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.

FedEx Service


KC-30, KC-767 prices revealed

In a remarkable piece of reporting, Reuters‘ Andrea Shalal-Esa uncovered the price offered by Northrop Grumman to the US Air Force for its KC-30 and from there the extrapolation of the price Boeing offered for the KC-767.

Reuters also details a number of other cost details in this report.

Boeing confirms new 6 mo delay

Boeing confirmed a new delay of six more months for the 787 program. By now readers will likely have seen the press release. The update conference call begins shortly.

We’ve constructed this table below based on information in the press release and previous information available through Internet research.

Market reaction to the press release was good, with stock up $2.78 in the minutes before the conference call. As we noted yesterday, since the news of the six month delay had been “out there” for weeks, the stock was already beaten down.

The press release has a read of confidence this time that contains some firm delivery dates and definitive information about new timing for the 787-9 and 787-3 derivatives. All of this clearly reassured Wall Street in the lead up to the call.

(As an aside, the “elevator music” on the webcast while waiting for the call is pretty much a downer. It’s somber and plays more for a funeral. Boeing needs to put a more upbeat tune for those of us on hold. Maybe a little Jefferson Airplane would work better.)

The conference call begins:

From Scott Carson, president of BCA:

The 787-9 entry-into-service moves from late 2010 to early 2012. No new EIS of the 787-3 was announced from its original 2010 EIS.

From Pat Shanahan, program manager:

The interior on airplane #3 will be installed this summer, giving the first look at a nearly finished airplane.

The power-on reset changed from April 2008 to June because not enough progress has been made, with change orders and strengthening the center wing box.

Rework continues to impact the schedule. As luck would have it, the rework fell right in the path of wiring and other issues.

The more conservative approach extends testing period by two months, but if we don’t need the additional time we won’t use it.

Four months will separate power-own and first flight.

Current assessment assumes production rate to reach 10/mo by 2012. (Originally Boeing expected to be at 10 well within 18 months of first planned delivery (May 2008), or by the end of 2010–Ed.)

(Stock market responding positively–up $2.98 on heavy volume, nearly matching a full day’s trading by 11:20 EDT.)

Q&A begins:

Carson says Boeing is working with individual suppliers to ease cash pressures as a result of the delays, but he declined to go into details.

Carson terms the wing box weakness discovery “relatively routine” at this point in the program. Readers will recall that Boeing had to undertake some wingbox redesign, as revealed recently by Steve Hazy, CEO of ILFC–Boeing’s largest customer for the 787 and the entire 7-Series line.

Shanahan says there is 15% of the component testing remaining. When we look at the balance of tests to go, it’s our judgment that these are low risk. The test-to-destruction will be a “really great” demonstration of our design. Structure testing will be this summer, flight testing 4Q08/1Q09 will be key time periods. All six test airplanes will be flying by early 2009.

(Stock up $3.25 on volume surpassing the average daily volume at 11:40 am EDT.)

Shanahan says that Boeing has more confidence in this schedule because it’s added more time into the schedule, progress on problem-solving and resolving supply-chain issues. The inherent risk remains in the capability of the supply chain to get things done, however. Until we demonstrate performance, it will be difficult to eliminate skepticism in the program.

Carson says Boeing is not at the stage to discuss penalties–discussions are just getting underway with customers. Carson ducked a question whether reserves have been set aside until the earnings call in late April.

Shanahan expects to have 24 airplanes built prior to certification, including the six test airplanes. He said there are four months in the third and fourth quarter to deliver these airplanes, which suggests the first delivery will be in September 2009.

Carson says that it’s too soon to say when Boeing will catch up delivery dates on all 892 outstanding orders. Assessments are underway when Boeing could go beyond 10/mo production rate.

Carson said we have had a lot of discussion with customers who have ordered the 787-3 and at this point it’s our intention to execute program with two derivatives (as opposed to canceling the -3).

(Stock up $4.17 as the conference call closes on 26% more than average daily volume at 1200 n EDT.)

Podcast Commentary

Here is a 7 minute podcast with commentary on the conference call, offered by AirInsight.


Original Schedule

Revised Schedule (April 9, 2008)


Power On

April 21, 2007

June 2008

14 months


July 8, 2007

First Flight

August 27, 2007


+12 months

First Flight #4

Sept. 30, 2007


April 30, 2007

3Q09, likely August

16 months


May 31, 2008

3Q09, likely Sept.

14-16 months

Service Entry

June 21, 2008

3Q09 or 4Q09

+14-16 months

More on the KC-767 technical merits

Boeing just published its Boeing Frontiers magazine for April and it it there is a one-page story about a low-tech solution to a high-tech problem.

The story may be found here.

In advance of the 787 update

Boeing will update its 787 program Wednesday (April 9) at 11 am EDT, when officials are expected to confirm the widely reported additional six month delay. A Reuters report suggests the new delay could be six to nine months, but nothing we’ve heard suggests the upper end of this range and the “street” consensus comes in at six months.

Wall Street analysts are restless. They make stock recommendations based on company statements and they’ve been embarrassed a couple of times as previous Boeing pronouncements proved to be wrong. In Boeing’s defense, predicting delays for a program as complex as building a new airplane must be problematic at best. Just ask Airbus. But Boeing certainly hasn’t helped its case when officials make definitive statements that the program is on time when all signs are that it’s not. As we previously reported, Boeing Commercial Airplanes president Scott Carson made a presentation at a Cowen Co. investors conference and said firmly that Boeing was sticking to its schedule of power-on at the end of March and first flight at the end of June. A week later James Bell, chief financial officer of parent The Boeing Co., made a similar statement at a Lehman Brothers investors conference. His remarks were likewise firm and unequivocal.

Considering that we were already hearing then that another delay was likely, we were surprised that neither Carson nor Bell left themselves any wiggle room.

This time around, corporate communications and others began hedging when Wall Street analysts issued reports of likely new delays, two weeks after the Carson-Bell comments. This is to Boeing’s credit, and corporate communications was more forthcoming about the issues this time than in the past–also to its credit. Then a story in The Wall Street Journal, presumably carefully leaked, all but confirmed the six month delay.

When the news comes from Boeing tomorrow, there won’t be a surprise (unless, of course, nine months is announced). The stock has already been beat down, so absent any shocker tomorrow, the market reaction should be pretty benign.

But that won’t stop the skepticism. Analysts have been unpleasantly surprised too many times and they will continue to wonder if there won’t be another one down the road. The problem for Boeing, of course, is that having damaged its credibility, it will be impossible to prove the negative–that there won’t be another delay.

Analysts are now turning to the cost to Boeing. Morningstar predicts the penalty costs will be $800 million to $1 billion. Wachovia issued a report today that forecasts penalties will cost $2 billion to $3 billion by the time Boeing gets the program, and deliveries, back on track (though Wachovia also admits this is a soft number).

So far we haven’t seen an analyst report that attempts to add up all the cost overruns, additional R&D money as well as the penalties. What we know is that Boeing has previously announced the addition of $1.5 billion in costs to the production and engineering of the program, but this is a pretty old number. The acquisition of the Vought portion (50%) of Global Aeronautica, the troubled South Carolina facility, is, we believe, essentially a no-cash deal. Terms weren’t announced but we understand accelerated payments for work done and work to be done offsets the acquisition cost and perhaps any potential liquidated damages for failure to perform.

It’s possible but unlikely that Scott Carson and program manager Pat Shanahan will get into the program costs and penalties. These are more appropriate questions for the Boeing first quarter earnings call due late this month.

We expect tough questions on the update call and tough questions on the earnings call.

We’ve been asked by media whether the new delay will mean any cancellations. Analysts have already written that they don’t think so and neither do we. For one thing, there is nothing wrong with the airplane itself: the 787 will be the ground-breaking airplane as has been advertised all along. For another, there is no place for airlines to go if they did want to cancel. Boeing’s own 767 and 777 lines are sold out to well beyond the date the 787 program is anticipated to be back on track. Boeing can’t flip a switch and boost production on either line for near-term orders because the supply chain can’t respond quickly enough. Airbus’ A330 line is sold out as well. So the airlines have to try and find lift on the used market, not from the production lines at Boeing or Airbus.

We’ve also been asked by the media whether all these problems prove the production model is flawed. Our answer to this is “no.” The execution of the model has obviously been flawed, and Boeing has acknowledged this on previous conference calls when officials admitted they failed to provide the oversight needed, and some suppliers and industrial partners failed to perform. We continue to believe that once Boeing gets the execution right, the production model will revolutionize airplane building. Assembling an airplane in three days is a fantastic opportunity. With the huge global demand over the next 20 years, this futuristic foresight can have nothing but benefit when the execution is fixed.

We’ll be reporting tomorrow following the update with news and analysis.

Update, April 8 530 PM PDT: We’re told Airbus is going to 12 A330s/A340s a month in 2009 from 10 in 2008. This has been under consideration but we’re hearing it’s a “fact” and if true, it’s sooner than expected. This could give Airbus some ability to offer the A330 as interim or supplemental lift to disappointed 787 customers.

Speaking of USAF procurements…

Steve Trimble of Flight International has this bizarre piece. It’s about the Joint Cargo Aircraft, the C27J, which is being acquired by the Army and the US Air Force. It turns out the Army is paying half that of the Air Force.

As an aside, this is an Italian airplane made by Alenia (the same company involved in the Boeing 787 program). This European company partnered with a US company to make the big to the Pentagon. This sounds familiar, doesn’t it?

The US company partner is–Boeing.

Boeing’s IDS struggles

This story by Dominic Gates of The Seattle Times paints a grim picture for Boeing’s Integrated Defense Systems. He points out that IDS “can’t boast even a single prime contract to supply the US military’s next generation of fighters, bombers, tankers and transport planes.”

Here’s an article from Aviation Week discussing China’s plans to build a plane that directly targets the Boeing 737 and Airbus A320 lines and another in The Australian about the engine competition between GE and Rolls-Royce that’s developed concurrently with the rivalry between Airbus and Boeing.