AA: getting early delivery positions

With Boeing’s 787 line sold out to 2017 or 2020 (depending on which aerospace analyst you believe), how did America get early positions? Here’s what we wrote for Commercial Aviation Online (paid subscription only) yesterday. We had to wait 24 hours before we could post this on a free site.

Commercial Aviation Online, October 16:

American Airlines’ previously held purchase rights for the Boeing 787 provide the airline with favourable delivery slots beginning in 2012.

American declined to comment directly on the 787 contract, but reminded CAO of its previously announced 787 purchase rights.

A CAO source says the delivery positions had been reserved for American, and with American’s reminder of its previously stated purchase rights, this is the probable explanation for the early delivery positions.

The positions do not come from another customer, either by deferral or cancellation, nor do they further delay the program deliveries.

Also, American’s early delivery positions shouldn’t come as a surprise to those familiar with the airline’s over-arching contract with Boeing, signed shortly before the 1997 merger between McDonnell Douglas and Boeing.

The contract called for Boeing to be the exclusive aircraft provider to American for 20 years. As a condition to the merger in order to gain approval from the EU, Boeing agreed not to enforce its side of this contract provision, enabling American to order from Airbus should it choose.

However, from American’s perspective, the contract provides most favored nation pricing as well as what is described as the “mechanism” to ensure American gets aircraft in the future when it wants them. This mechanism is how American gets early deliveries even though the 787 is otherwise sold out to the end of the next decade.

IAG/AirInsight has this podcast about the American order.

Since writing this piece, we confirmed that the purchase rights dating to the 1996 contract are indeed the key and that American’s delivery slots had been reserved all along. Delta and Continental have similar exclusive supplier contracts with Boeing and have similar purchase rights.

We also reconfirmed that for any other customer, 787 delivery positions are unavailable.

Airbus unshaken: WSJ

Update, October 15:

Bloomberg reports that Airbus is scaling back plans to increase production of the A320 and A330 lines. Here is the story. This prompts us to highlight an item in The Wall Street Journal piece below: Boeing won’t up production to catch up delivery delays due to the strike (though this is really no surprise).

Original Post:

With Boeing dominating the news in recent months due to delays with the 787, the 747-8, the controversy over the KC-X program and the labor difficulties, a little news about Airbus is refreshing.

As previously reported, Airbus has its own delay issues with the A400M military program. A380 delays continue to make news from time-to-time. The Wall Street Journal just published a long piece about Airbus, saying the European company is “unshaken” by economic turbulence. Unlike most WSJ articles, this one is free. It’s worth a read.

Meantime, from what we are hearing in the market, Airbus continues to make efforts to benefit at the 787’s expense by selling the A330 to disappointed 787 customers. Sales of the A330 have been more than healthy and with the anouncement that the company is designing an A330 Heavy with longer range, Airbus is making a concerted push to further expand the A330 market.

With the 787 troubles, Boeing doesn’t have delivery slots (beyond the occasional hold-back) until 2017 or 2020, depending on who you believe. Airbus has A330 delivery slots as early as 2012. The A350 is scheduled to go into service in 2013 (which, given the A380 performance and the 787 issues, draws a lot of skepticism even at this early date) but Airbus believes the A330 could be produced alongside the A350 for another decade–as a passenger airplane. While an A350 Light is being discussed that would clearly be a replacement for the A330, this plane probably would not be available until 2015 or later, if at all.

Boeing contemplates a second line for the 787, something that is required if there is any hope to catch up on program delays in a reasonable amount of time. But the question not only is when can Boeing do this but also where will a second line be established. Common sense says do it at the Everett, WA, plant where the 787 line is now. But the IAM strike and the likelihood of one by SPEEA suggests Boeing management has had enough and we think it entirely possible a second 787 line could be opened in a right-to-work state.

(For non-Americans, a right-to-work state means no unions required.)

If this happens, might an interim period be undertaken for Line 2 to cover production while Line 1 is shut down and moved alongside Line 2 in the right-to-work state? Call us conspiratorial, but we certainly see a scenario where this could happen. We believe the odds are much better than 50-50 that the replacement airplanes for the 737 and 777 won’t be built in Washington State. Why, then, keep the 787 here? The 747 and the 767 will die here, but these are both at the end of their life cycles anyway (final outcome of the KC-X program being the only variable).

Airbus, meanwhile, chugs along with the A380 (and A400M) the only hiccups (or up-chucks, as the case may be). The company is working on improvements to the A320 that will reduce fuel burn by several percentage points; Boeing is only doing minor improvements that customers hope will gain as much as 3% fuel improvements but say could be as little as 1%.

Pratt & Whitney began testing its Geared Turbo Fan on the A340-600 test bed owned by Airbus. Although Airbus cautions against reading anything into the use of the A340 as the platform, observers speculate that this could lay the groundwork for Airbus to put the GTF on the A320 as an interim step toward a full replacement airplane, not expected before 2018 or 2020. An A320 GTF theoretically could be certified by 2012 or 2013.

Boeing responds by saying the GTF could be fitted on the 737, but the problems are greater than on the taller A320. CFM International is working toward certification of its new LEAP-X powerplant, an entirely new engine, which is promised to reduce fuel burn around 12%-15%, similar to the GTF. But certification isn’t promised until 2016.

Airbus’ A330 Heavy, it says, will have more range than early models of the 787 (something Boeing disputes) because its analysis concludes that the 787 will be heavy and fuel burn promises of the GEnx and Trent 1000 engines won’t live up to promises. Meantime, Boeing works on a Product Improvement Package for the 777 which Emirates says provides a 10% operating cost improvement.

Airbus will likely finish this year with a substantial sales lead over Boeing.

Change in Boeing production?

The economic times may cause Boeing to alter production, a top executive said. Bloomberg News reports that Randy Tinseth, VP-marketing, hinted at this. The aerospace analyst at Goldman Sachs last week issued a report predicting fewer deliveries in coming years as airlines face financing difficulties. Bloomberg now reports pretty much the same thing.

Flight Global’s Laura Mueller reports that two lessors have urged production cuts.

This is the sort of “flexibility” Boeing seeks in its contract with the IAM and, upcoming, SPEEA: to alter production and jobs in bad times. Boeing says that the job guarantees sought by the IAM inhibits this flexibility. Airbus has long had handcuffs on its ability to reduce its workforce in bad times, due to European labor laws (as opposed to union contracts) that mean a huge severence pay that makes laying off people academic.

What’s interesting in Tinseth’s reported comments is the contrast with Boeing executive statements all year. Boeing’s top execs repeated told everyone who would listen (including, it seems, its own unions) that Boeing was insulated from any downturn because the backlog was so well spread out among customers around the globe in different economies and with varied business models. Some observers didn’t drink the cool aid, but certainly the labor unions took note and these chickens came home to roost in the current labor demands for reduced outsourcing and job guarantees.

So while Boeing execs were reassuring Wall Street, they in some respects set the stage for the current labor impasse.

Week 6: IAM-Boeing strike

October 17:

MarketWatch: Boeing is expected to finally reveal the damage caused by the IAM strike during its earnings call October 22. This is a matter of much speculation: some analysts figured Boeing was losing between $100m-$110m a day, or $3bn+ a month–which is higher than the monthly revenue reported in the second quarter. We tried to back out the non-affected units of Boeing Commercial Aircraft and estimated the revenue loss at $75m-$83m a day. Dominic Gates at The Seattle Times, in a well researched article, estimated that Boeing is losing $1.3bn a month in cash, or $43.3m a day. Perhaps we’ll find out on the 22nd.

October 16:

Seattle Post-Intelligencer: Columnist Bill Virgin asks the question: Can Boeing reverse outsourcing even if it wanted to?

Kansas.com: Spirit AeroSystems, a major supplier to Boeing for the 737, 747 and 787 programs, may have to begin layoffs as the strike as Boeing continues. Spirit originally went to a three day work week when Boeing’s IAM walked off the job.

October 15:

Seattle Post Intelligencer: James Wallace gives this report about what went wrong in the IAM-Boeing negotiations.

Seattle Times: Dominic Gates has this report about the failed negotiations.

Everett Herald: Here’s its report on the collapse.

The Street.com: Ted Reed takes a look at the analogy used by Boeing to the auto industry in arguing its hard-line position.

October 14:

It’s election season and a candidate for the Democratic State House of Representatives in the district where we live is supporting the IAM strike against Boeing. He’s asking for wood for the burn barrels used by striking members to stay warm. OK, this makes sense, now that it’s getting cold in the Seattle area. But he goes on to ask for volunteers to help man the picket lines.

Say what? The IAM has 27,000 members, most in the Seattle area (other striking locations are in Wichita, KS, and someplace in California). With 27,000 members on strike, the IAM needs outside volunteers to man the picket lines? We previously heard a story from Boeing management that at Boeing’s Renton plant that Boeing’s security guard talked with some picketers and found they had been hired to walk the picket line. We don’t know if this story is true or apocryphal but the story from the Democratic candidate is true; we got the email to prove it.

What gives? Where is the solidarity? Why aren’t the union members manning their own lines in sufficient numbers?

Tacoma News Tribune: Aviation writer John Gillie has a Q&A with SPEEA’s president from March, but it’s worth revisting as negotiations with SPEEA begin around the clock in two weeks.

October 13:

Talks broke off after only three days, reports The Seattle Times, over the issue of outsourcing. Here is the story from The Seattle P-I.

787 First Flight: 1Q09 (or 4Q08)

Update, October 9:

In a third story posted by Mary late last night, Boeing sticks to its plan for a first flight in the fourth quarter this year. Originally the first flight was supposed to be late October. At the Farnborough Air Show, program chief Pat Shanahan said November; and more recently, December became the target date. Boeing CFO James Bell told an investors conference in mid September the 787 delay is a one day-for-one day on the strike. It won’t take too much longer for the first flight to slip. Aerospace analysts already predict it.

Original Post:

Our colleague, Mary Kirby, at Air Transport Intelligence (we both write for the same Flight Global family of publications) reports that Boeing is planning on the first flight of the 787 in the first quarter of next year. Her ATI report, on the paid-subscription site, includes this passage:

Boeing now eyeing 1Q for 787 flight testing
Mary Kirby, Philadelphia (09Oct08, 00:52 GMT, 187 words)

Over a month after Boeing machinists began strike action, bringing jetliner production to a standstill, the airframer is now eyeing a further delay to the 787’s maiden flight.

Responding to comments by a Northwest Airlines executive concerning the carrier’s requirement that its 787s be delivered with the range and specifications promised, a Boeing spokesman in a telephone interview today said the airframer will have “more specific airplane performance data following flight testing. That’s scheduled to happen first quarter 2009.”

This expands on her earlier report with a free posting on Flight Global that Northwest
Airlines is unhappy with the status of its airplanes at the moment. This full story may be found here. The relevant passage in this story is:

Boeing will have more specific airplane performance data following flight testing, which is scheduled to occur during first quarter 2009.

This is the first confirmation by Boeing that the first flight is now the 1Q09; only yesterday, The Seattle Post-Intelligencer speculated the first flight slipped, reporting:

The first flight of the Dreamliner was to have taken place by the end of this year after a series of production and supply-chain issues. But the strike has probably pushed that out to at least early 2009, although Boeing has not confirmed this.

The P-I’s full story may be found here.

Several aerospace analysts had already forecast the first flight was slipping, even before the IAM struck Boeing on September 6.

Update, 7:20 PM: Mary’s full story from the ATI site has now been posted on the free site and it is here.

Week 5, Boeing-IAM strike

Update, October 8:

Breaking News, 6:30 PM PDT, Seattle Times: Dominic Gates reports that Boeing and the IAM secretly met and are resuming talks. The story can be found here.

The Seattle Post-Intelligencer has a catch-up piece here. The P-I’s James Wallace has this story about the impact on suppliers from the strike, posted this evening.

Bloomberg News: The IAM responds to Boeing’s management pressure tactics. You don’t scare us.

Update, October 7:

Update, 1:30 PM: Boeing further ratcheted up the pressure with an appearance before the Governor’s Aerospace conference today with a direct warning that strikes can drive assembly out of Washington State. The Seattle Times has this report.

We have some in-depth comment about the McNerney memo listed below on our bi-weekly update on our Corporate Website.

Seattle Post-Intelligencer: James Wallace has a lengthy story here. In it, Teal Group analyst Richard Aboulafia speculates that in 10 years there may be no airplanes built in the Seattle area. We think that’s a little too soon, but fundamentally agree that Boeing is moving in this direction, fed up with the labor strikes and threats of strikes.

McNerney’s memo isn’t just about the IAM strike, of course; it’s a not-too-subtle shot across the bow of SPEEA. Boeing’s contract information exchanged with SPEEA is very similar to that rejected by the IAM. Boeing’s can’t give in to the IAM without giving in to SPEEA, which shares many of the same issues with the IAM.

Is this year about union-busting? SPEEA thinks so. We met with SPEEA two weeks ago (we were to meet with Boeing yesterday, but this was rescheduled at Boeing’s request) and SPEEA thinks Boeing is engaged in busting SPEEA.

Clearly Boeing would rather not have to deal with unions, but the only way to achieve this will be to move to a right-to-work state. As long as Boeing is in Washington State, unions remain a fact of life. At an IAM rally held while negotiations were still underway, a labor official boasted that Washington is the fourth-most organized state in the union (or something like that). This might have been cool stuff to express at the rally, but it’s not something that would be looked upon favorably by management.

But moving to a right-to-work state won’t guarantee a non-union force. The IAM successfully organized the employees in Charleston, SC, where major portions of the 787 are built. Employees for Southwest Airlines and American Airlines are highly unionized in Texas (Continental Airlines employees are less well organized), though one might argue that as national airlines votes could overwhelm local sentiment. We don’t think this is a valid argument. (We lived in Dallas for nearly 12 years and have a pretty good feel for local union sentiment.) Boeing has an operation in San Antonio and speculation has been rife a second 787 line might emerge there. Could be and it wouldn’t be long before unionization efforts would happen–especially if Boeing succeeds in putting down the IAM here in Seattle. Payback is, as they say, a bitch, and the IAM would seek payback bigtime.

We remain concerned that outsourcing off-shore is a major threat to the viability of the US aerospace industry, as we commented last week and today on our Corporate Website. McNerney uses the threat of the rise of new competitors in his memo below, but the irony is that Boeing’s own outsourcing (along with Airbus, Bombardier and Embraer) are creating these competitors.

Update, 0935 PDT October 6:

Boeing CEO Jim McNerney issued an internal memo this morning about the IAM strike. The bottom line: Boeing doesn’t look to be budging on its positions. Here is the memo in full:

Boeing stalled by strike as competitors strengthen their positions Any settlement must balance rewarding valued employees with protecting our ability to compete and win

Jim McNerney
Chairman, President and Chief Executive Officer
Many of you responded to my column last week on the crisis in the financial markets with questions and comments about the ongoing strike in the Pacific Northwest and Kansas, which has now entered its fifth week.
I understand and share the frustration so many of you feel when we don’t have the whole team together working to meet the commitments we’ve made to our customers and competing to win the new business that will sustain and grow Boeing jobs for years to come.
Read more

USAF loses yet another tanker award

Update, October 6:

Mobile Press-Register: The Mobile paper has a long interview with Northrop Grumman’s CEO on the KC-X tanker debacle.

Original Post:

The USAF has been overturned on yet another contract award concerning aerial tankers. A federal court overturned a maintenance contract for KC-135s awarded to Boeing after Alabama Aircraft (formerlly Pemco) protested to the GAO, lost, and sued. Alabama Aircraft’s press release may be found here.

The contract is worth $1.1 billion.

The inability of the Air Force to conduct proper contract evaluations and awards is mind-boggling. Not only are there the high-profile issues with the KC-X program, dating to the 2001-2004 illegal conduct in that award, and the clear disregard for its own rules on eight critical points in the more recent award, the USAF couldn’t even properly award a public relations contract for the Thunderbirds air show team.

Corporate Website updated 9/30

This week we discuss the dangers of technology transfers to China, Russia and Japan by Airbus, Boeing, Bombardier and Embraer in our bi-weekly update of our corporate website. By outsourcing work to these countries, aviation’s Big Four are creating new competitors.

Update, 11:45 AM PDT:

Reuters has this interview with Northrop Grumman’s CEO about the decision by DOD Secretary Robert Gates to cancel the contract. The NGC CEO calls the move “chilling.”

Failed bail-out bad news for aviation

The collapse of the $700 billion bailout of the US financial system is bad news for aviation.

The capital markets were already driving up pricing on debt and driving out many lending institutions from the aviation market. Airbus and Boeing downplayed the declining credit markets (our conversations with them being about two weeks ago, before things really began to go south). Each believed that money to finance airplanes was available, albeit more expensive, and that neither would have to step up to provide backstop financing until the second half of next year. Part of this is the large segments of their respective order backlogs that are eligible for export credit financing backed by the European and US governments. In Boeing’s case, the company has said on several occasions that about 83% of its backlog may be financed by the US Export-Import Bank. We don’t have a figure for Airbus, but we believe that most of its backlog is similarly eligible for the European Credit Agency (ECA) financing.

Based on the information we had at the time, we generally agreed. But not now. ExIm or ECA or not, there still have to be viable banks and general market liquidity available for the credit agencies to provide guarantees for the funding.

The situation has changed so dramatically in just the last seven days that we are now concerned there will quickly be a financing crisis for the airlines. In this respect, the airlines may just decide that the longer a Boeing strike the better.

Our colleagues at Commercial Aviation Online, the finance-oriented publication of the Flight Global family, paints a dire picture emerging in aviation finance in our conversations with them. (We write for CAO as well.) But they are still constructing their stories, and we’re obligated to me ambiguous at this stage. Furthermore, it’s a paid-subscription service, so while we’ll be able to synopsize stories when the time comes, we won’t’ be able to fully reproduce them here. But the bottom line is that things are going south faster than anyone believed in aviation finance.

Update, September 30: Bloomberg News has this short item about customers for Embraer having difficulting financing the planes that were ordered. Brazil, like the US, Europe and Canada (for Bombardier), offers export financing support, too.

Update, 11:45 AM PDT: Commercial Aviation Online posted its story. (Paid subscription required.) Here are some excerpts:

With no US bailout package on the table, the aviation finance market remains frozen unable to make sound decisions in an uncertain climate.

“Right now, there is no interbank lending and banks are hoarding cash. Most bankers are putting off any decisions because there are no good decisions right now,” says a London-based banker.

He adds: “It is hard to say anything concrete right now except that if the current crisis continues, we are in big trouble. However, even with a US bailout don’t expect a panacea. What we are seeing now is what happened to the Japanese banks. It will take five to ten years to get out of this mess.”

Due to uncertain market conditions, a number of aviation deals that are currently in the works are likely to be renegotiated.

“No one wants a RFP right now. Everything is being delayed and many deals will have to be revisited,” says another banker.

Week 4: IAM-Boeing strike

Update, October 2:

Here’s a new twist. An Australian newspaper reports that Virgin Blue may seek damages from Boeing and the IAM over the strike-induced delays of the 777s the airline wants. We think Boeing’s customer contracts preclude strike-caused delays. The IAM liability, if any, is another matter.

September 29:

Seattle Times: Dominic Gates has this detailed analysis of the strike and its cost to both sides.

One piece of math in the article that Dom didn’t do is to present the daily cash drain for Boeing. Based on his information that the monthly cash cost is about $1.3 billion, this means the daily cash cost is about $43 million. This compares with the widely reported figure of $100 million to $110 million a day, which was actually deferred or “lost” revenue, but which is also quite a bit higher than it should be because these figures don’t take into account the unaffected businesses within Boeing Commercial Airplanes that continue to produce revenue: Alteon (pilot training), Aviall (maintenance) and Jeppessen (maps and related stuff). We estimated that strike-related BCA revenue loss was more like $75 million to $83 million a day.

An IAM official predicted at the start of the strike that the IAM could bleed Boeing of its $10 billion in cash in a matter of a few months. Not hardly. Certainly $1.3 billion a month in cash loss is not chicken feed, but it’s also only one-third of the widely quoted figures.

Everett Herald: The IAM’s health benefits end Oct. 1. Some inside Boeing told us they believe that this event will help trigger a settlement.