Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- 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
- Pontifications: A Personal Note June 19, 2025
- Airbus books 142 firm orders as Boeing retracts from the Paris Air Show June 19, 2025
- AIN Media Group Agrees to Acquire Leeham News & Analysis June 17, 2025
Air Asia acquires stake in Batavia Air; opening for CSeries?
Air Asia will acquire 77% of Batavia Air and the rest of the shares next year.
Air Asia is an A320/A330 operator. Batavia has a mix of A320s, A330s and Boeing 737 Classics. We can’t help but wonder if the flirtation at the Farnborough Air Show between Air Asia’s Tony Fernendes and Bombardier over the CSeries might be tied to Batavia.
Boeing 2Q12 earnings up
Boeing reported its second quarter and half-year results today. The press release may be found here.
Initial analyst take:
Bernstein:
Boeing reported Q1:2012 EPS of $1.27, versus our estimate of $1.20 and consensus of $1.12. Q1 sales came in at $20.0 bn, above our $19.2 bn estimate and consensus of $19.4 bn. The difference in revenues was all due to higher defense revenues. Although we do not view near term EPS as the most important driver for Boeing stock, this was a positive result. Long term cash flows are most important, which we see as strongly linked to 787 program performance. Deferred production for Q2 again did not meet the trajectory one would want to see on a learning curve. But, we reached the conclusion after meetings with Boeing in June that it was premature to develop a baseline off of reported deferred production at this stage. There is still substantial uncertainty in that trajectory. We see progress on the production ramp and supplier performance as important indicators, though, which appear to be on track
Credit Suisse:
QTR DETAIL
- EPS of $1.27 beat by 15-cents leading to a guidance raise of 25-cents.
- Outlook: Expectations were high, but we do not think that this level of guidance increase was expected yet. That said, we believe there is additional upside to guidance as we do not think management would have used all of its “cushion” this early in the year. Consequently, we see consensus of $4.56 rising further.
- Margins in BCA of 10.2% were strong driven by volume and mix; BDS margins of 9.1% were in-line with Q1 and with the full-year guidance.
- 787: We see a nice improvement in learning curve with estimated intangible 787 unit costs declining to $118M in Q2 (from $133M in Q1). Note, the improvement is probably greater given that Charleston’s first delivery is embedded. The tangible unit cost of 787 is estimated at $108M for total cash unit cost of ~$226M, down from ~$241M in Q1.
- The change in 787 deferred production in the quarter was $1,235M; dividing this by the units produced in the quarter (3.5 aircraft x 3 months = 10.5 aircraft yields the $118M estimated intangible unit cost for Q2.
- R&D: BCA R&D was $560M in the quarter (up from $544M in Q1). Boeing retained its forecast for total R&D expense of $3.3-3.5B for the year.
JP Morgan
- Boeing delivered a solid Q2, and we expect the stock to perform well out of the gate. Our main concern coming into earnings was the outlook for 737 margin, and since the 737 block extension is likely to take place in 2H, we still expect some level of cautious commentary on the call. Management did raise BCA margin guidance to the top of the prior range of 8.5-9.0%, which is still below our estimate of 9.5% (we thought prior guidance was excessively conservative) but at least suggests that management feels good about performance. Higher defense sales also drove the 25-cent increase in 2012 EPS guidance.
- We see aircraft demand and 787 execution as the two key issues for the stock. Regarding aircraft demand, we expect little incremental info today. On 787, we expected little cash flow progress in Q2 since there were only six deliveries (this was already disclosed), but today management maintained guidance for roughly 40 deliveries this year, indicating confidence that the planned 2H pickup.
UBS
- *Q2 at $1.27: BA Q2 EPS at $1.27 vs $1.14 UBS and $1.12 consensus. All the upside relative to our model came from BDSS (Defense) as BCAG (Commercial Airplanes) came through slightly below our expectations with 10.2% margins. Pre R&D BCA margins at 15% roughly in line with Q1 while we estimate pre R&D margins ex 747-8/787 at 17%. BDSS surprisingly grew revenues 7% with stable margins at 9.1%. FCF at $552M or 57% of net income, although slightly better than our forecast, dragged down on $2B+ inventory build and $763M pension contribution.
- *Minor improvement in 787 cash costs: 787 deferred production grew by $1.2B, roughly in line with prior quarter, although on slightly higher production. We estimate deferred production at $120M per airplane produced during the quarter down from $132M in prior quarter. BCAG reported a $144M unit accounting loss reflective of 747-8 and 787 losses, slightly higher than $138M in Q1 on one additional 747-8 and 787 delivery.
Comments from the earnings call:
AMR’s goofy merger explorations
So AMR says it will explore merger opportunities as part of its bankruptcy process.
The choices of potential partners are odd, indeed. According to The Wall Street Journal, AMR’s choices for a potential combination with American Airlines are US Airways, JetBlue, Alaska Air Group, Republic Airways Holdings’s Frontier Airlines, and Virgin America.
The Wall Street Journal notes: Besides US Airways, none of the others has publicly expressed a desire to merge with American. JetBlue and Alaska Air have indicated they prefer to remain independent, and people familiar with closely held Virgin America also said the company isn’t interested. Asked about that, Mr. Horton said: “If somebody’s not interested, they’re not interested.”
The choices, aside from US Airways, are pretty goofy. None is a network carrier that would add a system to American. JetBlue and Alaska Airlines would certainly beef up the East and West coasts, respectively, where American is weak. JetBlue would add strength to American’s JFK international hub. But neither brings a network to the airline.
Frontier Airlines and Virgin America wouldn’t bring even the attributes offered by JetBlue and Alaska. Frontier’s Denver hub competes with United Airlines and Southwest Airlines. Does American really want to get into this fight? We think not.
Virgin America, which regularly posts huge losses, isn’t strong in San Francisco where it is based and neither is American. We don’t understand why this airline is even mentioned.
The only airline that makes sense for consideration among those mentioned is US Airways. US Airways has a network, strong East Coast presence, and a sharp management, which wants to be in control and this seems to be the biggest obstacle for the AMR/American management.
And it only makes sense for the US Airways management to be the surviving one.
MAX v NEO, continued
Aspire Aviation has another long piece analyzing the two airplanes.
Aerotubropower takes issue with some of Aspire’s analysis in this piece. Aeroturbopower cites publicly available information from Turkish Airlines that is particularly noteworthy in the debate between Airbus and Boeing about the A320 v 737.
Odds and Ends: COPA, Aeromexico, GOL for MAX
The Wall Street Journal reported late today that COPA, Aeromexico and GOL are lining up for the Boenig 737 MAX.
The WSJ article is subscription-only but perhaps it will show up on Google News, as some do.
COPA was one of the original airline “commitments” for the MAX last year, which we reported. We reported that Aeromexico had been expected to announce MAX and 787 orders at the Farnborough Air Show, as its absence was a disappointment to expectations.
GOL, of Brazil, is a long-standing 737 operator but Airbus made a strong push to win this business.
The Seattle Times reported that United Airlines, which last week announced orders for 100 MAXes and 50 737-900ERs, has options that could mean 310 orders from Boeing. United also settled its compensation issues with Boeing over the 787 delays.
US Airways’ CEO talks AMR, industry conditions at National Press Club
US Airways CEO Doug Parker spoke today on the effort to merge with American Airlines and of industry conditions.
This is a running tally of the comments and Q&A.
Parker:
- Was introduced as a good poker player, citing Herb Kelleher. Parker responds: I’m not particularly good. Herb is just very bad.
- Our country needs a practical and sustainable airline policy.
- Team at US Airways is doing a phenominal job. Producing record revenues, yields, strong load factors, new records in every operating measure. Credit goes to 32,000 employees. I can’t thank them enough.
- You might ask if US Airways is doing so well on its own, why talk so much about mergers? We don’t need to merge but we owe it to employees and other stakeholders to become as strong and as viable as possible.
- Previous mergers have led to increased traffic, cost reductions, better competition.
- Employees will have better opportunities.
- American Airlines sat out these mergers and have missed opportunities. It is not the largest airline in the world anymore or even close to it. Delta and United have surpassed it.
- Finally American resorted to bankruptcy. Bankruptcy does allow airlines to negotiate to contracts, renegotiate and terminate contracts and debt. Bankruptcy cannot fix a revenue problem or network deficiencies through organic growth.
- American can fix these only through merger with US Airways. American’s Cornerstone strategy doesn’t regain previous strength. There is a big hole on the Eastern seaboard.
- American is steadily losing share to Delta and United. It can only be gained back by merging with US Airways which is strong on east coast.
- Merger will enable both airlines to become stronger. Networks are complimentary and little overlap, so no need to scale back services.
- A new American would be able to provide connecting services through Philadelphia, Washington and Charlotte rather than backtracking through Chicago, which passengers won’t do.
- American is now in fourth or fifth place in most regions. A combined carrier would become first or second in most areas.
- Almost all analysts concluded American’s Cornerstone strategy won’t fix problems.
- Why isn’t it happening? Timing is everything. We believe a merger should happen within bankruptcy to avoid many costs that would occur outside bankruptcy.
- US Airways is here now and ready to do this now. There is no guarantee it will be later. We believe the action for merger is now. We want a fair chance to present our plan.
- We are certain any objective analysis will conclude merger with US Airways is best for the bankruptcy process.
- According to American, the bankruptcy process is because of the unions–they are the “offenders.” My experience with these unions in supporting the merger is to the contrary.
- The compensation gap between the US Airways proposal and the American proposal is not that large. The unions understand the future for American is a strong carrier.
- Everyone knows what the right answer is. The public has a lot at stake in the outcome. There are 100,000 jobs at stake here.
Odds and Ends: Designing 737 MAX; RR & PW; CFM
737 MAX: Boeing Frontiers Magazine has a long article with lots of pictures describing the designing process of the Advanced Technology Winglets.
RR-PW on big engines: Aviation Week has this article speculating on the prospect of Rolls-Royce and Pratt & Whitney teaming to offer an engine for the Boeing 777X.
CFM says the use of advanced materials will reduce fuel consumption in the LEAP-1A (Airbus) engine by 1.5%, which happens to be the amount John Leahy of Airbus said that PW’s GTF has an advantage over LEAP.
It’s official: United orders 150 firm Boeing jets (100 Max, 50 900ERs)
Press conference
Jeff Smisek, CEO United
- 100 737 Max 9
- 50 737-900ERs, replaces 757s flown domestically.
Jim McNerney, CEO The Boeing Co.
- Thanks to UA for putting trust in us.
- Boeing and United go back a long, long way. Once part of the same company.
- Boeing has delivered more than 1,400 airplanes to United and Continental.
- With today’s order, the 737 program has now surpassed 10,000 orders.
Boeing Photo.
Ray Conner, President Boeing Commercial Airplanes
- The 737 MAX like the 787 will provide customers best solution in air transport.
- Will provide greater value in fuel efficiency. MAX, like the NG, is perfect match for United.
Q&A:
Smisek:
- $14bn value, NG delivery begins in 2013. (Where did Boeing come up with delivery positions next year?–Editor.)
- -900ERs replace 757s domestically, 9 MAX will replace other, less fuel efficient aircraft including A320s. We have 152 Airbus airplanes today.
- First 787 due in late September. McNerney has personally guaranteed this.
- We had extensive discussions with Airbus and Boeing. Spent almost the past year in discussions with engine and airframe manufacturers.
- We’ll finance aircraft as we get closer to delivery.
- Deciding factors we negotiated what we believe to be the best airplane with the best engines at the best price.