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Special Report: Boeing remains formidable even if BAE/EADS merger goes ahead

  • BAE/EADS merger to create world’s biggest aerospace company
  • Merged BAE/EADS to be 35% bigger than Boeing based on 2011 sales
  • Boeing 2011 profit of US$4.01 billion 22.6% higher than BAE/EADS’s combined US$3.27 billion profit
  • Boeing 2012 H1 profit of US$1.89 billion 26.3% higher than BAE/EADS’s combined US$1.5 billion profit
  • Little cost & revenue synergies on BAE/EADS merger
  • Production ramp-up, weight reduction biggest 787 challenges as risk declines
  • A 787-8 between LN66 & LN90 due to be delivered still 4 tonnes overweight
  • 787-8 to miss LN90 MEW & OEW weight targets
  • First batch 787-9 to meet MEW targets, later-built ones 2% lighter
  • Launch of 787-10X imminent, firm configuration H2 2014, roll-out H1 2017 & EIS 2018/19
  • Authority to Offer (ATO) of 777X pushed back
  • Trade-off between CFRP & metallic wing still ongoing
  • Metallic wing to be 5% worse in fuel efficiency than CFRP wing
  • Preparations for a full-scale demonstrator taking place behind 40-25 and 40-26 buildings for 777X wing

In further normalising the business structure from political interference, European Aeronautic, Defence and Space Co. (EADS) is exploring a US$45 billion merger with Europe’s largest defence contractor BAE Systems, which will create the world’s biggest integrated aerospace company with an annual revenue of US$93 billion (€72 billion) and 200,000 employees worldwide, eclipsing Chicago-based Boeing’s 2011 revenue of US$68.7 billion. However, with the United Kingdom (UK), French and German governments unlikely to cease effective control of the combined company, coupled with an impending October 10 deadline to declare the companies’ intention of whether to press ahead with the difficult if not insurmountable merger, the chance for the deal to go through is increasingly slim.

Importantly, with no to little overlap between the two companies, it is questionable whether the mediocre revenue and cost synergies of the deal are worth going through its complexities which are fraught with political interference amid a declining defence environment across the Atlantic both in the United States and Europe.

“BAE Systems and EADS believe that the potential combination of their two businesses offers the prospect of significant benefits for customers and shareholders,” EADS and BAE Systems said in a joint statement on 12th September.

That said, Chicago-based Boeing is likely to remain solidly profitable regardless of the eventual outcome of the BAE/EADS merger with a more closely integrated and balanced corporate structure spread between the defence and commercial portfolios which EADS now intends to emulate through the BAE merger.

Image Courtesy of Bloomberg

Political jostling does not bode well for a BAE/EADS merger
The shareholding of European governments has been a contentious point since the existence of European Aeronautics, Defence and Space Co. (EADS) in 2000 and there seems to be little exception to the merged BAE/EADS entity. Under the proposed merger term, EADS shareholders will own 60% of the merged entity with BAE shareholders owning the remaining 40%.

With the French government directly owning 15% of EADS and having another 7.5% economic interest through the stake held by French media firm Lagardere, of which the latter has expressed its intention to sell its stake once the risky and challenging A350 aircraft development programme is completed, coupled with the fact that Germany is content with a Franco-German balance within the merged business, state influence in a merged BAE/EADS looks more complex than ever.

The 15% stake held by the French government will be diluted to a 9% share in BAE/EADS whereas a 22.5% stake held by German carmaker Daimler which was originally destined to be acquired by German state bank KfW will be diluted to a 13.5% share in the merged entity. According to a Financial Times Deutschland (FTD) report, Germany and France will each hold 13.5% of the combined company with the French government acquiring Lagardere’s 7.5% stake in EADS. The two states with the biggest and second-biggest European economies will each gain a seat on the board of directors at BAE/EADS, the same Financial Times Deutschland report says.

While this would please the French government, not only will this provoke Britain and the United States against state influence from European governments, it will also decimate and compromise one of the fundamental reasons behind the proposed tie-up in normalising the corporate structure of EADS. The British government, meanwhile, says “we need to make sure the UK public interest is properly protected.”

“There are many examples to prove that companies in this sector and of this size should not necessarily be subject to state involvement,” EADS chief executive Tom Enders said last week.

The state influence would irk the United States government in particular, due to the special relationship BAE Systems enjoys with the Pentagon, of which its US subsidiary BAE Systems Inc. holds US$14.4 billion of defence contracts and provides training to the Central Intelligence Agency (CIA), a Bloomberg report said. While ring-fencing the US unit and only allowing US citizens to sit on its board of directors do allay some of the national security concerns the deal raises and may enable the US unit to hold onto its existing special security agreement (SSA), this alone does not guarantee the deal will be given the go-ahead by the US CFIUS.

BAE is one of the biggest defence contractors with the Pentagon and beyond, as it is a principal subcontractor on the Pentagon’s costliest weapon programme which manufactures the aft fuselage, vertical and horizontal stabilisers and wingtips, as well as being responsible for the fuel system, crew escape, life support, prognostics health management integration for the US$397.5 billion F-35 Joint Strike Fighter (JSF) programme. Besides the JSF involvement, BAE Systems also provides avionics for 6,343 Boeing airplanes used by 181 airlines worldwide and supplies more than 60,000 cockpit and cabin parts to Boeing annually, US Navy repair work, Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) solutions to US forces.

“We would expect that to be subjected to all the normal regulatory scrutiny. There are national security questions, industrial questions, and those will have to be dealt with. This is a serious matter that needs to be scrutinised,” Boeing Defense, Space & Security (BDS) chief executive Dennis Muilenburg was quoted as saying.

Even if the CFIUS review board may approve the BAE/EADS merger on pure legal grounds, the political interference may spread across the Atlantic, especially over the row of a nearly decade-long World Trade Organisation (WTO) case, in which Boeing and the US Trade Representative (USTR) said it has complied to a September 23 deadline and removed US$2-4 billion worth of illegal subsidies.

“USTR has been working extensively over the last six months with all of the government entities affected by the March 23, 2012 ruling in this case – including NASA, the Department of Defense, the State of Washington, and the City of Wichita – to ensure full compliance with the United States’ WTO obligations,” the US Trade Representative said in a statement.

“Boeing fully supports the actions the U.S. government announced today that it has taken to address the relatively small amounts of subsidy that the World Trade Organisation identified as inconsistent with its rules. The United States has now complied with the WTO ruling. Unfortunately, the same cannot be said of Airbus and its government sponsors, which have thumbed their noses at the WTO. Despite a crystal clear ruling against launch aid subsidies, European governments have continued the practice by providing Airbus with billions of taxpayer euros and pounds for its next new product, the A350. What is more, the European governments have yet to remove the very substantial subsidies, including those propping up the A380, which the WTO’s ruling in June of last year requires them to do,” Boeing lamented.

“The illegal subsidies to Airbus, most importantly the pernicious, market distorting practice of launch aid, must stop. The U.S. government remains committed to ending these subsidies, and Boeing fully supports the actions the U.S. government has taken to ending them,” Boeing reiterated.

The European Union (EU) shot back and refuted the claim by the US that it has complied with WTO rules and went further by seeking a US$12 billion sanctions against the US side.

“We had expected that the US would have finally complied in good faith with its international commitments and would have abided by the WTO rulings that clearly condemned US subsidies to Boeing. We are disappointed that this does not seem to be the case. So, the US leaves us with no other choice but to insist on proper compliance before the World Trade Organisation. We are confident that this process will finally lead to a level playing field in the aircraft sector,” EU Trade Commissioner Karel De Gucht said in a statement.

With both sides seeking trade sanctions against each other, including US$12 billion by the EU against the US and US$10 billion by the US against the EU, Aspire Aviation believes the trade spat threatens to further drag on and is unlikely to be resolved anytime soon. While Aspire Aviation thinks both sides are equally guilty of unfair government subsidies and this WTO case is likely to have a minimal impact on securing the approval on the BAE/EADS merger, it has fully demonstrated how complicated the merger could become once politics is involved, both in Europe and the United States.

In addition, the 60%/40% merger ratio and the locations of headquarters for the commercial and defence units of the merged entity have become the latest point of contention between European governments and stakeholders lately, with the UK government vowing to use its “golden share” in BAE to block the BAE/EADS merger should the defence unit of the merged company not be headquartered in the UK while Lagardere and Germany are reportedly discontent with the 60%/40% merger ratio.

“Lagardere calls on the management of EADS to undertake, without delay, the indispensable re-examination of the project to combine EADS and BAE, to better take into account the interest of all the French controlling shareholders of EADS. Despite the industrial and strategic potential attributed to it, this plan has not yet demonstrated that it was creating value for EADS. Lagardere considers that the merger conditions between EADS and BAE are currently unsatisfactory,” the French media firm said in a statement earlier this week.

Image Courtesy of Getty Images

Bigger is not better
While merging BAE and EADS would create the world’s largest aerospace and defence company based on 2011 full-year results and gain its hard-fought independence free from political interference should the plan to give French, German and British governments a single golden share each prevail, bigger is not necessarily better.

Importantly, profitability, not market share nor size of the business, counts. While bigger clout does help a merged BAE/EADS better compete in a declining defence environment amid austerity drives in Europe and a potential fiscal cliff facing the US, how closely integrated a merged BAE/EADS is and how much can its future profitability be improved remain unanswered.

According to a flightglobal report citing an analysis by PricewaterhouseCoopers (PwC), only 47% of BAE’s 2011 revenue of £19.2 billion (US$32 billion) came from the aerospace business, whereas virtually all of EADS’s 2011 revenue of €49.1 billion (US$63.3 billion) came from aerospace business, except the €5.8 billion 2011 revenue from its cybersecurity unit Cassidian.

With little overlap in business other than cybersecurity, Aspire Aviation forecasts a cost synergy of €500 million, or a mere 0.69% of the firm’s combined US$93 billion (€72 billion) 2011 revenue. Even including a revenue synergy of another €500 million would only lead to a 1.4% merger synergy for the combined firm.

In terms of profitability, a combined BAE/EADS would have reported a 2011 net income of US$3.27 billion with approximately 226,615 employees worldwide, taking into account EADS’s 2011 net income of €1.033 billion and BAE Systems’ £1.244 billion 2011 net income based on a dollar/euro exchange rate of 1.2961 and dollar/pound exchange rate of 1.5543 at 31st December, 2011. The combined operating margin would have been a low 3.5% based on a combined US$93.4 billion 2011 revenue. A combined free cash flow (FCF) would have been US$1.55 billion, comprising €958 million FCF from EADS and £201 million from BAE, whereas total net cash stood at US$12.9 billion consisting of EADS’s staggering 2011 net cash of €11.68 billion and BAE’s net debt at £1.439 billion.

In comparison, Chicago-based Boeing reported a 2011 net income of US$4.01 billion with 171,692 employees worldwide as of January 26th, 2012, with a solid 8.5% operating margin. Free cash flow (FCF) stood at US$2.31 billion with a net cash position of -US$1.1 billion.

Commercial airplanes business accounted for 52.6% of Boeing’s 2011 revenue whereas €33.1 billion of EADS’s €49.1 billion 2011 revenue came from the Airbus division.

The trends have further sharpened in the first-half of 2012.

In the first 6 months of 2012, BAE Systems recorded a 10% decline in revenue from £8.33 billion to £7.84 billion with net income attributable to shareholders declining marginally from £478 million to £474 million. Free cash flow (FCF) swung to a positive £618 million from a year-earlier -£198 million negative FCF, though net debt worsened by 9.8% from £1.12 billion in the prior year period to £1.23 billion this year.

For Airbus parent EADS, the first half was plagued by a 3-month delay in the entry into service (EIS) of the A350-900 to the second half of 2014 and booked a charge of €124 million against the delay, in addition to a €181 million charge booked against the A380 wing rib feet fix, €23 million of which were recorded in the second-quarter.

The retrofit to fix the wing rib feet problem on 120 A380s will take 8 weeks and 30,000 man-hour to complete for in-service A380s and 4-6 weeks for in-production A380s of which the operators opt to have the retrofit installed while the examples are in the Toulouse, France final assembly line.

“Of course we are not happy, but we have to live with it. It’s taking quite a long time because we have the largest fleet,” Emirates president Tim Clark told Bloomberg.

EADS’s revenue in first-half 2012 soared by 14% from €21.9 billion in 2011 first-half to €24.9 billion in 2012 first-half, whereas net income during the period more than quadrupled by 445% to €594 million this year from €109 million a year ago. A noteworthy point is, however, the free cash flow (FCF) worsened dramatically to a -€1.75 billion from -€184 million a year earlier as a result of back-loaded deliveries and net cash dropped by 17% from €11.68 billion in 2011 first-half to €9.7 billion this year as A350 development ramps up ahead of its first flight in mid-2013. Its operating margin stood at an unsatisfactory 2.38% during the period.

The world’s second-largest plane-maker Boeing, on the other hand, saw a strong and robust 2012 first-half, with revenue increasing by 25% from US$31.45 billion in the first 6 months of 2011 to US$39.4 billion this year and raising its 2012 earnings per share (EPS) guidance from US$4.15-4.35 per share to US$4.40-4.60 per share. Net income for 2012 first-half was US$1.89 billion, 24% higher than year earlier’s US$1.53 billion, thereby translating into a 7.9% operating margin, a 0.2% decline owing to the dilutive effect from early 787 and 747-8 deliveries. Free cash flow (FCF) swung to a positive US$965 million for the 6-month period, reversed from a -US$119 million recorded a year earlier and net debt stood at US$0.9 billion, improved from US$1.1 billion at the end of 2012 first-quarter.

Its Boeing Commercial Airplanes (BCA) unit blossomed during the 6 months as airplane deliveries increased by 29% from 222 last year to 287 this year, including the first 747-8I Intercontinental delivered to launch customer Lufthansa. Revenues at BCA soared by a staggering 43% from US$16 billion a year earlier to US$22.78 billion with earnings from operation skyrocketing after having increased by 60% to US$2.29 billion this year from US$1.4 billion last year.

The Boeing Defense, Space and Security (BDS) unit, in the meantime, surprisingly delivered healthy, if not robust results for the first half despite a US$487 billion defence cut already planned over the next decade and a potentially devastating across-the-board US$500 billion defence cut should the sequestration not be averted by US Congress. Revenue at BDS increased by 7% from US$15.3 billion last year to US$16.4 billion this year, buoyed by a 20% increase in Boeing Military Airplane’s (BMA) revenue from US$7 billion in 2011 first-half to US$8.4 billion in 2012 first-half, primarily owing to the sale of 84 F-15SA fighter jets to Saudi Arabia, offsetting a 17% decrease in Network & Space Systems (N&SS) revenue.

On a combined basis, BAE/EADS achieved a 2012 first-half net profit of US$1.496 billion on a combined revenue of US$43.84 billion, thereby delivering a 3.41% operating margin. Notwithstanding its combined -US$1.25 billion free cash flow (FCF), its combined war chest would have been unrivalled and unparalleled with a US$761.6 billion backlog and US$10.4 billion of net cash, almost double the US$374 billion backlog Boeing has.

“The rationale that drives this transaction is growth, not contraction,” European Aeronautic, Defence and Space Co. (EADS) chief executive Tom Enders and BAE Systems chief executive Ian King wrote in a joint newspaper article.

“With the necessary political will and support, management determination and proper governance, BAE Systems and EADS can produce a whole that is greater than the sum of its parts,” Enders and King asserted.

However, the flexibility of a merged BAE/EADS business and how closely integrated it will become remain a significant concern, which, if not properly addressed, would lead to an undermining in shareholder value.

For instance, unlike the close collaboration between Boeing Commercial Airplanes (BCA) and Boeing Defense, Space & Security (BDS) units such as the P-8A Poseidon antisubmarine aircraft and the KC-46A aerial refuelling tanker in addition to overseas offset deals which see more commercial activities being established in return for defence sales, the Cassidian cybersecurity arm, Astrium space unit, Eurocopter and Airbus units are not closely integrated within EADS in the first place.

While adding Airbus sales chief John Leahy to the EADS executive committee somewhat helps boost defence sales, it is indeed doubtful how a merged BAE/EADS integrates its newly added shipbuilding, armoured vehicles, submarine, torpedoes, warships, explosives products to EADS’s existing portfolios despite the Eurofighter and MBDA missile programmes where both of them are existing partners. Worse yet, the possibility of the flexibility of the business being hindered due to the involvement and the protection of jobs by the British, French, German governments is worrisome, particularly at a time when the European economy is still teetering on the brink of recession.

All in all, the jury is still out on the cost/benefit of the BAE/EADS merger, with a complicated if not tumultuous process in creating a delicate political balance which is a pre-requisite of the merger going ahead without easily identifiable cost and revenue synergies that will create shareholder value.

“I don’t see this as something that is going to threaten us fundamentally. I have a pretty deep and abiding faith in our company’s strength,” Boeing chief executive Jim McNerney commented on the BAE/EADS merger, saying the merger will make EADS look more similar to Boeing’s corporate structure.

Image Courtesy of Bloomberg

Retiring 787 risks
With US$10.4 billion in combined net cash, BAE/EADS will have a large cash pile and rich engineering resources into which new development programmes can tap. But with the A350 development ramping up significantly and the goal of delivering 30 A380s this year and the next is destined to be missed, how fast these will drain EADS’s €9.4 billion cash pile at the end of the second-quarter remain to be seen.

Crucially, the risk profile being carried by EADS’s wholly-owned subsidiary Airbus and Boeing is decidedly different in the foreseeable future, notably the gradual retirement of risk of the Boeing 787 Dreamliner programme while the Airbus A350 XWB (Extra Wide Body) ramps up in its development.

The baseline A350-900 model is already suffering from more than a year of delays as its entry into service (EIS) was delayed from mid-2013 to second-half of 2013 in November 2010, then to the first-half of 2014 in June 2011 and the latest 3-month delay which pushed its EIS to the second-half of 2014, owing to a snag in the software of the robot responsible for wing-drilling.

“The robot was not working properly, the software was not optimised,” head of the A350 programme Didier Evrard told flightglobal, adding that the manual drilling “took much more time” than the automated process.

“For the next sets of wings we won’t have the same problem. We’ve already tested the new software on one wing and it’s much more efficient,” Evrard reassured.

In order to catch up with the tight production and flight test schedule as well as limit the risk of further A350 delays, Aviation Week reported the European plane-maker intends to incorporate changes to the structural and wing components, cabin in 3 batches, with manufacturer’s serial number MSN5 being first block point for change and MSN17 being the second block point earmarked for 70% change in cabin parts, with component weight being reduced by up to 5%.

According to Aspire Aviation‘s sources at the world’s largest plane-maker, the A350-900 is around 3 tonnes (6,614lbs) overweight although more change in part designs will enable more weight savings to be realised as Airbus begins flight-testing the airplane from mid-2013 onwards, which should be carried out carefully in order to prevent unintended consequences in overburdening the supply chain with change orders.

In contrast to the creep in change orders and increasing development risk with the A350, the Boeing 787 Dreamliner has turned the corner and is starting to soar after celebrating its 1st anniversary of delivery (“Boeing 787 Dreamliner programme starts to soar“, 23rd Aug, 12).

And in spite of the recent contained engine failures of the General Electric GEnx engines, including a GEnx-1B engine aboard an Air India 787 spewing hot parts that sparked a grass fire on July 28 due to a fractured shaft and a GEnx-2B engine aboard an AirBridgeCargo (ABC) 747-8F freighter which failed during a take-off in Shanghai, China on September 11, the 787 has had a relatively smooth entry into service (EIS) with 25 examples being delivered to 6 airlines, including United Airlines, LAN Airlines, Air India, Japan Airlines (JAL), All Nippon Airways (ANA) and Ethiopian Airlines.

While the two incidents have no apparent link as the US National Transportation Safety Board (NTSB) saying the fan shaft of the GEnx-2B engine “was intact and showed no indications of cracking”, it nevertheless resulted in US Federal Aviation Administration (FAA) calls for ultrasound inspections every 90 days for signs of cracking.

“Because of the short time to failure and the fact that all of the engines on any single airplane, whether the 787 or the 747-8, have all operated for the same period of time, the NTSB is not only concerned about the potential for further fractures occurring, but also the possibility that multiple engines on the same airplane could experience an FMS [Flight Management System] failure,” the US National Transportation Safety Board (NTSB) said on 14th September.

“We have done the checks on all our GE engines. GE has done a great job of figuring out quickly what we have to do to ensure the integrity of the engine. We know that and we’ve implemented it,” Boeing vice president (VP) and general manager (GM) Jack Jones said.

“It obviously didn’t stop deliveries. That is absolutely critical,” Jones emphasised.

As a result of these findings, the world’s biggest engine-maker has implemented changes to the production process involving the dry-film coating on the mid-shaft, with “the change to different coatings, which has already been certified on other GE engines like the GE90, is FAA-approved for GEnx production”, General Electric spokesman Rick Kennedy said.

“We’re issuing a service bulletin within the next day or two to all the GEnx operators, and what that will do is call for an inspection of the low-pressure turbine area,” Kennedy told Reuters on 2 October.

“I think the NTSB’s fine with where it stands, deliveries are going forward and I actually think the fact that it is a different cause is more positive than negative,” General Electric (GE) chief executive Jeffrey Immelt conceded.

These technical glitches notwithstanding, including a temporary grounding in ANA’s 787 fleet owing to a corrosion risk in the Rolls-Royce Trent 1000 gearbox, the 787 launch customer is more than satisfied with its performance and reliability so far.

“Yes, the performance of the 787 is as we expected and we are satisfied with it. The 787 has also exceeded expectations in terms of fuel efficiency. At launch, it was anticipated that the 787 would save 20% in fuel for each international flight, but we can confirm that the saving amounts to 21% per flight,” All Nippon Airways spokeswoman Megumi Tezuka told Aspire Aviation.

“In August, the on-time departure rate of the 787 was 93.3% in domestic and 83.9% in international. Compared with the average of other aircraft (excluding 787), 92.1% domestic and 79.8% international, the performance of 787 is slightly more punctual and shows high reliability.

The airline said it currently has 15 787s in its fleet and expects to have 20 examples by the end of FY2012 next March, while adding that it did not suffer from technical glitches involving the 787’s electric line replaceable units (LRUs), hydraulic hoses & new software which Aspire Aviation‘s multiple sources at Boeing say plagued its arch-rival, Japan Airlines’ (JAL) 787 fleet that were partly stemmed from the airline maintenance personnel’s unfamiliarity with the 787’s high-voltage electric architecture.

“Dispatch reliability average of the 787 fleet is in the high 90s,” Boeing spokesman Scott Lefeber said.

Therefore as Boeing continues to de-risk the 787 programme, the biggest challenges facing the perennially delayed programme are the ambitious production ramp-up to 10 aircraft per month by the end of 2013 and weight reduction, after having successfully substantially reduced the amount of travelled work to 160 on line number (LN) LN70.

Boeing is currently producing 3.5 airplanes per month and plans to ramp the 787 production up to 5 units per month in November.

“We’ve got a few hot spots in the supply chain but nothing I’m freaked out about. We’ll end the year at five (787s) a month. I like where we’re going. If we hit these ramp rates we’re going to do very well, and we’re going to hit them,” Boeing Commercial Airplanes (BCA) chief executive Ray Conner said at a September 14 Morgan Stanley conference.

This positive sentiment was echoed by Wall Street analysts, as the momentum on the 787 production picks up steam.

“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 said in a September 18 note to its clients.

“We estimate that most of Boeing’s suppliers are already at 5 ship sets 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,” investment bank Credit Suisse said in a September 18 research note.

Image Courtesy of Getty Images

Nonetheless the real litmus test seems to lie on ramping up the 787 production from 5 per month to 7 per month, with Aspire Aviation‘s multiple sources confirming the lower tiers of the 787 supply chain are already operating at 7 per month and the next rate break to 7 per month is currently planned for March/April 2013.

“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 Centre) 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,” Credit Suisse analysts led by Robert Spingarn cautioned.

In response, Boeing has decided to use the vacant slots made available by Australia’s biggest carrier Qantas Airways which cancelled its 35 firm orders for the 787-9 to provide extra margin of error in the production ramp-up (“Qantas/Emirates partnership to reshape competitive landscape“, 10th Sep, 12).

“I’ve been getting calls all the time to get those positions. We’re using that as an opportunity to de-risk our rate ramp,” Boeing Commercial Airplanes (BCA) chief executive Ray Conner commented.

Meanwhile, reducing the 787-8’s weight is the next biggest challenge to Boeing as it brings the 787-9 to the marketplace in early 2014.

Aspire Aviation has previously reported LN1 weighed in at 109.9 tonnes (242,500lbs) in manufacturer’s empty weight (MEW), 9.75t (21,500lbs) over the target of 221,000lbs whereas LN7 and LN20 are 6.1t (13,500lbs) and 3.99t (8,800lbs) overweight, respectively.

However, Aspire Aviation has learnt that a 787 customer due to receive a production example between LN66 and LN90, the first clean 787 with no travelled work and the first 787 planned to meet the aircraft’s original manufacturer’s empty weight (MEW) and airline-specific operating empty weight (OEW) targets, respectively, is still 4 tonnes overweight, thus rendering meeting the LN90 weight targets as “unachievable”, multiple sources at Boeing say.

The same sources attributed the likely miss in meeting the LN90 weight targets to a lack of abundant 787-9 parts, as the -8 parts are “over-engineered” and “well over-designed”.

The weight reduction programme on the 787-9 stretch variant is going on “smoothly”, with ZB001 or LN126, the first 787-9 example to be produced is to meet its manufacturer’s empty weight (MEW) along with the first batch of 787-9s, with the MEW of later-built 787-9s expected to be 2% lighter, Aspire Aviation can exclusively reveal.

“We have a very robust baseline and we’ve learned a lot of lessons. We’re ecstatic with where we are with weight. When we hit firm configuration, we locked in on a number and we’ve just come down on that. As in any new aircraft design, at every turn there’s a risk and an opportunity. On the -8, after firm configuration the weight grew, but the -9 is a more stable design that builds on the experience of the -8 in terms of structural static and fatigue,” Boeing 787 vice president (VP) and chief project engineer (CPE) Mike Sinnett told Aviation Week.

“We are getting cleaner aircraft. When we designed it with an all-composite wing and fuselage, we were conservative. Then, as we started looking at weight-reduction changes and we rolled in things like the improved wingbox and the results of full-scale fatigue and static tests, this allowed us to be less conservative.

“[As a result], we’re seeing some level of surprise that it is performing as well as it is. You always want to talk yourself into thinking that something is not quite right, but its performance is basically spot on. There was a misconception in part because of the weight challenges early on. People expected the initial aircraft would be heavy, and maybe they are by a little bit, but even the early aircraft are performing to specification,” Sinnett commented.

The 787-9 has hit the 85% engineering drawing release milestone, the Aviation Week report says.

“From a production standpoint, all the major structural pieces are in initial build. In a lot of cases, we’re early. It’s a significantly different spot we’re in than we were with the -8,” Sinnett said.

The 787-9 is a 6.09m (20ft) stretch of the -8 with a range of 8,050nm (nautical miles) while carrying 280 passengers in a standard 3-class configuration. It features a swathe of weight improvement packages from Spirit AeroSystems’ one-piece cockpit window frame that will eliminate around 200 fasteners and reduce the cockpit structure’s weight by 100lbs, to the elimination of side-of-body modification which saves 363kg (800lbs) in weight.

In addition, improved engines such as the 76,000lbs Rolls-Royce Trent 1000 TEN (Thrust Effciency New Technology) and the 75,000lbs General Electric GEnx-1B PIP 2 will further improve the economics of the 787-9, along with the passive hybrid laminar flow control (HLFC) which the aforementioned Aviation Week report says is still planned to be included on the stretch variant.

The Rolls-Royce Trent 1000 Package A engine missed its original engine specific fuel consumption (SFC) by 4.3% and the Package B will exceed the SFC target by 2% and the Trent 1000-TEN engine will be around 0-1% better than the original SFC target. In comparison, the General Electric GEnx-1B engine has missed its original SFC target by 2.7%, with performance improvement packages PIP1 and PIP2 clawing back 1.6% and another 1% of fuel efficiency, respectively.

Image Courtesy of Boeing

Widebody strategy
While the risk profile of the 787 is hopefully declining at last and brings shareholders a relief with a largely stable research and development (R&D) spending, the relief may well be short-lived as Boeing faces a set of challenges in formulating its widebody strategy that is unique to the Chicago-based plane-maker as Airbus is mounting a challenge to both the 777 and 787 at the same time with its A350 XWB family.

Boeing’s future widebody strategy centres around the double-stretched 787-10X and the revamped 777X aircraft, with key decisions yet to be made on how much and to what extent the makeover should be to the highly successful long-haul 777 family which sold 200 examples last year.

The 323-seat 787-10X is expected to be launched imminently with an authority to offer (ATO) within October, Aspire Aviation‘s multiple sources confirmed the news which had firstly been reported by Leeham News. The 787-10X will have a range of 6,750nm when equipped with the Rolls-Royce Trent 1000-TEN engine or 6,700nm with the General Electric GEnx-1B PIP2 engine. It will feature the same maximum take-off weight (MTOW) as the 787-9 at 250.8t (553,000lbs), a maximum landing weight (MLW) of 201.8t (445,000lbs) and a maximum zero fuel weight (MZFW) of 192.8t (425,000lbs).

The 787-10X will be 5.49m (18ft) longer than the -9, with a 4-frame and 5-frame stretch in the forward and aft fuselages, respectively and will burn 25% lower less fuel than an A330-300, as well as a 10% and 5% lower operating cost than the A350-900 and -1000, respectively.

While Airbus insists the recently launched higher weight A330s will not encroach on the 270-seat A350-800, the days of the A330 are arguably numbered beyond providing interim lift before the 787 and A350 become readily available in later this decade, as the A350 programme leaves a large medium-haul market wide open with no true replacement in the Airbus product lineup.

Make no mistake, while continuously improving the A330 with a 240-tonne capability and a 2% block fuel burn reduction is the right decision to hedge against the risk of further A350 delays and provide relatively cheap interim lift (“Airbus is right on A330 improvement strategy“, 10th Jul, 12), the game-changing economics mean the A330s, particularly the early-built ones which entered into service in the early 1990s, will be made obsolete overnight.

“I can’t imagine anyone that would want to finance or own an A330-300 in the wake of this airplane,” Boeing vice president (VP) of business development and strategic integration Nicole Piasecki said in a flightglobal interview.

Furthermore, as most of the foundations have already been laid by the 787-9 stretch development, the main technical difficulty facing the 787-10X will be accommodating a possibly larger landing gear, which may necessitate redrawing the internal wing configuration albeit it has the same wingspan as the -8 and -9 and a larger main landing gear bay, this is relatively straightforward without significantly diluting engineering and capital resources that are needed for the development of the more complex 777X.

This will enable Boeing to pitch a highly-efficient offshoot to Asian and Middle Eastern airlines on regional trunk routes where the extra range is not needed such as Japan’s JAL and All Nippon Airways (ANA) for trunk domestic routes from Tokyo Haneda to Sapparo, the intra-Asian operation of Hong Kong-based Cathay Pacific Airways which is the largest A330-300 operator in the world with 34 examples in the namesake unit’s fleet, plus another 16 in its wholly-owned subsidiary Dragonair’s fleet and 17 examples on order. Singapore Airlines operates 19 Airbus A330-300E (Enhanced) on lease and has another 15 additional examples joining the fleet from 2013 onwards. Other large A330 operators include Air China with 30 A330s, Taiwan’s China Airlines with 20, China Eastern Airlines (CEA) and China Southern Airlines with 20 and 21 examples, respectively; Delta Air Lines with 32, Emirates and Etihad Airways with 27 and 24, Qatar Airways with 29, Thai Airways International with 28 and Korean Air with 23, just to name a few.

The 787-10X’s firm configuration will take place in the second half of 2014, with a roll-out in the first half of 2017 and an entry into service (EIS) in 2018/19, one of Aspire Aviation‘s Boeing sources reaffirmed today.

In the meantime, the development of the 777X is reported to have slowed down since selecting the largest wingspan at 71.1m (233.4ft) with an addition of 30m² (322.9ft²) to the 777-300ER’s wing area of 436.8m² (“Boeing chooses largest wingspan for 777X“, 26th Jul, 12).

The Wall Street Journal reported several important customers are at odds with each other over the final design of the 777X, with WSJ quoting company sources in saying that Boeing chief executive Jim McNerney and former Boeing Commercial Airplanes (BCA) chief executive Jim Albaugh became concerned at the creeping in development cost as the largest carbon fibre reinforced polymer (CFRP) ever built will require significant investments in facilities and production tooling such as an autoclave.

The article cited Emirates president Tim Clark as saying the composite winged 777X will require a 10% to 15% premium to offset the higher development cost, a demand the outspoken chief executive of Air Lease Corporation (ALC) Steven Udvar Hazy is unwilling to pay for and wants a more affordable solution. The alternative, a metal-winged 777-9X will be 3%-4% less fuel efficient than a CFRP-winged 407-seat 777-9X, the report says, which will have a 21% lower block fuel burn than a 365-seat 777-300ER and have a 16% less COC (cash operating cost) per seat.

“I’ve stressed to [Boeing chief executive] Jim McNerney that this was a product they should be seriously looking at. They were enthusiastic, and then it all seemed to go wrong,” Emirates president Tim Clark lamented.

“While the Seattle Times reported this morning that we have slowed down the development process for the 777X, our timing on a decision to offer that airplane has not changed. We are absolutely committed to the 777X and continue to invest the necessary time and resources to ensure we produce a superior airplane for our customers. That’s what they expect of us,” Boeing Commercial Airplanes (BCA) chief executive Ray Conner refuted.

“As we’ve consistently said, when we are satisfied with the risks, costs and schedule, as well as many other important factors, we intend to present a plan for offering these wide-body airplanes to customers. The airplanes would enter the market late this decade. My position is that when we are ready, we will go,” Conner stressed.

“Our customers are really comfortable with our decision to put the most advanced engine technology onto this 777, and that means, by definition, that’s really end of [the] decade. Are we comfortable with that? Yes. Because it’s going to be so much better. It’s going to obsolete the A350-1000 before the A350-1000 is even delivered,” Boeing vice president (VP) of business development and strategic integration Nicole Piasecki said.

However, several Aspire Aviation sources at Chicago-based Boeing have denied today that the 777X development has slowed down, albeit admitting the authority to offer (ATO) of the 777X is pushed back. The same sources say a trade-off between a CFRP and a metallic wing is still “ongoing”, while preparations for a full-scale demonstrator are already being made, hinting at the activities taking place behind 40-25 and 40-26 buildings.

Aspire Aviation thinks a combination of a carbon fibre reinforced polymer (CFRP) wing and a 3rd-generation aluminium lithium (Al-Li) fuselage still make most economic sense for the 777X, as a metallic wing will lead to a 5% worse fuel efficiency of the airplane and the 3rd-generation Al-Li technology is a proven one requiring no modifications to production tooling and processes that is ready today and provide a 12% weight saving and a 6% reduction in skin friction.

Simply put, while a CFRP wing for the 777-9X does require significant financial investment in facilities and autoclaves, this investment will prove its worth not least because a 407-seat 777-9X with a CFRP wing is going to be even more fuel efficient than the A350-1000 which is going to burn 20% less fuel than a 777-300ER whereas the 777-9X burns 21% less, but also its popularity and eventual yield premium that it is going to command with a large installed base such as Dubai-based Emirates, International Consolidated Airlines Group (IAG) subsidiary British Airways, Qatar Airways, Singapore Airlines, Japan Airlines (JAL), All Nippon Airways (ANA), Cathay Pacific, Air France and more will more than offset the initial significant investment in the aircraft programme.

“The 787 experience has been so overwhelmingly complex that Boeing is trying to be thoughtful and conscious of what is involved in launching what amounts to a new airplane,” Air Lease Corporation (ALC) chief executive Steven Udvar-Hazy conceded.

“Boeing is gun shy about promising an airplane,” Hazy said.

Image Courtesy of Boeing

Conclusion
Nevertheless, regardless of which decision prevails on the choice of materials on the 777X wing, Boeing is fundamentally strong and well-positioned to make a quantum leap in the widebody segment, of which the 2-year delay to the entry into service (EIS) of the 350-seat A350-1000 has yielded strategic advantage to Boeing to enable it to continuously improve the 777-300ER product through a recontoured body fairing that improves aerodynamics of the aircraft and more enhancements, while gauging the final specification of the A350-1000.

Aiding the decision-making process is the decision to re-engine the 737 NG (Next-Generation) and launch the 737 MAX, whose re-engining efforts cost significantly less than a composite-based clean-sheet new small airplane (NSA) where the 2nd or 3rd-generation composite technology with Out-of-Autoclave (OoA) processes to build 50-60 airplanes per month is not yet available today.

In doing so, Boeing can maintain a market parity with Airbus in the single-aisle market through price factors such as heavy discounting and non-price factors such as earlier slot availability than the A320neo (new engine option) and a 2% all-in cash operating cost (COC) advantage of the 737 MAX 8 versus the A320neo, while freeing up scarce engineering and capital resources for the 787-10X and 777X. With Brazilian low-cost carrier (LCC) Gol and General Electric Capital Aviation Services (GECAS) announcing firm orders for 60 and 75 737 MAX 8s, the firm orders tally now stand at 821, the 737 MAX’s momentum continues to build and is on track to reach a 1,000 year-end goal set forth by company management (“Boeing 737 MAX ups the ante in dogfight with A320neo“, 20th Jul, 12).

“On R&D, the 787-9 is winding down as the MAX builds, and at some point we would expect Boeing to feather in 787-10 and ultimately 777X. As of now we believe that pressing forward on -10 is the priority over 777X, based on expected returns. If Boeing can tightly manage the timing on these 4 projects it would expect 2013 R&D to maintain the 2012 level,” Credit Suisse said in a September 18 note to its clients.

Moreover, should Boeing decide to ramp the 787 production beyond 10 per month once it has successfully achieved the 10 per month target by the end of 2013, the additional cash brought in by higher 787 deliveries will help fund the development of the 777X without drawing on its balance sheet excessively.

“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. Regarding 787 cash flow, management continues to expect deferred production to peak at some point in 2013, which is the point at which cast unit cost equals book unit cost. This is expected to hold flat until roughly late 2014 or early 2015, after which deferred production inventory should decline,” Credit Suisse said.

Ironically, what is absent from the Boeing decision-making process is the one which European Aeronautics, Defence and Space Co. (EADS) has long desired to achieve: an independent commercial decision-making process without political interference and jostling.

As EADS chief executive Tom Enders puts it, “This week will be decisive. We cannot go on much longer.”

Despite its contract negotiations with the SPEEA (Society of Professional Engineering Employees in Aerospace) hit a bump on the road this week with the company’s proposal being rejected and the all-too-dramatic refusal to take 787 deliveries unless the GEnx engine fault is fixed by Qatar Airways chief executive Akbar Al-Baker which is a deja vu from his airline’s refusal to take A380 deliveries, it is the political interference from European governments that undermined the success of EADS in the past and threatens to continue to do so in the future.

Fortunately, the wait of shareholders will not be long.

Image Courtesy of Bloomberg

8 Comments

  1. Brian October 5, 2012 Reply

    Excellent points, particularly on Boeing’s widebody strategy. I have long agreed with the conclusions you make here regarding the fundamental strength of the 787 aircraft, the ultimate fate of the A330, and the need for an all-out effort on the 777x to fully compete with the A350-1000.

    However, if I may make a suggestion regarding formatting. In my opinion, this piece really should have been broken in two at the start of the “Retiring 787 Risks” section, since everything after that point is about Boeing widebody plans, with no mention of the BAE-EADS merger. The 787/777x analysis is great, and is certainly worthy of its own article, but it really has nothing to do with the BAE-EADS merger this article is meant to cover.

    • Author
      Daniel Tsang October 5, 2012 Reply

      Brian,

      Thank you very much for your good suggestion!

      What you said is right & we’ll split in half next time, as being too long also makes it somewhat difficult to read.

      Thanks again & we’ll keep it shorter too.

      Best Regards,
      Daniel.

  2. Marcus Brody October 5, 2012 Reply

    Interesting stuff. Thanks. Agree, it’s a rather long winded read though, it could do without the press clippings seen elsewhere.

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