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.
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.
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.
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).
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.
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.
787 Ramp-Up: UBS Securities issued a research note Monday in which it reports that the 787 rate ramp-up to 10 per month–a goal Boeing’s to be by the end of 2013–has slipped to the first quarter of 2014.
- More from UBS: Supply chain ahead of Boeing: We believe the supply chain is still ahead of Boeing given significant rework and a high level of component deliveries in 2009-10, although a pick up is expected soon. We understand Boeing now plans to ramp from current 3.5/mo to 5/mo in Q4 (had been Q1), 7/mo in Q2 2013 (had been Q4 2012) and 10/mo in Q1 2014 (had been Q2 2013).
ISTAT: We’re at the annual ISTAT AGM in Phoenix and we’ll be reporting throughout the event odds and ends (adding to this post initially, separate posts later on). So come back often.
- 40% of Airbus 2011 deliveries were via lessors: 115 through direct sale to lessors, 95 via lessor purchase-leaseback
- Lessor sees overlapping production of 737 NG with MAX, A320neo with CEO due to limited availability of production slots because of massive early neo/MAX commitments.
- Congressional targeting Ex-Im Bank financing is short-sighted; cutting funding will harm Boeing, GE, Pratt & Whitney.
- Airbus has delivered 10 A330-200Fs, four operators now.
- Undercurrent buzz about 737MAX. Watch for developments in the next weeks and months.
- Airbus about to start final assembly line for A350.
- Flight tests of Trent XWB going well.
- Airbus now advertising A350-1000 at 369 passengers, up from 350.
From Twitter, via Phil LeBeau of CNBC:
@Boeing says it has NOT changed its goal of building 10 Dreamliners per month by end of 2013.
Back to ISTAT:
- A321neo gains 600nm, A320neo gains 500nm.
- Average oil price 1968 non-inflation adjusted was $3.18bbl (that’s per barrel, not per gallon!).
- Airbus sold 448 A320ceo since launch of neo.
- Airbus competes 99% of the time against Boeing, not new entrants, for sales. Barriers to entry for a new aircraft type very high rather than changing fleet type.
Side trip to Ex-Im:
Take a read of this column on the Ex-Im Bank financing controversy.
Back to ISTAT:
- Mike Bair: We are in a march to put Airbus out of business in the twin-aisle space: 777 vs A340, 787 vs A330, 747-8 vs A380.
- 787-10 will have 50% lower operating costs than A340-600, Boeing’s Bair claims.
- 747-8I has turned out to be the darling of billionaires who have too much money–Bair.
- New revenue opportunities for long, thin routes validate the 787 like San Diego to Japan. Opening new markets and opportunities for customers.
- Boeing uses 162 seats in 737-800/8 vs A320ceo/neo 150 seat comparisons; Airbus uses 157 seats for the Boeing.
- Every engine/airframe combination has a sweet spot, a bucket’s flat area with 3-4 inches of fan diameter. In MAX’s case, this means the 68.4 inch fan is the sweet spot.
- Our intent is to build the MAX until the market decides it doesn’t want it any more.