Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Bjorn’s Corner: Air Transport’s route to 2050. Part 28. June 27, 2025
- Parent agency, FAA often at odds as politics outweighs safety June 26, 2025
- Electric Flight and the Ugly Duckling June 25, 2025
- Engine makers tout “Plan A” but have “Plan B” backups in R&D June 23, 2025
- Bjorn’s Corner: Air Transport’s route to 2050. Part 27. June 20, 2025
Air France A350 contract stalled; here’s the way forward
Bloomberg News has this report that the Air France-KLM talks for 25 Airbus A350s remain stalled over the long-running dispute between the company and Rolls-Royce over AF’s desire to overhaul the Trent XWB engines.
The Air France-KLM group offers its own maintenance, repair and overhaul services and wants the ability to provide MRO to others as well as perform the work itself.
Engine suppliers are loath to grant MRO rights to others. Engines are often sold at deep discounts, and in extreme cases, even given to airlines in exchange for the exclusive parts and MRO contracts. This is where the engine makers truly make their profits.
Rolls-Royce is known to be particularly hard-nosed in this regard.
So how will the log-jam be broken?
Rolls wants Air France to order the Trent 1000 for the 25 Boeing 787 orders announced last year. Given the long relationship between Air France and GE, the supplier on AF’s current fleet of a variety of aircraft, this will be a tough pill to swallow. But don’t count it out.
787 production ramp may be faster; softer 2013 orders expected
Credit Suisse and UBS issued notes on Boeing today. Here are excerpts. Key points: production ramp up on the 787 may go faster than expected; Boeing continues to consider a rate higher than 10.mo for the 787; 2013 orders expected to be around 1:1 book-to-bill.
Credit Suisse
Softer 2013 Bookings May be [coming]. We agree with [Boeing] that cancellation concern is likely overdone. However, we think orders will slow…most airlines are already in the book, and we will not see a new product soon enough to spur activity. Although softer bookings are better than cancellations, and may not pressure production or earnings growth, orders have been the key historical share driver. So, although BA has not backed off a ‘13 book:bill target of 1.0x, we are less convinced, unless a number of ‘12 MAX commitments defer to ‘13.
[Boeing] noted that deferral and cancellation rates continue to be at or near historical lows. The leading indicator of trouble are conversations between airlines and Ray Conner (CEO of BCA) and these have not elevated beyond the normal level. Also Boeing commented that it is not seeing a slowdown in demand, if anything it is seeing an increase in demand for accelerated deliveries.
Regarding 2013 book:bill, we believe the most recent formal Boeing projection was made by Jim Albaugh at May’s investor day, targeting 1.0x or slightly better. Since Ray Conner recently assumed control of BCA, he has not changed the target, saying at an investor conference just last week that he expects 2013 bookings to remain near 1.0x.
However, we believe this target is highly sensitive to the timing of MAX commitment conversions, the health of the cargo market as it relates to 747, and 777 demand in the context of timing of the A350 schedule for those carriers interested in both.
One factor that could augment 2013 orders is a timely introduction of a 787-10 or 777X, although we think the former is more likely. Boeing expects more clarity on its widebody plan later in 2012 or early in 2013.
787 Rate – We estimate that most of Boeing’s suppliers are already at 5 shipsets per month, which should enable Boeing to achieve that rate sometime in Q4. Following this we expect Boeing to begin loading at 7 per month and then 10 per month in 6-month intervals.
Regarding 2013 production, while rate plans would indicate 6-months at 5 per month and 6-months at 7 per month, for a total of 72 aircraft produced, we note that a multi-week lag (currently 6-8 weeks but Boeing is attempting to get this down to 4 weeks) in delivery timing means that deliveries of newly produced aircraft will be somewhat lower.
However, some EMC (Everett Modification Center) aircraft will supplement deliveries, which should offset the production-to-delivery lag. Consequently, we now see 74 787s delivering in 2013, give or take, down slightly from our previous estimate of 78 deliveries. Boeing is continuing to evaluate the potential for the rate to exceed 10 per month, with investment as the key decision factor. The company expects to make a decision on a higher rate at the point at which it reaches 10 per month, scheduled for end of 2013.
UBS Securities
Dreamlifter indicating BA could go to 5/mo earlier than expected We believe the large structural suppliers are now in line to ahead of Boeing’s final assembly rate at 3.5/month. We believe our Dreamlifter tracker indicates Boeing’s final assembly rate could move up to 5/month earlier than expected.
SPEEA to members: reject Boeing contract offer
Late Monday, SPEEA, the engineers union, issued this press release urging members to vote down a contract offer from Boeing.
SEATTLE – On Monday, Sept. 17, the SPEEA Professional and Technical Bargaining Unit Councils voted to send Boeing’s September 13 contact offers to members for a vote. The BUCs joined the Professional and Technical negotiation teams in unanimously recommending members VOTE NO.
See the letter to Boeing announcing the vote:
See the letter to the professional membership explaining the vote:
See the letter to the technical membership explaining the vote:
See SPEEA’s summary of the Boeing contract offer:
The union presented its full proposal to Boeing on June 15. Existing contracts expire Oct. 6.
Our take: this is no surprise. The rhetoric has been clear this was going to happen. We expect a No vote, followed by more negotiations.
Odds and Ends: More on EADS-BAE; surviving crashes
EADS-BAE: NOW that a few days have passed since the announcement BAE and EADS want to combine, here’s some more worldwide press:
Reuters: Government demands could make or break deal.
Interactive Investor: Merger will advance EADS military goals.
Mobile Press Register: Merger will advance Gulf Coast aerospace cluster.
London Daily Post: Defence worried about UK security.
International Business Times: US access key to merger.
Surviving crashes: A crash test of a Boeing 727 in Mexico drew snickers from some quarters, but the test concluded it’s safer to sit in the rear of the airplane than in the front. No kidding, and this is not new; this has been known in aviation for decades. But we actually like the response of Ted Baker, the founder and long-time CEO of National Airlines in the US (he sold out around 1961). When asked by a reporter where the safest place to sit in a plane in the event of a crash, the blunt Baker replied, “flat on your ass.” And you didn’t need a crash test to figure this one out.
Shrinking UAV market: Once thought to be one of the bright spots in a shrinking defense budget, Boeing now says the drone market will decline despite moves to increase civilian use.
US Defense sequestration: USAF tanker on hit list
The White House issued a 394 page report on what defense programs are subject to sequestration. The USAF tanker replacement–a program won by Boeing in a bitter contest–is on the hit list (PDF Page 274, document page Appendix B 38). It’s something called the Replacement Transfer Fund, Appropriation Discretionary. Whatever all this means.
Around the world in 5 minutes
This has nothing to do with aviation (except implicitly that’s how Matt got from one place to another) but this is just so darn cool, we have to share it.
[youtube http://www.youtube.com/watch?v=Pwe-pA6TaZk&w=560&h=315]
And here are outtakes from the trip.
[youtube http://www.youtube.com/watch?v=l4quCAG4eCc&w=560&h=315]
BAE Systems is growth opportunity for EADS
Update, Sept. 13: Here are some stories from today:
Bloomberg: EADS move seen by Boeing as growth; Revives decade-old plan; and this update about the rankings:
BAE is the ninth biggest vendor to the U.S. government, with $7.3 billion in direct, or prime, contracts in the year that ended Sept. 30, according to a Bloomberg Government study ranking the top 200 contractors. EADS ranks No. 100, with $684 million in awards.
Reuters: US approval seen likely.
AOL: Big deal in Europe, not so much US.
Mobile (AL) Press-Register: EADS-BAE in merger talks, with a spin on local impact.
Original Post:
The prospective combination of BAE Systems and EADS is a growth opportunity for EADS, particularly in the US, where it has been striving for years to expand its defense footprint.
BAE Systems in 2009 was the Defense Department’s #5 of the Top 10 defense contractors. At that time 50% of BAE’s business was in the US. We have checked more recent figures. EADS North America, during the KC-X tanker competition, did about $1bn worth of business with the US government, in defense, Homeland Security and other contracts. We don’t believe this has appreciably changed in the 18 months since the tanker contract was awarded to Boeing.
Although the immediate reaction among observers and media is that the combination will make a strong competitor to Boeing, in fact BAE Systems services defense segments that are more closely aligned with Lockheed Martin and Northrop Grumman than with Boeing. There is also little if any overlap between BAE and EADS, whether here or in Europe and the UK, where BAE is headquartered.
BAE has about 40,000 employees in the US.
The combination, which has to be approved by the boards of both companies as well as a host of governments on both sides of the Atlantic, will certainly strengthen EADS and its argument that it is a substantial contributor to the US economy and US employment. Airbus, a wholly owned subsidiary that accounts for around 80% of EADS revenues, purchases $12bn in goods and services in the US and says it employs or supports 100,000 jobs directly or indirectly.
BAE, which owned 20% of Airbus until EADS bought these shares in 2006, isn’t a current supplier to Airbus. Although defense cuts in Europe and the US are limiting growth at this time, these come in cycles and BAE would strategically position EADS to grow its defense business and reduce reliance on Airbus revenues and financial performance.
The new company will be 40% owned by BAE shareholders and 60% owned by EADS shareholders. The current shareholdings in EADS of the German and French governments, presently 15% each, would almost certainly be diluted. (The German EADS shareholdings are currently indirect but may become direct. The French shareholdings are direct.)
The new company would be listed on several European exchanges, including BAE’s listing on the UK stock market.
Boeing & SPEEA: shifting work brings its own hazards–and costs
Boeing & SPEEA: As we routinely do when it comes to trying to understand rhetoric of two warring parties (usually Airbus and Boeing but in this case SPEEA and Boeing), we reach out to third parties. We asked an aerospace engineer not associated with either Boeing or SPEEA about the Bloomberg interview with Boeing’s Mike Delaney in which Delaney was quoted as saying if SPEEA doesn’t accept Boeing’s terms, it will move engineering elsewhere.
Outsourcing engineering has been a sore point with SPEEA for some time and, frankly, outsourcing on the 787 and 747-8 created a lot of problems in the development of these aircraft. So Delaney’s threat can’t be dismissed.
But as with the 787 and 747-8, outsourcing isn’t a simple matter, either. Our third-party noted that engineering tasks may be unique enough that simply shifting work from groups in Seattle to engineers in Wichita (KS), where Boeing is closing its military operation, or to Boeing’s Defense engineers in St. Louis or elsewhere may hardly be a seamless transition.
Boeing, of course, will know this. But at a time when Boeing is ramping up production by 60% and has the 737 MAX, the 787-9, the 787-10, 777X and KC-46A programs underway, we’re not sure shifting work makes a lot of sense.
Even if quality work is assured–in contrast to some of the outsourcing on the 787 and 747-8 programs–and which is by no means a certainty during the switch, transition times could well slow the work at a time Boeing could ill-afford.
But Boeing looks at the long-term. It knew the risks in creating the 787 plant in Charleston. Recall that documents revealed the Charleston move to be high risk for quality, for learning curve and for cost–and the company proceeded anyway because it was fed up with the IAM 751 strikes (or because of incentives, depending on who you believe and we firmly believe the strike theory).
We’ve no doubt that Boeing is fully capable to damning the labor torpedoes. But we firmly hope common sense will prevail for both parties.
Even if a contract is reached, we also firmly believe Boeing will relocate engineering work from Seattle. The sheer volume of growth over the next several decades will demand it. If SPEEA believes otherwise, it’s whistling Dixie. And that’s probably where a lot of the future engineering will be regardless of the outcome of current talks.