Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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- Bjorn’s Corner: Air Transport’s route to 2050. Part 21. May 9, 2025
- Does an A220-500 need a new wing and engines? Part 2. May 8, 2025
- Embraer downplays tariff impact on 2025 results May 6, 2025
- JetZero readies effort for private equity fund raising May 5, 2025
Cash cows at Airbus and Boeing
Eyes are on Boeing over the prospect of a 777X.
Chatter doesn’t cease about the prospect of an Airbus A330neo.
Boeing is in no hurry to proceed with the “7X” and an A330neo is unlikely any time soon, if at all.
Here’s why.
Boeing rolls out Ray Conner to analysts
Boeing rolled out Ray Conner, the new CEO of Boeing Commercial Airplanes, to analysts in New York yesterday. The first research note we’ve received, from Imperial Capital’s Ken Herbert, portrayed a positive meeting. Below is a synopsis. As we receive more notes, we’ll add those comments.
We don’t like the resumed policy of using cash to repurchase stock, instead of putting it into new airplane programs (something Richard Aboulafia of the Teal Group, normally a pro-Boeing consultant, has roundly criticized for years).
Imperial Capital
We believe BA is benefitting from several tailwinds, and is demonstrating increased confidence regarding its 787 execution and the ability to take further costs out of the supply chain. However, we believe much of the good news is reflected in BA stock, and we see slowingorders in 2013 as limiting the multiple; therefore, we are maintaining our In-Line rating. Investors areexpecting a significant dividend increase or share repurchase program, which could be a positive catalyst, but we see the new program developments, which include the 737MAX, the 777X and 787-10, as potential competing cash pulls.
Regarding the 787, Boeing confirmed that Charleston is ahead of plan, but that it has been staffed to over deliver. Boeing also made a point of stressing that its movement down the cost curveon the 787 will be similar to that of the 777. We believe that there is an opportunity for Boeing toexceed expectations on the 787.
We continue to believe, however, the much of the execution upside is priced into Boeing stock. We believe that in order for the stock to see material upside, Boeing needs to demonstrate a very bold use of the expected free cash flow, in the form of both increased dividend and share repurchases, that will attract new investor interest and accelerate the EPS growth. However, this will limit the new product development options, considering the potentially competing development requirements of the 737MAX, the 787-10, and the 777X. We believe current BCA leadership wants to do both the 777X and the 787-10, and believes that there is significant pent-up order demand for both new aircraft, but we believe the focus on share repurchases and/or the dividend, reiterated at the 8/28/12 reception, could push some development effort to the right.
Separately:
- A reader posted this link on NEO vs MAX orders and options and we think it so good we’re elevating it to a primary post. This website also recaps which airlines have switched allegiance. Thanks to Dave O’Flynn for the link.
- China ordered 50 A320s instead of the expected 100.
Odds and Ends: Crummy DOT data and why we’re skeptical; 787 deliveries; PAL and A321 deliveries
Crummy DOT Data: We’ve previously written that we, and AirInsight, are skeptical about airline data filed with the US Department of Transportation. AirInsight doesn’t rely on it at all when doing aircraft economic analysis. We are openly skeptical of Boeing’s reliance on DOT 41 data when comparing maintenance costs of the 737 vs the Airbus A320.
Aviation Week has this item that illustrates precisely why we think DOT 41 data has to be viewed with great skepticism.
Airbus Mobile and Washington State: This Op-Ed in, of all places, The Seattle Times, explains how Washington State will benefit from Airbus’ new Mobile (AL) plant. Says what we’ve been saying for a long time. Misses the fact that WA is the No 1 or No 2 supplier to Airbus in the US by company count and No. 6 by dollar volume.
787 Deliveries: 17 and counting, with Air India, Qatar and others to deliver shortly. We are feeling more and more confident Boeing will hit its target of 40 deliveries this year, with just four months and a few days left.
PAL’s Big Airbus Order: This has been written up a lot, so it’s no surprise. What caught our eye was Aviation Week’s report that says Airbus found A321 delivery slots next year. Who deferred or who cancelled to find these slots in a production line that’s supposed to be sold out to mid-to-late this decade?
A350 Supply Chain Challenge: Aviation Week has this article about changes to the A350 supply chain and change incorporation.
After-thoughts of Qantas 787 cancellation, SPEEA and Boeing
A day after it became public Qantas Airways canceled 35 Boeing 787-9s, it might be worthwhile giving a thought or two.
The Wall Street Journal has a good story (unfortunately, paid-subscription, though it may show up via Google News) looking at the impact. We also received some media calls on the topic.
We’re not nearly as gloomy as the general reaction. In fact, we sort of shrug about it. The cancellation is because of Qantas’ own problems, not because of anything with the 787 program. QF’s issues have been a long-time coming, in much the same way as US legacy carriers.
QF’s cancellation gives Boeing two choices with these slots: resell them to an important, strategic customer or “close up” the production line and reduce some delays to other customers. Either is an acceptable alternative.
Had these been 737 or 777 cancellations, nobody would have blinked an eye. But because it is the troubled 787 program, a lot of hand-wringing goes on. We think it’s overdone.
Doug Harned at Bernstein had this to say in a note issued today:
Questions about the strength of the 787. The Qantas cancellation should not be taken as any indication that 787 demand is weaker. At planned production rates, it appears that there are few slots available for 787 deliveries until 2019, which makes these earlier slots very valuable. We understand that Boeing has been looking at approaches to raise production rates for the 787, given the strength of demand – not something Boeing would be doing if it saw the production ramp as at risk. Because we believe that Boeing originally priced its 787s too low, we expect that the Qantas slots will be taken by other airlines, potentially at higher prices. There have been comments in the press (e.g. WSJ) that this cancellation is a blow to the 787-9 (as distinct from the 787-8). We do not believe that is the case, as we have found customers more interested in the 787-9 than the 787-8, although its availability comes later in time.
SPEEA and Boeing: charges and counter-claims
Odds and Ends: Qantas cancels 35 787s; 787 program upswings; 777X development slows
Qantas Airways: The troubled airline canceled 35 787-9s. Stories in Google News from all over.
Update: David Strauss at UBS re-issued his April note analyzing over/under orders for all Airbus-Boeing models. In his cover email, Strauss today referred readers to the 787 section. Excerpts:
At 859 aircraft from 56 customers, 787 accounts for roughly two-thirds of Boeing’s widebody backlog. Assuming Boeing hits its planned 10/month 787 production rate by end of 2013, we estimate Boeing has roughly eight years of production in backlog. By region, Asia accounts for the largest percentage of the 787 backlog at 38%, with the remainder fairly evenly split between North America, Europe and the Middle East. We estimate that roughly 73% of the 787 backlog has been ordered for growth as compared to 27% for replacement.
Our analysis indicates Boeing’s 787 customers are in a net over-ordered position of roughly 400 aircraft or 29% of their combined widebody backlog. 787 customers that we have identified as being over-ordered include Singapore, Aeroflot, Qatar, Gulf Air, Qantas, Air China, Vietnam and United, while BAIberia, Etihad, China Eastern, Jet, Oman, Uzbekistan and Saudi appear under-ordered. Although our analysis indicates Delta is under-ordered on widebodies, we don’t expect Delta to order more 787s as it has already deferred its existing 787 orders indefinitely.
787 upswings: Aspire Aviation has a long piece on the 787 program.
777X Development: Dominic Gates has this story about the slowing of 777X development. This is very similar to what we’ve been hearing from a variety of sources. Update, 7:25pm PDT: Randy’s Blog (Randy Tinseth) refutes Dominic’s article with a memo from Ray Conner, president of BCA. As we noted in this item, Dominic’s reporting is similar to what we’ve been hearing–including as late as Tuesday of this week. We’ll also observe, for what it’s worth, that this seems to be unfolding in a scenario very similar to the New Small Airplane/737 MAX timeline. If nothing else, the customers seem to have an understanding that appears to be “evolving.”
Odds and Ends: Assessing the MAX; Airbus and Mobile; skilled labor in the supply chain
It’s a slow August for news, but here are two items we’ll bring to your attention:
Assessing the MAX: Over at AirInsight, we have this post assessing the Boeing 737 MAX, written shortly after the Farnborough Air Show.
Airbus and Mobile: This story discusses how the Airbus plant at Mobile (AL) will add to the aerospace cluster there. The comparison with Seattle, which we make, highlights a real challenge we see for Airbus and the aerospace cluster in Mobile. The supply chain here is struggling under the weight of the high demand for airplanes (not just at Boeing, but all the OEMs), both in terms of product and skilled help. As a member of the Board of Pacific Northwest Aerospace Alliance, we hear of the manpower shortage all the time and the efforts by the State and others to boost training and education to meet demand.
The shortage of skilled labor, and of engineers, is a major challenge for Boeing, and (like it or not) one reason for outsourcing. But the impact on the supply chain is equally great. The lower Tier suppliers in effect become the training ground for the upper Tier and Boeing. This means there is a continuous skill-churn that these small businesses really can’t afford.
Washington State is not the only place where this problem exists; it’s a national problem. What we hear at PNAA is story after story of foreign students (notably Chinese) coming to this country for engineering education then taking their skills home rather than emigrating here. Nationally, there is a wide imbalance between education and training and demand. The shortage of our education institutions in graduating the skills in STEM and touch labor is large. Even high schools have cut back on vocational training of all kinds.
In this State, budget cuts have severely impacted the community colleges and high-ed schools. The aerospace industry is but one of those hurt by these cuts.
Odds and Ends: Dire outlook for airlines; 787 Deliveries; American-USAirways
Dire Outlook: This article is nothing to cheer about. The author predicts a low growth in global GDP, and this is what Airbus and Boeing rely upon for their growth and production forecasts. It says airlines are emitting much more pollution than generally thought, and if true, this means more costs (especially in Europe) in fees. Also buried in the article is the revelation from Air New Zealand that it costs the airline $1.25m to operate a Boeing 777-300ER round trip from NZ to London, with more than 50% of the cost being in fuel. No wonder the prospect of the Boeing 787 and Airbus A350, with 20% lower fuel costs and 25%-30% lower trip costs, is so important.
787 Deliveries: They are still slow but they are picking up, and it will be about 1 1/2 years before the backlog of airplanes parked at Paine Field in Everett is cleaned out. But it’s progress.
American-US Airways: AirInsight has a podcast discussing the disruptive impact of a merger here.
Odds and Ends: 737 faces challenges; 737 MAX and China; American Air
737 Challenges: The Puget Sound Business Journal has this long piece about the challenges facing the 737 from Airbus and others.
737 MAX and China: Meantime, China is, at long last, looking at the MAX for its airlines.
American Airlines: A merger with US Airways makes the most sense, says Aspire Aviation (we agree as long as US management is in control)