenge, it was time to think about how to get ready. Even though the flying I once learned would sit, modern airliner flying is 90% about the procedures and how these make the transportation of passengers safer and more reliable.

This is something different than just flying the around in the aircraft. It is all about how the aircraft manufacturer has created an environment for consistency, economy and safety and how the goalposts in these dimensions gets moved further and further out. That is what we should test.

I cannot reveal what aircraft it will be, but my tools for training will give away the general type.  I am right now using Airbus flight simulators and manuals to refresh my flying and learn the procedures used. Read more

Rolls-Royce displaces Engine Alliance for Emirates A380 order

Rolls-Royce, in a major upset, won the Emirates Airlines order to power 50 Airbus A380s ordered in November 2013. The win displaces Engine Alliance, which to now has been the sole-source provider for EK’s A380s.

Two sources confirmed the RR win. RR and Airbus did not comment on the win. EK and RR have not made any announcement. EA also did not comment.

According to one source, EK determined the RR Trent 900 was determined to be up to 4% more efficient than EA. But it’s unclear if there were other factors involved. Read more

Boeing 737 MAX: performance if engine has SFC shortfall

By Bjorn Fehrm

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Introduction

14 April 2015, C. Leeham Co: There have been persistent reports that the CFM LEAP engines should be behind their fuel consumption targets. We commented on these rumors recently. It’s normal for engines to be behind final SFC to varying degree during development, this is part of the gradual development and fine-tuning of an engine until its entry into service point.

As we commented before, the key is not where an engine is two thirds through its development but if the engine would fill specification at Entry Into Service (EIS). Gaps to final specifications are normal during development, should there remain any gap at EIS it would also not be the first time this happened. Engines where target specifications are met from day one are historically in the minority. As we are in the unique situation to have a complete airliner performance model, we have modeled how any engine performance gaps would actually affect aircraft performance.

Summary

  • We have investigated what any shortfall of LEAP-1B SFC would mean for the aircraft. For situations where there would remain any deficit at EIS we choose to look at 2.5% and the rumored 4.5%.
  • Finally, we compared these two situations with a 737 MAX that would have nominal performance LEAP-1Bs and looked at the improvement in performance for all three compared to today’s 737NG.

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Aviation Partners Boeing: next step–scimitar for 757, 767

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Introduction

April 14, 2015: Several airlines operate the Boeing 757 across the Atlantic on “thin” routes but sometimes have to do refueling tech stops when high westerly winds

Aviation Partners Boeing plans the Split Scimitar Winglet (SSW) for the Boeing 757 and 767. Officials plan to seek board approval on the 757 SSW this year, the 767 next year. Source: Aviation Partners Boeing. Click on image to enlarge.

occur.

The 757s are aging, with engine maintenance, repair and overhaul costs increasing under the tightly-controlled contract with Rolls-Royce and Pratt & Whitney.

Some airlines want a “757 replacement.” Boeing and Airbus don’t see a market for “just” a 757 replacement and argue the 737-900ER/9 and A321neo/LR are the replacements. Even these fall somewhat short.

Industry observers and pontificators nonetheless are obsessed with a “757 replacement” (except us—we’ve redefined the replacement as one needed for the 225/5000 Sector [225-250 seats, 5,000 miles] and concluded an airplane very similar to the 767-200 is needed).

Patrick La Moria, EVP and chief commercial officer, Aviation Partners Boeing.

While all this debate is going on, Aviation Partners Boeing (APB) is close to seeking board approval to offer a scimitar option for the 757 that will improve efficiency by about another 1.5%. A scimitar for the Boeing 767 may not be far behind.

Summary

  • Scimitars and the increased range will eliminate some “tech” stop for fuel.
  • Field performance will be better.
  • Low fuel prices and prospect of scimitars (as well as lack of availability of new airplanes) may lead to longer retention of 757s and 767s.

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Boeing 4Q cash flow increase stemmed from huge accelerated customer advances: UBS

April 13, 2015: Boeing surprised aerospace analysts at the year end earnings call with far higher cash flow than had been expected.

Analysts beat up Boeing pretty badly on the 3Q2014 earnings call and were taken aback by the dramatic upswing in the fourth quarter.

We began to hear as early as January that Boeing achieved the marked improvement by getting accelerated advances from customers who had placed commercial airplane orders, resulting in the dramatic upswing. The reason was to respond to the beating Boeing took on the third quarter earnings call, several Wall Street analysts told us.

In advance of the first quarter earnings call April 22, UBS aerospace analyst David Strauss issued a detailed report about Boeing’s Free Cash Flow (FCF) that outlines just how dramatically Boeing pulled forward customer advances.

Below are selected excerpts from the April 13 note. Read more

Pontifications: Wizz could be first face-off of 737 MAX 200 vs “A320neo 195”

Hamilton (5)

By Scott Hamilton

April 13, 2015: A campaign that began last year between Airbus and Boeing for a large order of 100 airplanes at Europe’s Low Cost Carrier, Wizz Air, could be the first face off between the “A320neo 195” (our name) and the 737 MAX 200 (Boeing’s name).

Note I said “could be.” I know Boeing is offering the MAX 200. I know Airbus is offering the A320neo. What I don’t know is if Airbus is offering the A320 195.

We first discussed the A320neo 195 last week, after a tip off by Mary Kirby of Runway Girl Network.

Wizz Air, of Hungary, currently operates only A320s and A321s. The competition is for 100 aircraft of the re-engined generation. This is a hot contest, with Boeing looking not only to flip Wizz from the A320 to the 737 but also to get a second customer for the MAX 200. Ryanair was the launch customer for the airplane last year, but no new orders have been landed since. Boeing touts the MAX 200 as the perfect solution for LCCs.

The contest is hot enough that our Market Intelligence indicates the pricing is already comfortably below $40m.

Airbus hasn’t announced a marketing name for its high-density version of the 195-seat A320neo, which last month won regulatory approval of the 195-seat concept. This is at 27-inch seat pitch. The MAX 200, which Ryanair said it will configure for 197 seats, will have a mixture of 30-inch and 29-inch pitch. Airbus believes galley cart requirements means Ryanair will have to go to 194 seats. Read more