Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
UBS estimates MAX break-even at 200
UBS Securities issued this note today:
Boeing is accounting for its 737 NG (Next Generation) program over a large number of aircraft with roughly 2,200 remaining in its block as of Q1, reflecting production into 2016 at planned rates. Across its block, we estimate Boeing is booking margins on 737 NG around 20% on a pre-R&D basis. With the launch of its re-engined model, the 737 MAX, Boeing will need to either account for MAX as part of its existing 737 accounting block or create a separate block. We think Boeing is most likely to add 737 MAX to its existing 737 NG block given fairly limited design changes on the MAX relative to the NG that wouldn’t appear tojustify a separate accounting block.
We expect initial MAX production to come through at lower margins than Boeing is currently booking on NG, diluting BCA (Commercial Airplanes) margins. The inclusion of lower margin initial MAX production in the 737 block will also negatively impact EPS relative to expectations as Boeing will need to book a lower average (program) margin on its current 737 deliveries. We expect MAX costs to improve at a fairly rapid pace with our assumed breakeven program quantity at 200 implying that unit margins approach 737 NG type levels near the end of our assumed 1,000 unit accounting quantity (two years of production).
737 MAX vs A320 neo: The debate continues
Here’s the next round in the continuing debate.
Bernstein Research published this chart detailing how Airbus and Boeing differ on the performance improvements they predict.
There is, of course, no way to know who is correct until the airplanes enter service.
We hear the A320 sharklets are performing better than advertised (Aviation Week actually reported this a while back as well). If the figure we’re hearing proves correct, the neo and MAX should have parity.
787 surge line delayed by rework; 787-9 to use this line in 2013; 787-10 launch all but certain
Boeing is delaying activating the 787 surge line in Everett (WA), while rework on the first 65 787s continues. Steve Trimble of Flight Global has this report. Meanwhile, Bernstein Research, in a note issued today, says the surge line will be where the 787-9 is produced and that the launch of the 787-10 is a near-certainty:
Boeing management described development work on the 787-9 as being ahead of plan at this stage. The 787-9 will go into production in 2013 on the surge line, where change incorporation is being done today on earlier airplanes. First delivery for the 787-9 is planned for early 2014. At this stage, Boeing also sounds optimistic about the 787-10. We have seen the 787-10 as a natural derivative, given the size of the wing.
But, success involves getting weight down sufficiently on the 787-9. Boeing appears optimistic on this
point, but we will wait to see progress. We are conservatively assuming first 787-9 delivery in late 2014. Although Boeing does not intend to announce a 787-10 launch until it is farther along on the 787-8, it appears that a launch is all but certain at this stage.
Bernstein also expects Boeing to deliver 595 aircraft this year vs 581 for Airbus, returning Boeing to the top spot as the world’s #1 airplane maker. With the 787 and 747-8 now being delivered, Bernstein forecasts Boeing will remain #1 through 2016, the outside of Bernstein’s current forecast.
Odds and Ends: 787 fuel savings at ANA; Airbus will benefit from Boeing
ANA 787s: Market Watch quotes an ANA official saying the Boeing 787-8 is saving 21% in fuel over eh previous airplanes. The article didn’t ID the previous planes, but they were the Boeing 767-300ER. Note, too, that the initial 787-8s are heavy and with Rolls-Royce engines that don’t initially meet specs.
Airbus to benefit from Boeing: The latter is closing its Wichita operations. The former will likely hire some of Boeing’s soon-to-be-out-of-work engineers. Here’s the article. Note that former Kansas Sen. Sam Brownback, who is now governor, was present garbed in Airbus colors. This is the same Brownback who couldn’t diss Airbus enough during the EADS-Boeing tanker competition. Now Airbus seems to be Brownback’s best friend.
China-EU showdown over ETS: China continues to refuse to comply with the European Union’s demand that carbon emissions information be provided. China, which already refused to firm up orders for 45 Airbus A330s, threatened to impound European airplanes if the EU retaliates against China’s refusal to comply.
Air Lease Corp to order MAX: Steve Udvar-Hazy, CEO of the lessor, plans to order the 737 MAX within the next few weeks. Boeing wants to firm up orders from ALC, CIT Aerospace, ILFC, GECAS and Aviation Capital Group by or at the Farnborough Air Show.
Odds and Ends: Price vs Price in Indian contest; China theat; 787 financial impact on Boeing
Price vs Price: More on the price war between Airbus and Boeing in the A320 v 737 contest. Dominic Gates of The Seattle Times has this analysis of hot contest to win an order from India’s Jet Airways, hitherto an exclusive Boeing customer. He takes a larger look at the troubled Indian airline industry.
Finalizing Orders: Norwegian Air Shuttle finalized its order for 100 Airbus A320neos, breaking Boeing’s monopoly here. NAS was also a launch customer of the 737 MAX.
China threat: Maybe, maybe not. Jim Albaugh, CEO of Boeing Commercial Airplanes, cites China as the biggest emerging threat to Boeing and Airbus. Reuters, in Beijing for the IATA AGM, has this article saying, not so fast. The article takes a close look at the ARJ-21, China’s first effort at a modern jet. Although this is a regional jet and not competitive with Airbus or Boeing, it’s a “makee-learn” effort that leads the way to the Comac C919, which is directly competitive with the A320 and 737 class. Implications of the ARJ-21 are also discussed in the article.
LionAir and the 787: Confirming news reports this week, LionAir announced it has committed to the Boeing 787, agreeing to buy five. We’re told these are from the so-called “terrible teens,” those early 787s that required an enormous amount of rework and which were rejected by the original customers. Transaero and Rwanda Air are said to also be taking some of these early aircraft.
EADS Bank: More information on the reports EADS is considering getting a banking license.
Boeing economics and the 787: Jon Ostrower at The Wall Street Journal has an excellent piece today talking about the milestone of 787 #66 and the implications for cost reduction. Unfortunately, the full article is available only for paid subscribers. Contained within the article is this key data:
The losses don’t show up on Boeing’s bottom line, because accounting rules let the company spread the Dreamliner’s costs over years—effectively booking earnings now from future Dreamliners that it expects to produce more profitably. With previous models, Boeing initially spread its costs over 400 planes, but with the Dreamliner it is distributing the costs over 1,100 planes—a number it says reflects unprecedented demand. Boeing already has 854 Dreamliner orders from 57 customers.
Boeing reported that first-quarter profit at its Commercial Airplanes division more than doubled to $1.08 billion from a year earlier. But the company acknowledges that accounting for the costs of each individual plane would have resulted in a first-quarter loss of $138 million—a drop UBS analyst David Strauss says is almost entirely attributable to the Dreamliner.
The Dreamliner’s drain on cash is balanced by strong sales of the profitable single-aisle 737 and long-range 777 models. And analysts estimate Boeing is reducing the losses per Dreamliner by about $10 million each quarter. But maintaining the pace of cost reduction gets harder as the simplest problems are solved. Meanwhile, Boeing aims to increase production of Dreamliners to 10 per month at the end of 2013, up from 3.5 per month today—meaning the losses per plane will be magnified, but will also be tempered by the decreasing cost of each jet.
Some analysts believe Boeing’s target for cost reduction on the Dreamliner could be too optimistic. Mr. Strauss of UBS says the company appears to be assuming it can reduce its cost 50% faster than it did with the 777. If instead the pace of cost reduction matches the 777, says one of UBS’s models, the estimated $20 billion hole could double.
Air India accepts 787, Boeing produces first “clean” version
Good news for Boeing on two fronts: Air India and Boeing agreed to a compensation deal, reported to be valued at $1bn, that paves the way to deliver the first 787s to the embattled airline. The first airplane comes from Everett, and Charleston’s first completed 787 is also slated for Air India. Air India has 27 787s on order.
Boeing produced the first 787 that is “clean” of the problems that have plagued the program for years and which caused massive rework that takes an average of 13 months to complete. This is a major milestone for the program.
Meantime, Boeing hopes to firm up some MOUs on the 747-8I soon.
Finally, a bit of history. This story contains an interview with one of the surviving Tuskegee Airmen. Their story has been depicted in the awful George Lucas movie Red Tails and the far better Ted Turner movie Tuskegee Airmen. The latter is available on DVD through Amazon.com.
Odds and Ends: A320 v 737 debate continues; Embraer on its future planes; ATR’s life story
A320 v 737 Debate: This continues over at AeroTurboPower, where an analysis of fuel burn cost per seat has been undertaken.
Embraer reiterates futures plans: No plane in the 130-160 market segment. EMB will continue to concentrate on its 70-125 seat market.
ATR 1000: This is a very clever video by ATR celebrating its 1000th ATR turbo-prop.
Boeing’s space plane returns after nearly a year
This isn’t our usual gig, but we’re fascinated by this story. Kudos to Boeing on this one.
Boeing 787s require 13 months of rework, concludes UBS
UBS Securities, in a research note issued today, estimates that the Boeing 787s delivered so far spent an average of 13 months getting rework done, with three delivered in April reduced to 9-12 months. Writes UBS:
On average, we estimate that the 11 787s delivered thus far spent 13 months in change-incorporation. While it appears Boeing did not deliver any 787s in May, we estimate that the three delivered in April (LU 37/38/42) spent between 9-12 months in change-incorporation.
Change-incorporation key component of 787 unit costs: Change-incorporation work is a key component of 787 unit costs. We estimate Boeing’s 787 unit production cost at ~$240M in Q1, more than double its assumed average cost at ~$109M over the first 1,100 units. We expect 787 unit costs to trend lower as mix of change-incorporation deliveries lessens.
JP Morgan, also in a note issued today, had this to say:
787 still on the right track, but it’s never easy. Boeing delivered no 787s in May, a step backward following three deliveries in each of March and April. This does not appear to be due to execution issues, but rather to a pilot strike at Air India and the carrier’s efforts to extract more compensation for delays. We anticipate that there could be at least four deliveries in June, which would bring Q2 deliveries to seven, above Q1’s five. Boeing will need a significant ramp in 2H to reach its guidance for 35-43 deliveries this year, but the ability to deliver aircraft directly off the assembly line rather than sending them through change incorporation should improve the flow, and more aircraft should be delivered from change incorporation as well. Management has indicated in the past that aircraft #66 would be the first to go from the assembly line to the flight line without passing through change incorporation, and this aircraft is now in the last position on the Everett final assembly line, although it is unlikely formal delivery will take place until July. While there will be ups and downs, such as May’s lack of deliveries, we continue to expect 787 execution and financial metrics to improve through the year.