Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- SPEEA, Boeing at impasse over safety program, union says April 23, 2024
- Better transparency needed on Boeing’s 1Q earnings call April 22, 2024
- Bjorn’s Corner: New engine development. Part 4. Propulsive efficiency April 19, 2024
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
Boeing wants to outsource more work to Mexico; updated MAX v NEO orders
Boeing outsourcing: In an election where outsourcing is a major political campaign issue, The Seattle Times reports Boeing wants to outsource more work to Mexico. Here is Boeing’s letter, via The Times.
MAX v NEO: Here is an excellent set of tables updating the orders between the 737 MAX and the A320 NEO. According to the analysis, Airbus right now has a 63% market share for the airframe. On the NEO, where two engines are offered, CFM has a 41% share vs PW’s 39% share with the remainder undecided.
Odds and Ends: Airbus–60% of single aisle market; 777X customer meeting and EIS; advancing A350-1000
Airbus Market Share: Airbus figures it will keep around a 60% market share for single-aisles, according to this Reuters story. Boeing is going to beat Airbus handily for sales this year with the conversion of hundreds of MAX commitments to firm orders, but Airbus’ runaway success with the NEO program is a tough hill to climb for Boeing. A more telling market share story will likely come next year, after the orgy of sales is over for both companies and market stability returns.
777X Customer Meeting and EIS: With all the talk about what Boeing is planning with the 777X, there is a customer meeting in Seattle next week (a routine event) to talk about the aircraft, several who are planning to attend tell us. The 777X came up during the Boeing earnings call yesterday and Boeing CEO Jim McNerney said this about EIS: “Well, we are looking at the end of the decade [or] the beginning of the next decade…. [Emphasis added.] Our customers would like it sooner…. We have a robust dialogue going out with our customers right now to make sure we get it right.”
Note the comment about the beginning of “next decade.” Up until now, Boeing has been saying consistently that EIS would be the “end of this decade.” We’ve been hearing from our sources that EIS might slip to the beginning of the next decade, but as far as we can tell, this is the first public acknowledgement.
Airbus this week said it might advance EIS of the A350-1000 from 2017. If Airbus could achieve this, and if Boeing were to slip EIS of the 777X from 2019 to early next decade, Airbus could have an advantage with the 1000. Even if Boeing stuck with 2019, an advance by Airbus would give it a two or more year advantage (similar timing of the NEO vs MAX).
The sport game continues.
Boeing’s 3Q strong; initial analyst takes; transcript link
Boeing announced strong results for 3Q2012. The press release may be found here.The transcript from the earnings call is here.
The initial analyst take is below. Note the pension comments in JP Morgan; this helps explain why Boeing wants to shift new hires to a 401(k) program from a Defined Pension Plan.
Bernstein Research
Boeing reported a very strong Q3, particularly related to its outlook for the year. For the year, the company has raised guidance for defense revenues, defense margins, and operating cash flow. We see cash generation as a particularly important area of focus for Boeing. Although Boeing Commercial Airplanes guidance was unchanged, we will be looking for more insight on progress on the 787 during the earnings call – we see the 787 as central to the long term performance story. High margins in defense are consistent with our view of strong margins across the defense sector as companies (including Boeing) focus on cost reduction.
Boeing reported Q3:2012 EPS of $1.35, above consensus of $1.13 and our expectations of $1.03. Boeing attributed the EPS beat to “strong core operating performance”. Boeing raised 2012 EPS guidance by $0.35-$0.40; to $4.80-4.95, up from $4.40-$4.60. The size of the EPS guidance increase is encouraging because it suggests even better performance in Q4.
Sales for the quarter were $20.0bn, in line with consensus of $20.0bn and our expectations of $20.1bn. Boeing raised sales guidance for the year up $500M-$1bn, to $80.5-$82bn from $79.5-$81.5bn on expectations of higher Boeing defense sales.
Goldman Sachs
Boeing reported 3Q12 EPS ahead of its consensus, raised its 2012 EPS guidance to a range above consensus, and generated strong orders and cash flow in the quarter.
3Q12 reported EPS of $1.35 compares to consensus of $1.12 and GS at $1.15. The tax rate was 550 bps below our estimate, which added roughly $0.10. Boeing’s reported segment operating profit is 8% above our estimate which was above consensus.
Total revenue of $20.0bn was 1% below our $20.2bn estimate, as Boeing Commercial grew 28% and Boeing Defense declined 4%. But total EBIT margin of 7.8% was 70 bps ahead, with Commercial 20 bps better and Defense 150 bps better.
Free cash flow in the quarter was $1.18bn, implying FCF/NI of 1.14X. It is up from $564mn qop and $104mn yoy.
Total company backlog increased sequentially to $377.6bn from $373.8bn. BCA book-to-bill was 1.41X, while BDS was 0.76X.
Boeing raised its full-year 2012 EPS guidance to $4.80-4.95 (ahead of consensus of $4.72) from $4.40-4.60. Even when adding the $0.10 tax benefit in the quarter to consensus, the mid-point of the new range is still above the Street’s prior expectations. Boeing raised its revenue guidance to $80.5-82.0bn from $79.5-81.5bn. It reiterated its BCA margin guidance, but raised its BDS margin guidance by 25 bps. Operating cash flow guidance was raised to >$5.5bn from >$5.0bn. The 2012 787 + 747-8 unit forecast of 70-85 was reiterated.
JP Morgan
Boeing put up a solid quarter with a big headline beat and higher guidance, but the pension expense outlook is even worse than we had expected. Defense margin drove the operational beat and a lower than expected tax rate contributed as well. Boeing delivered the preliminary 2012 pension guidance we had expected, and it is a whopper. Pension expense is expected to be up by $1 bn, about half of which is driven by previously inventoried expense. We had anticipated that the inventoried pension could provide incremental headwind, but not by nearly this much. The difference between this and our current 2013 estimate could be worth another 55 cents of EPS. We anticipate that management will offset some of this with some combination of share buybacks and pension contributions, but we believe that full capital deployment plans will not be discussed until at least December; so, GAAP EPS estimates for 2013 are likely to drop in the coming days.
EPS of $1.35 exceeded our estimate by 24 cents and consensus by 23 cents Relative to our estimate, EBIT accounted for 14 cents of upside, with defense margins comprising nearly all of it. Tax contributed another 9 cents. Management raised 2012 EPS guidance from $4.40-4.60 to $4.80-4.95
BCA EBIT of $1,153 mn was 4% ahead of our estimate on margin strength. We estimate the core operating margin (ex R&D and the low margin 787 and 747-8 programs) was 17.3%, in line with our 17.2% estimate. We had had some concern that a 737 block extension during the quarter could provide some pressure, but this did not materialize. R&D was also modestly lower than expected, contributing to the overall 30 bps margin beat. BCA margin guidance remained ~9.0% despite the 9.9% YTD level. Q4 period costs could provide some headwind, but we believe there is plenty of conservatism in this guidance.
UBS
Q3 at $1.35 included $0.10 from lower tax rate: Q3 EPS at $1.35 including $0.10 benefit from lower 29% tax rate. Upside relative to our model came from BDSS (Defense) as BCAG (Commercial Airplanes) came through overall in line with our expectations. BCA margins at 9.5% with pre R&D at 13.8% diluted by higher 747-8/787 deliveries. We estimate pre R&D margins ex 747-8/787 at 17%, in line with Q2. BDSS revenues down 4% vs our -8% while 10.5% margins were 100bps better than our model. FCF at $1.2B or 113% of net income dragged down on $1.8B inventory build and $750M pension contribution.
787 cash costs improved by ~$15M per unit: 787 deferred production grew by $1.1B, slightly below prior quarter on similar production. While we need further details for precise calculation, we estimate deferred production per unit improved by $15M relative to Q2. BCAG reported a $1B unit accounting loss reflective of 747-8 and 787 losses, much higher than $144M in Q2 on seven additional 747-8 and 787 deliveries.
Boeing starts 777 build at 8.3/mo rate
777 Build Rate: Even as Airbus opened its A350 Final Assembly Line in Toulouse today, Boeing announced it has now gone to rate 8.3/mo on the rival 777. (One must wonder if the timing of the announcement is coincidence….) Here is Boeing’s press release.
Randy Tinseth, in his blog, writes this, with some photos.
Airbus A350: Aviation Week has this story from today’s FAL opening, reporting the company is trying to reassure stakeholders that the program is on track.
TSA move to replace body invaders a good one
The news that the Transportation Security Administration is swapping out the invasive body x-ray scanners with other equipment is good news indeed.
Setting aside the debate over whether the levels of radiation to produce x-rays is a health risk, the images created were truly invasive to personal privacy. We went out of our way to look for TSA lines where only magnomitors were in use in order to avoid the x-ray body invaders and as often as not requested a pat down if only the body invader was in use.
Europe has long used machines that produce stick figures of the person going through the machine, and little round dots to highlight areas that required pat downs. We had no issue with these machines.
The stick figure machines will reduce the number of invasive pat downs as well. Hopefully this will speed the entire security process.
[youtube http://www.youtube.com/watch?v=bLqZknQ6GcQ&w=560&h=315]
And another:
[youtube http://www.youtube.com/watch?v=q3yaqq9Jjb4&w=560&h=315]
Key supplier says engine makers unsure of Boeing ramp up plans
A key supplier says engine makers aren’t as positive about plans by Boeing to ramp up production.
Allegheny Technologies hosted an investors’ day last month. In a note issued September 14 by Buckingham Research Group, BRG wites:
ATI has confidence in BA’s production ramp schedule but believes engine manufacturers do not. ATI is confident BA will achieve 787 production rates of 10/mo at the end of 2013 and successful ramp on the 737 and 777. Although ATI has faith in BA’s production ramp, CEO Richard Harshman noted that the engine supply chain may not have the same faith in BA’s production ramp. ATI’s observation is that the engine supply chain is being very tightly managed and that engine OEMs are being very guarded about getting ahead of airframe manufacturers (historically they have gotten ahead, anticipating production increase). This somewhat supports our view; although we think execution on the 787 has been better than BA expected, we think BA will be challenged to meet its production rate schedule of 10/mo by the end of 2013. We also think that view is well within buy-side expectations.
From our conversations with suppliers, we know that there is a general fear of the high rates announced by Airbus and Boeing, let alone those being studied. We believe these concerns are natural, given the unprecedented volumes announced and under study. Concern is also driven by a fragile global economy.
Airbus, Boeing battle for US MAX-NEO market share
With the announcement by Alaska Airlines for 20 737 MAX 8s, 17 737 MAX 9s (and 13 Next-Generation 737-900ERs), Airbus and Boeing continue their battle for the US market.
There are still a number of customers who have not ordered either aircraft. US Airways has been exclusively an Airbus customer. Airbus lost a hard-fought battle to Boeing in the competition for the A321-737-900ER order. ILFC orders seem to be on hold pending its Initial Public Stock offering.
| 737 MAX | A320neo | No Order Yet |
| American* | Spirit Airlines | US Airways |
| Aviation Capital Group** | Frontier Airlines | Delta Air Lines |
| Southwest Airlines | jetBlue | |
| United Airlines | American* | |
| Air Lease Corp | Aviation Capital Group | |
| GECAS | CIT Aerospace | |
| Alaska | Virgin America | |
| *To be affirmed in bankruptcy court**Commitment, not yet converted to firm order | ILFC |