Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Collins Aerospace faces new merger before previous one is fully integrated July 16, 2019
- 14 new airplanes and derivatives see EIS through 2027 July 15, 2019
- Pontifications: Boeing can’t catch a break July 15, 2019
- Airbus pulls anniversary book July 12, 2019
- Bjorn’s Corner: Kjos departure signals changes at Norwegian July 12, 2019
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.
Leeham Co. website updated 4/15
Our Corporate Website has been updated for this week. We discuss what’s perceived by many as Boeing’s scorched earth approach to its protest over the tanker award to Northrop Grumman; and we expand our previous discussion on the financial impact of the delays for the Boeing 787.
We also have documents from Boeing related to the tanker protest.
Boeing Field book
We found a new book about Boeing Field. This 128 page book has only black and white pictures and it’s $19.99. Photos date to 1910, before Boeing Field was built, with a plane landing on the site, to the arrival of the Concorde. It has a photo of the nose-gear collapse of the 707 prototype, happening when the brakes failed and the airplane had to be ground-looped.
The book description and an on-line order form may be found here.
We found our copy at Barnes & Nobels.
Tanker wars, continued
Boeing and Northrop continue their tanker public relations war. Boeing fired off this press release about the KC-767’s “survivability” vs. the Northrop KC-30.
Northrop fired off a release about jobs, steering people to a 3 1/2 minute National Public Radio report.
Northrop partisans also made sure we saw this biting cartoon.
(For the record, we previously have asked Boeing to send us any similar cartoons supporting the KC-767, but were told none existed. If there are any, we’ll post them.)
Here’s a pro-Boeing cartoon, which for some reason we can’t insert the image, so here’s the link.
Lost 787 Revenue: WAG $30bn
The WAG estimate for lost revenue to Boeing for the delays of the 787 program is around $30 billion through 2013, based on some production estimates from a Goldman Sachs report issued this morning.
Goldman predicts $3 billion in penalty payments.
Goldman revised its delivery forecast, based on the Boeing program update conference call Wednesday, from 629 airplanes through 2013 to 407 airplanes. This forecast, by aerospace analyst Richard Safran, shapes up this way:
GS Current Assumption
2009: 25
2010: 60
2011: 85
2012: 120
2013: 120
Total: 407
January 2008 assumption
2009: 109
2010: 120
2011: 120
2012: 140
2013: 140
Total: 629
Difference: 222
We took these figures and applied it to Boeing’s list prices for the 787-8 and 787-9. Goldman’s data doesn’t break out how many of each type might be delivered during these years, so we calculated the average price of both models. At the low end based on all 787-8 deliveries, Boeing’s lost revenue during this period is $35.96 billion. Based on all 787-9 deliveries, the average lost revenue is $43.18 billion.
Applying an average 25% discount, which is not atypical in deals, the low end revenue loss is guesstimated to be $26.97 billion and the high end revenue loss is guesstimated to be $32.38 billion. Taking a somewhat middle-ground figure, we settled on $30 billion in lost revenue through 2013.
New A380 customer
We understand there is a new A380 customer in Asia. It’s currently a Boeing 747-400 operator and the order is for eight plus four options. We haven’t yet learned which airline but it’s not in China.
Frontier in chapter 11
We’re going to deviate for a minute from our usual focus on Airbus and Boeing matters to comment on the bankruptcy filing of Frontier Airlines late yesterday.
We’ve followed Frontier closely since inception because we personally knew people in the executive ranks, one of our clients advised Frontier on airplane deals and Airbus had become the sole supplier of mainline jets in a competition that we also followed closely.
When Frontier announced its results for the December quarter, the cash level had declined but that didn’t worry officials. One said this during the conference call, which we wrote for Commercial Aviation Online:
The airline ended the quarter with $170.4m in cash, down slightly from $203m at 30 September. While the cash position hasn’t varied much during the past year, it’s down sharply compared with the year ended 31 March 2006.
This doesn’t worry EVP-CFO Paul Tate, who says the current cash level is fine. In the earnings call with analysts, Tate said Frontier considers its liquidity to be more than raw cash. Rather, he considers it to be a combination of cash and the equity that can be tapped in 22 owned Airbus A318s and A319s.
In fact, four of these are for outright sale, to be replaced by two larger A320s to be delivered this year. Frontier has executed previous sale/leasebacks, raising cash.
Tate admitted he’d like to have $300m or $400m in cash but that doing so has a “cost” to it. “Without diluting shareholders, we’d have to do sale/leasebacks. I don’t see any need to do that.”
“We have a pretty sophisticated model that goes forward 20 years and this is much more well-founded than some other bogus [cash] measure,” Tate said. Tate dismissed 25% cash-to-revenues goals as “bogus” and attributable to “pundits.”
We found the comments to be rather appalling, not just for the content but also for telling the “pundits” (analysts) on the conference call that essentially they were stupid.
In an analysis we did a short time later, also for Commercial Aviation Online, we wrote this:
Frontier’s cash-to-revenue level is a paltry 13.2% for the trailing 12 months ended 31 December 2007, of $170m on revenues of $1.29bn. Tate suggested that Frontier has plenty of other liquidity it can tap in its 22 owned Airbus A318/A319s. Frontier previously executed sale/leasebacks for these aircraft types and currently has two each for outright sale, although the attractiveness and value realization potential of the less-than-popular A318s remains questionable.
A review of the cash-to-revenues percentage for the trailing 12 months to 31 December for 10 reporting carriers in the US is 22.2% . Delta Air Lines has the lowest level but it also has a $1bn untapped line of credit which, if considered, brings Delta up to the average at 22.4%.
Frontier is clearly in the weakest position to weather a prolonged recession or a major squeeze at its Denver (CO) hub between giant United Airlines and interloper Southwest Airlines. Frontier’s efforts to diversify itself have largely been failures, with the company entering and withdrawing from routes on a regular basis.
Frontier filed bankruptcy because it said a credit card company wanted to sharply increase the cash hold back on tickets sold, which would have had a material adverse affect on Frontier’s cash position.
If the airline had had a better business plan and better cash management policies, perhaps Chapter 11 would not have been necessary.