Leeham News and Analysis
There's more to real news than a news release.
Comment on the Delta-Northwest merger
The AirInsight team comments on the Delta-Northwest merger in this 11 minute podcast.
Leeham Co. website updated 4/15
Our Corporate Website has been updated for this week. We discuss what’s perceived by many as Boeing’s scorched earth approach to its protest over the tanker award to Northrop Grumman; and we expand our previous discussion on the financial impact of the delays for the Boeing 787.
We also have documents from Boeing related to the tanker protest.
Boeing Field book
We found a new book about Boeing Field. This 128 page book has only black and white pictures and it’s $19.99. Photos date to 1910, before Boeing Field was built, with a plane landing on the site, to the arrival of the Concorde. It has a photo of the nose-gear collapse of the 707 prototype, happening when the brakes failed and the airplane had to be ground-looped.
The book description and an on-line order form may be found here.
We found our copy at Barnes & Nobels.
Tanker wars, continued
Boeing and Northrop continue their tanker public relations war. Boeing fired off this press release about the KC-767’s “survivability” vs. the Northrop KC-30.
Northrop fired off a release about jobs, steering people to a 3 1/2 minute National Public Radio report.
Northrop partisans also made sure we saw this biting cartoon.
(For the record, we previously have asked Boeing to send us any similar cartoons supporting the KC-767, but were told none existed. If there are any, we’ll post them.)
Here’s a pro-Boeing cartoon, which for some reason we can’t insert the image, so here’s the link.
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
[youtube=http://www.youtube.com/watch?v=NahyfTAVNqk]
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.
|
Item |
Original Schedule |
Revised Schedule (April 9, 2008) |
Delay |
|
Power On |
April 21, 2007 |
June 2008 |
14 months |
|
Roll-Out |
July 8, 2007 |
|
|
|
First Flight |
August 27, 2007 |
4Q08 |
+12 months |
|
First Flight #4 |
Sept. 30, 2007 |
|
|
|
Certification |
April 30, 2007 |
3Q09, likely August |
16 months |
|
Delivery |
May 31, 2008 |
3Q09, likely Sept. |
14-16 months |
|
Service Entry |
June 21, 2008 |
3Q09 or 4Q09 |
+14-16 months |