- 787-10 MTOW might be increased
- 777X next customer meeting in September
- 777X engine thrust may increase again
- Boeing should be more willing to offer discounts on 777X
- Boeing should outsource 777X CFRP wing to Japan to cut costs, retain customers
- Too much “breathing room” already given to Airbus A350-1000
- No door modification on 737 MAX
- Ryanair 737 MAX 8 could accommodate 199 passengers by “rearranging doors”
- 737 MAX orders on par with A320neo: 1,495 versus 1,579 in 23 months since launch
- easyJet order lost on lowball pricing in middle of US$30-40 million apiece by Airbus
When it comes down to the one thing that the world’s largest aircraft manufacturer Boeing does not have, it is neither financial muscle nor engineering resources. Rather, it is luck. After freshly emerging from the three-and-a-half months long worldwide grounding of its flagship product – 787 Dreamliner as a result of overheating lithium-ion batteries onboard a Japan Airlines (JAL) example at Boston Logan International Airport on January 7 and another ANA Holdings Inc. jet merely a little more than a week later, Boeing has since found itself being embroiled in a string of technical glitches that attracted intense media scrutiny.
But none of these incidents, typical amongst new airplanes, is comparable to the July 12 Ethiopian Airlines 787 Dreamliner blaze in the crown of the aircraft after arriving from the Ethiopian capital of Addis Ababa and sitting on the tarmac for 8 hours, that stoked investor fears and triggered a sell-off in the Chicago-based company’s shares, slumping by 4.7%. Worse yet, a Thomson Airways 787 en route from Manchester to Sanford, Florida returned as a precautionary measure following a technical issue appeared in-flight on the same day.
If anything, both Wall Street and the media overreacted to the incident, which left the hull of the Ethiopian Airlines 787 involved damaged with scorch marks and “extensive heat damage in the upper portion of the rear fuselage, with significant thermal effects on aircraft insulation and structure”, according to a special bulletin issued by the United Kingdom’s Air Accidents Investigation Branch (AAIB).
To the relief of investors, the investigation since its early days has focused on the emergency locator transmitter (ELT) built by Honeywell International Inc. and the UK AAIB cleared the 787 Dreamliner’s redesigned lithium-cobalt dioxide main and auxiliary power unit (APU) batteries, which have not suffered a failure since adding 3 layers of protection such as the additions of a 3mm-thick stainless steel box capable of withstanding an explosion that encloses the lithium-ion battery, dielectric insulation and a titanium pipe that vents any gases and electrolytes generated by a melting battery overboard (“Boeing 787 is a dream come true, again.“, 26th Apr, 13).
“It is clear that this heat damage is remote from the area in which the aircraft main and APU (auxiliary power unit) batteries are located, and, at this stage, there is no evidence of a direct causal relationship,” the UK AAIB said in a statement.
Robust second-quarter financial performance
Furthermore, the July 12 Heathrow incident is unlikely to dent Boeing’s financial performance. On the contrary, Boeing has reported improving profitability on higher 737 and 787 deliveries, the former of which stands at 116 and the latter 16, from 106 and 6 a year earlier, respectively. This resulted in a 9% increase in 2013 second-quarter revenue to US$21.8 billion from US$20 billion in the prior year period and led to a spectacularly 108% higher operating cash flow before pension contributions at US$3.48 billion from US$1.67 billion in 2012 second-quarter. Operating cash flow (OCF) rose sharply by 282% during the quarter to US$3.47 billion from US$908 million last year. Likewise, free cash flow (FCF) rose more than 5 times during the quarter to US$3.01 billion from US$552 million in 2012 second-quarter.
Importantly, this top-line growth, when combined with productivity improvement, translated into a 13% higher core earnings of US$2 billion, or US$1.67 a share, from US$1.79 billion or US$1.48 a share, in the year-ago quarter. This outperformed analysts’ estimate of core earnings of US$1.57 a share by 6.4%. Core operating margin improved by 0.4% year-over-year to 9.3% from 8.9% in 2012 second-quarter.
Even after factoring in pension contributions and retirement benefit expense, operating profit on a generally accepted accounting principle (GAAP) basis still surged by 11% from US$1.54 billion in 2012 second-quarter to US$1.72 billion a year later, thus leading to a 0.2% improvement in operating margin to 7.9% from 7.7%.
For the 2013 first-half, revenue rose 3% from US$39.4 billion in 2012 first-half to US$40.7 billion this year, whereas core earnings rose by 9% from US$3.56 billion in 2012 first-half to US$3.9 billion this year, representing a 0.6% year-over-year higher core operating margin at 9.6%. On a GAAP basis, operating profit increased by 4% from US$3.1 billion in 2012 first-half to US$3.24 billion in 2013 first-half, thus leading to a 0.1% year-over-year higher operating margin at 8%, although net profit rose disproportionately faster by 16% to US$2.19 billion, or US$2.85 a share in 2013 first-half from US$1.89 billion, or US$2.49 a share, in the prior year period.
The operating cash flow (OCF) metric was somewhat skewed in 2013 first-half, as Boeing made a US$13 million pension contribution this year versus the US$763 million made last year. This caused the OCF before pension contributions rising by only 60% to US$4 billion in 2013 first-half from US$2.5 billion a year ago, but a 129% surge in OCF to US$3.99 billion from US$1.75 billion in the 2012 6-month period and also a 3.1 times higher free cash flow (FCF) of US$3.02 billion in 2013 first-half, up from the prior year period’s US$965 million.
“Continued strong core operating performance drove higher earnings, revenue and operating cash flow during the quarter, and we returned significant value to shareholders through share repurchases and increased dividends. We also further strengthened our market-leading position in commercial airplanes with the successful launch of the 787-10 and US$40 billion of new orders, while our defence, space and security business delivered improved margins and market share in a tough market. Overall, our strong first-half performance and positive outlook allows us to raise our 2013 earnings and revenue guidance, and our team remains intensely focused on execution, productivity and quality to meet our customer commitments and further drive growth,” Boeing president and chief executive Jim McNerney said.
The profitability powerhouse was Boeing Commercial Airplanes (BCA), which managed to improve its profits by 20% to US$1.45 billion in 2013 first-half from US$1.21 billion last year and its operating margins by 0.5% year-over-year to 10.7% despite the dilutive impact of higher loss-making 787 deliveries. Its 15% higher revenue at US$13.6 billion from US$11.8 billion in the prior year quarter was driven by a 13% higher delivery to 169 units from 150 a year ago. The unit’s backlog swelled to a record US$339 billion at quarter-end, after booking 520 737 orders and 40 787-10 Dreamliner orders, including 246 re-engined 737 MAX orders.
For the first half, Boeing Commercial Airplanes (BCA) pulled in a 7% higher revenue at US$24.3 billion from US$22.8 billion in the 6-month period last year backed by 7% higher deliveries at 306 airplanes compared to the 287 examples delivered a year ago. Earnings, however, rose by 17% to US$2.67 billion in 2013 first-half from US$2.29 billion in 2012 first-half, thus leading to an 11% operating margin, a 0.9% betterment to an already impressive 10.1% operating margin achieved in 2012 first-half.
Equally impressive, if not more, was the financial performance of its Boeing Defense, Space & Security (BDS) unit, which posted solid results despite US budget cuts brought by the sequestration, the full effect of which had yet to be felt. Nevertheless the Boeing Military Aircraft (BMA) division scored big wins during the 2013 second-quarter with multi-year deals for 92 MV-22 and 7 CV-22 Ospreys valued at US$6.5 billion as well as 177 CH-47F Chinook helicopters valued at US$4 billion. But this was insufficient to offset a lower delivery volume that led to a 4% decline in BMA’s second-quarter revenue to US$3.89 billion from US$4.05 billion in the year-ago quarter, erasing the 5% gain in Network & Space Systems (N&SS) second-quarter revenue from US$1.96 billion in 2012 second-quarter to US$2.05 billion a year later, thus resulting in a stagnant total BDS second-quarter revenue at US$8.2 billion.
The same was also true for the defence unit’s first-half performance, in which a 3% decline in Boeing Military Aircraft (BMA) revenue to US$8 billion from US$8.27 billion a year earlier outweighed a 5% gain in Network Space & Systems (N&SS) revenue to US$4 billion from US$3.83 billion in 2012 first-half, thus leading to a 1% lower year-over-year Boeing Defense, Space & Security (BDS) revenue at US$16.3 billion from US$16.4 billion a year earlier.
Though the profit picture tells a different tale at the Pentagon’s second-largest supplier, whose productivity drive across all its units led to improved margins and earnings despite revenue headwinds. For instance, Boeing Defense, Space & Security’s (BDS) 2013 second-quarter earnings was actually 4% higher at US$776 million compared to the year-ago quarter’s US$748 million, driven by a 6% higher Boeing Military Aircraft (BMA) earning at US$373 million versus the US$353 million posted a year earlier and a 3% higher or US$7 million more, Global Services & Support (GS&S) second-quarter revenue of US$266 million. As a result, operating margins improved by 0.4% year-over-year to 9.5%.
Boeing Defense, Space & Security’s (BDS) 2013 first-half performance was more bespoke of the declining revenues, improving earnings picture, as a 20% higher Network & Space Systems (N&SS) US$293 million profit from US$245 million in 2012 first-half and a 7% higher US$803 million 2013 first-half profit at Boeing Military Aircraft (BMA) versus the US$752 million achieved in 2012 first-half, propelled total BDS first-half profit to US$1.6 billion, 8% higher than the US$1.49 billion figure posted a year earlier. Operating margins, as a result, increased by 0.8% year-over-year to an impressive 9.9%.
The major achievement during the quarter at the defence unit was the beginning of assembly of the first KC-46A aerial refuelling tanker for the US Air Force (USAF), whose first wing spar was loaded on June 26. The loading of the 82 feet 5 inches long component symbolised the success of the “One Boeing” concept with the KC-46A tanker, based on the 767-200ER airframe, passing the critical design review (CDR) milestone in July, much earlier than its US$4.9 billion engineering, manufacturing and development (EMD) contract stipulated, which calls for the deliveries of 18 KC-46As by 2017 with a first flight in early 2015 and the first delivery in 2017. This bodes well for Boeing to achieve profitability on the hard-won programme for 179 aerial refuelling tankers that saw Boeing lowballing its bid and making a loss early on in the programme which could amount to as much as US$700 million above the US$4.9 billion ceiling for the first 18 examples while relying on the remainder to make profits.
787 still under intense heat
While Boeing has completed all the lithium-ion battery modifications on the in-service 787 fleet during the second quarter and resumed deliveries of the revolutionary carbon-composite aircraft, the heat and media scrutiny associated with the first grounding since 1979 ensued. So when an Ethiopian Airlines 787 carrying the registration ET-AOP sustained extensive heat damage in a July 12 incident at London Heathrow, this rekindled concerns on the aircraft’s electrical system.
Yet this appears to be an isolated incident and mounting evidences suggest the incident was caused by “pinched wire” on the 3 pounds and 3 ounces (1.5kg) Honeywell Rescu406 emergency locator transmitter (ELT). The Seattle Times quoted sources in saying the wires connecting the ELT and its lithium-manganese dioxide (LiMnO2) battery was “smashed” and “trapped” when the cover of the device was put on. If true, this would indicate that Honeywell International Inc.’s emergency locator transmitter, which is activated by forces experienced during a crash and guides rescuers to the downed aircraft, was at fault.
“There are no other aircraft systems in this vicinity which, with the aircraft unpowered, contain stored energy capable of initiating a fire in the area of heat damage,” the UK Air Accidents Investigation Branch (AAIB) said in a special bulletin.
In response, the US Federal Aviation Aviation (FAA) issued an airworthiness directive (AD) calling for the “inspection or removal” of the Honeywell Rescu406 emergency locator transmitter (ELT) on Boeing 787-8 aircraft and asking carriers to look for any “unusual signs” of heating or moisture in the device’s battery, whose chemistry is less volatile than the lithium-cobalt dioxide (LiCoO2) used in the 787’s main and auxiliary power unit (APU) batteries.
“The investigation indicates that the ELT may have initiated the event. Discrepancies within the ELT, if not corrected, could cause a fire in the aft crown of the airplane. We acknowledge that ELTs are installed on various other aircraft. Therefore, continued investigation is required. Once final action has been identified, we might consider further rule-making,” the US Federal Aviation Administration (FAA) said in the order.
All Nippon Airways (ANA) has removed the Honeywell Inc. emergency locator transmitter (ELT) on 12 787s operated domestically while keeping it on the other 8 examples that are operated internationally in conformance to different local rules. UK’s Thomson Airways removed the device within hours upon the issuance of the special bulletin by the UK Air Accidents Investigation Branch (AAIB) while LOT Polish Airlines said it inspected the device and that it was “fine”.
As the investigation progresses, the scope of the probe has also widened as All Nippon Airways (ANA) and United Airlines‘ findings of damaged wires on 2 of the Japanese carrier’s 787s and 1 of the US carrier’s Dreamliner may indicate a more widespread installation issue of the Honeywell beacon on other aircraft, more than 6,000 of which have been manufactured since being certified by the US FAA in 2005. The Chicago-based plane-maker is now asking airlines to inspect the same model of beacon on up to 1,200 other Boeing aircraft whereas its arch-rival Airbus is talking to Honeywell International Inc. over the issue.
“Boeing is asking specific operators of 717, Next-Generation 737, 747-400, 767 and 777s to inspect aircraft with the Honeywell fixed emergency locator transmitters. The purpose of these inspections is to gather data to support potential rule-making by regulators,” Boeing said in a 28th July statement.
But the ramification of the Ethiopian 787 incident reaches far beyond that. Importantly, it symbolises the first test on the repairability of the 787’s patented one-piece contoured barrel (OPCB) fuselage. Unlike the Airbus A350 which adopts a panel approach with its fuselage section comprising of 4 panels held together by fasteners, the Boeing 787 Dreamliner adopts a barrel approach that eliminates 40,000-50,000 fasteners per barrel.
The move is designed to save weight, as each 787 consisting of 4 barrels makes the number of fasteners being eliminated significant while varying the thickness of the barrel in accordance to the engineering loads at different locations, thus fully utilising the carbon fibre reinforced polymer’s (CFRP) lightweight nature that is 40% lighter than aluminium yet being 4 times stronger.
Airbus contests such claims by asserting that its 4-panel approach is more fully able to optimise the thickness of the carbon fibre reinforced polymer (CFRP) material better than a barrel possibly could, while the ability for airlines to remove and replace the CFRP panel in case of major structural damage provides “better reparability”.
“Another benefit is better reparability in operational service, as an individual panel can be replaced in the event of significant damage – avoiding major repair work that could require extensive composite patching,” Airbus contends.
Make no mistake, while there is no denial that a carbon fibre reinforced polymer (CFRP) panel could be more easily replaced than a CFRP barrel, it is very rare for a fuselage to sustain such significant damage. Moreover, there is little difference between the Boeing 787 Dreamliner and the A350 XWB (extra widebody) in the way how composite aircraft are going to be maintained under the US FAA-approved “patch pair” maintenance technique to place a large carbon fibre reinforced polymer (CFRP) panels over damaged areas.
As for “ramp rash” such as a collision between a catering truck and the fuselage and many other ground-handling incidents that take place frequently, new layers of carbon fibre reinforced polymer (CFRP) could be bonded with the damaged areas using epoxy and heat from portable blowers, a New York Times report said.
All in all, adopting the one-piece contoured barrel (OPCB) approach on the 787 is still a sound decision not only from a weight perspective, but also, ironically, a maintenance perspective as significantly fewer fasteners imply considerably lower corrosion and fatigue risks, which the same New York Times report puts the number of holes on a 787 at fewer than 10,000 against the 1 million on a 747.
“We have for the last 5 or 6 years, we’ve thought about how to repair composite structures when they are damaged. And typically, both we and the carrier have insurance that back this up. So if the question eventually gets to financial impact, there will be very little,” Boeing chief executive Jim McNerney said.
A blip quarter for 787 learning curve
Meanwhile, the second quarter has proven to be a blip for the 787’s learning curve, as Boeing introduces the stretched -9 variant into its production system and builds up inventories ahead of the rate break to 10 airplanes per month by the end of the year. This led to a US$1.5 billion increase in 787 gross inventory to US$30.3 billion, including US$18.7 billion deferred production balance representing 64 work-in-progress (WIP) airplanes, just US$1.3 billion short of the US$20 billion target at which Boeing aims to stabilise once it achieves the production ramp-up to 10 airplanes per month.
This means the average deferred production balance on each 787 produced during the second-quarter increased from 2013 first-quarter and masked the underlying improvement on the 787-8’s production cost, which has produced meaningful cost reductions with its average deferred production dwindled to US$73 million in 2013 first-quarter from US$97 million during the fourth quarter of last year. Investment bank Credit Suisse said in a 24th July note to its clients that the figure has soared to US$86 million as a result.
“We estimate Boeing’s unit accounting cost at $199M per 787 in Q2, higher from $185M in Q1, partly attributable to introduction of 787-9 into the production flow,” aerospace analysts at investment bank UBS concurred.
With the 280-seat, 8,050nm (nautical miles) 787-9 being executed tremendously better than its sibling as it recently rolled out of paint hanger and is on course to have its first flight in August or September before its entry into service (EIS) in April 2014 while being underweight when compared to its manufacturer’s empty weight (MEW) and airline-specific operating empty weight (OEW) targets (“Boeing 777X & 787-10 show the lure of the X factor“, 2nd Jul, 13); it is likely that the learning curve of the 787-9 may give a pleasant surprise to analysts and investors alike.
Coupled with a maturing production system that saw the cost per job at Charleston and Everett being reduced by 45% and 39%, respectively, and higher-margin -9 examples, this lays a solid foundation for further cost reductions to improve its profitability.
Though not every aerospace analyst agrees. UBS noted in a 24th July report that the 787 programme has only achieved a 14% learning curve so far, falling short of the 777’s 16% and the 24% required to break even on a net cash flow basis by 2015. UBS forecasts the 787 programme will continue to register cash outflow until 2019 when it is expected to book a US$0.4 billion net cash flow, against the US$0.2 billion net cash flow in 2015 assumed by Boeing.
“Guidance for breakeven 787 cash by 2015 implies unit cost will drop to ~$110M. However, if Boeing learns at a 16% rate like it did on 777 (better than it has done on 787 so far), we estimate that its unit cost would only drop to ~$140M by then. Our updated learning curve (LC) analysis continues to indicate that 787 costs are not declining rapidly enough for Boeing to be able to hit its target for break-even 787 cash flow by 2015. Instead, we see the 787 cash burn at $4-5B/year in 2013-14, declining to ~$2B/year in 2015-16,” UBS cautioned in the report.
“As we look at the unit to be produced going forward, we still see a learning curve that continues on a pretty steady trajectory similar to what we’ve experienced on other programmes,” Boeing chief financial officer (CFO) Greg Smith said.
“The programme is profitable today and we continue to drive profitability going forward through a lot of things we talked about; Partnering for Success and increasing productivity inside of our factories,” Smith emphasised.
Nevertheless there is upside to the 787 programme as the double-stretched 320-seat 787-10 was launched at this year’s Paris Air Show. As there is no direct competition to the 787-10, whose seat-mile costs even a de-rated Airbus A350-900 could not match as it carries more deadweight with a 24% larger empennage and 20% larger wing than the 787-10, Boeing could command a premium on the aircraft which requires minimal investment and engineering resources, thereby improving the profitability of the programme.
This will very likely see Boeing increasing the programme accounting block of 1,100 in addition to raising the production rate beyond 10 units per month, which Credit Suisse expects to reach a rate of 12 per month by 2014 and 14 per month by 2017.
“But there is pressure beyond that to raise production rates and it is led by demand for -9s and -10s. So the mixing up into larger longer-range models is correct and mixing up on pricing and therefore profitability is also – it wants to move in that direction as well. So, I think we’ll make the call on going beyond 10 once we’ve settled in at 10 and have a very firm foundation,” Boeing chief executive Jim McNerney commented.
In doing so, Boeing will fully leverage the market potential of the 787-10 and realise the pent-up demand for the aircraft, which is capable of replacing both the A330-200, -300, A340-300 and some 777-200ER in one fell swoop. The 787-10 will have a 10% lower cash operating cost (COC), a 4% lower relative trip cost and a 8% lower relative seat-mile cost on a 6,000nm mission than the de-rated A350-900, which will have a maximum take-off weight (MTOW) of 250 tonnes and a 75,000lbs thrust rating, while burning 13% less fuel than the -900 and 25% than the A330-300 (“Boeing to make up lost grounds on all fronts“, 27th May, 13).
When the heat surrounding the 787 dissipates, which is a matter of time just as the grounded Qatar Airways 787 returned to service after a 10 days hiatus, the focus on the 787 programme shall return to its underlying economics which burn 20% less fuel and enable carriers to connect ever more city-pairs that are previously economically unfeasible.
At the end of the day, the 787 Dreamliner is a game-changing airplane, redefining the passenger experience with more than 30% larger dimmable windows, lower cabin altitude at 6,000ft compared to the 8,000ft found on today’s airplanes, fresh cabin air instead of engine bleed air, enabled by an electrical system that saves weight and reduces maintenance cost, while also redefining how airplanes are manufactured and maintained. In these aspects, the 787 Dreamliner is arguably more revolutionary than the Airbus A350, which, while being executed flawlessly so far, will have its share of technical glitches sooner or later just as every single new airplane does.
Therefore, Aspire Aviation thinks that these 787 teething issues should be put in perspective and viewed independently where there is no basis on any possible links between them, rather than having knee-jerk reactions and getting over the top such as the allegation by Airbus chief operating officer (COO) customers John Leahy that the 787 is “not reliable” and “what they have got is an architecture that is not mature and that eventually will become mature. It is going to take a lot of time, a lot of money, a lot of cancelled flights”.
737 MAX targets profitable growth
On the narrowbody front, the re-engined Boeing 737 MAX is making significant progress as it nears its second anniversary since its launch on 30th August, 2011 and after garnering 107 firm orders and commitments at this year’s Paris Air Show.
First of all, the first delivery of the 737 MAX has been advanced by up to 6 months from the fourth quarter of 2017 to the third quarter that year after a series of wind tunnel tests validated the 13% fuel burn reduction and their results “give us confidence that 13% is executable”, Boeing 737 MAX vice president (VP) and programmme manager Keith Leverkuhn said.
“We are saying this airplane will be capable of 13%, and there’s room for even more, as we learn more and more in the wind tunnel,” Leverkuhn was quoted as saying.
“Through our disciplined development on the 737 MAX programme, the team has retired key technology risks. We have informed our customers and they are pleased they will be able to put these more fuel-efficient airplanes in their fleets sooner than planned. We continue to follow our knowledge points through the development process and we have an executable plan. Testing, improvement workshops, and solid early data have allowed us to validate the airplane’s performance and move the schedule forward,” Boeing Commercial Airplanes (BCA) airplane development vice president (VP) and general manager (GM) Scott Fancher said.
Intriguingly, Boeing skipped the “door modification” in the 737 MAX 8’s firm configuration in July, which would add 9 seats to each MAX variant’s seat count and further lower the 737 MAX’s fuel burn per seat as Aspire Aviation report earlier. This followed the loss of the easyJet order on pricing, which ordered 35 Airbus A320ceos (current engine option) and 100 A320neos (new engine option). Though Aspire Aviation‘s multiple sources at Boeing say a 199-seat high density configuration for the 737 MAX 8 remains an option for Ryanair, which will be achieved by “re-arranging doors” as the Irish low-cost carrier (LCC) is in the midst of talks to order 200 737 MAXs.
“Ultimately, Airbus offered us the best deal, and at a price with a greater discount to the list price than their landmark fleet purchase with easyJet in 2002,” easyJet chief executive Carolyn McCall acknowledged.
Early on in the easyJet contest, both the Boeing 737 MAX and Bombardier CSeries had been the frontrunners, before being swayed away by Airbus with an irresistible deal, which Aspire Aviation learnt easyJet has been offered a price tag in the middle of US$30 million-US$40 million apiece. Given that the 2002 easyJet A319 orders had been identified by the World Trade Organisation (WTO) that illegal subsidies provided by the United Kingdom (UK), France, Germany and Spain governments inflicted harm and resulted in the loss of Boeing’s business, it is no surprise that the easyJet order rekindled the war of words between the world’s two biggest plane-makers over one of the thorniest issues in US-European Union (EU) transatlantic trade.
“Airbus’ original capture of easyJet as a customer was a key part of the U.S. complaint in the World Trade Organisation about the massive harm that illegal government subsidies to Airbus has caused Boeing. Airbus’ recent sales to easyJet are a continuation of the harm that resulted from Airbus having been able to ‘flip’ easyJet as a customer. This is another vivid reminder as to why the EU must finally put an end to market-distorting launch aid,” Boeing spokesman Charlie Miller alleged.
“This is an insult to (easyJet’s) rigorous evaluation that clearly saw the A320neo winning. If we were to apply the Boeing logic on the WTO rulings, the 787 would not exist if not for subsidies,” Airbus spokeswoman Maggie Bergsma countered.
That said, while Airbus indeed captured 61% of the re-engined narrowbody market at press time with 2,348 firm orders since its launch in December 2010, Boeing is performing quite well in a market that is not a level-playing field with 1,495 firm orders received since its launch in August 2011. At the same stage of the programme or 23 months since launch, the A320neo received just 84 more orders than the 737 MAX at 1,579 firm orders.
While Airbus and its proponents are quick to lay claim that the European aircraft manufacturer’s success in grabbing a 60% market share is due to the offering of engine choice with two decidedly different engine architectures in the CFM Leap-1A and Pratt & Whitney (P&W) PW1100G-JM engines, the latter of which uses a gearbox to allow the engine fan to rotate at a speed 3 times slower than the low pressure turbine (LPT) and thus maximises propulsive efficiency, the 737 MAX’s single engine selection may not necessarily undermine its sales.
On the contrary, airplanes with a single engine selection traditionally carry a higher residual value in the aircraft financing market as it is easier for lessors to re-market used aircraft, evident in the 737NG’s (Next-Generation) US$27.1 million average value compared to the US$21.8 million of the A320 family aircraft, according to the Airline Business annual leasing survey 2013.
Furthermore, the 737 MAX carries a lighter airframe which requires less power and a smaller engine fan diameter of 69.4 inches than the A320neo’s 78 inches or 81 inches when equipped with the CFM Leap-1A and PW1100G-JM engines, respectively. The 162-seat 737 MAX 8 is 9%, or 710kg (1,570lbs) lighter than a 150-seat A320neo on a relative operating empty weight (OEW) per seat basis while the 180-seat 737 MAX 9 is 7%, or 4,175kg (9,210lbs) lighter than a 183-seat A321neo, Boeing said. The 126-seat MAX 7, in the meantime, is 5%, or 2,010kg (4,440lbs) lighter than the 126-seat A319neo.
“We have a lot of confidence in CFM to create an engine for us tailored to the airplane. The airplane is tuned to the engine, and the engine tuned to the airplane,” Boeing 737 MAX vice president (VP) and programmme manager Keith Leverkuhn explained.
Boeing argues the 737 MAX’s lighter weight will result in a 8% lower all-in cash operating cost (COC) than an A320neo, which Airbus disputes as only possible by considering a 500nm (nautical miles) stage length rather than an 800nm one. Aspire Aviation continues to believe the 737 MAX 8 will hold a 2% all-in COC advantage versus the A320neo.
Going forward, Aspire Aviation expects a 50/50 share split between the A320neo and 737 MAX, as the re-engined Boeing narrowbody will gradually narrow the order gap with higher availability whereas Airbus’ production slots are fully booked for the A320neo and has to manage multiple production sites, including the final assembly lines in Tianjin, China and Mobile, Alabama through the eventual transition to the re-engined version.
A key pre-requisite to achieving market parity is, Aspire Aviation believes, making the third 737 assembly line meant for transitioning the production system from 737 NG (Next-Generation) to the MAX permanent, which enables Boeing to raise the 737 production beyond the 42 aircraft per month level scheduled to be reached in the first half of 2014 and reap the benefits of further economies of scale. This will make the 737 MAX becoming more readily available and more affordable, hence increasing its competitiveness in closing the gap with the A320neo.
This will be useful in winning crucial campaigns such as flyDubai, a high-growth Dubai-based low-cost carrier (LCC), which said its order for a re-engined narrowbody is an “open race” between the A320neo and 737 MAX.
“You either can take too much risk if you are reaching too high or if you go too low, you can get off a learning curve relative to your competition. So, the way to think about market share is there’s a corridor you want to be in, and then, within that corridor, you want to have a better product produced at a lower cost, and so operating margins become the metric, and cash flow becomes the metric. Pricing to the place where it destroys or significantly impairs our economics, I don’t see that,” Boeing chief executive Jim McNerney summarised.
Simply put, Boeing is targeting growth on profitability over the 737 MAX, not simply market share alone.
Outlook – lean & mean profit machine
Looking ahead, Boeing will be a lean and mean profit machine churning out commercial airplanes at unprecedented production rates and supplying defence wares at more affordable prices in an era of fiscal austerity and defence cuts.
In order to do so, Boeing will rely on efficiency initiatives such as “Partnering for Success” that lures suppliers to lower their prices in exchange of higher volume in return. Boeing will shrink its engineering workforce by 1,700 this year at its commercial airplanes unit whereas its defence division will cut 30% of management jobs by the end of 2015 to save US$1.6 billion, adding to the US$2.2 billion saving already achieved since 2010.
Such laser focus on cost-cutting has bore fruits, as there is a 50% reduction in factory flow time and a 40% floor space reduction in building a 737 and a 27% reduced factory flow time and a 17% floor space reduction in the construction of a 777 mini-jumbo. This enables Boeing to post stellar profits despite non-recurring items such as the introduction of the 787-9 into its production system caused a temporary spike in cost.
This is highlighted when Boeing raised the operating margin forecast at the commercial airplanes unit to larger than 9.5% from around 9.5% while increasing its core earnings per share (EPS) estimate by 1.6% to US$6.2-6.4 a share from US$6.1-6.3 a share previously. EPS on a generally accepted accounting principles (GAAP) basis is also increased to US$5.1-5.3 a share from US$5-5.2 a share. In comparison, Airbus Commercial’s operating margin is almost half of Boeing Commercial Airplanes’ at 5.99% or 6.7% excluding one-off items.
For the remainder of the year, a key development will be the official launch of the 777X, which is widely anticipated to take place in November coinciding this year’s Dubai Air Show. While the Wall Street Journal underscored the difference between Boeing and customers on the 777X’s pricing with which Boeing is reluctant to offer too steep a discount to launch customers in light of its experience on the beleaguered 787 jet, it is not unusual for Boeing to search for the “sweet spot” on pricing at this early stage.
Though Aspire Aviation thinks Boeing had better be more willing to offer discounts on the 777X in order to fend off competition arising from the 350-seat Airbus A350-1000, especially when the list price of the 777X is expected to top US$400 million apiece. This is because the success of Boeing’s “bracketing” strategy to “box in” Airbus – with the 787-10 at the lower end of the 300-400 seat segment and the 407-seat 777-9X at the top-end hinges upon the commercial success of the revamped mini-jumbo, which sports a 787-styled 4th-generation carbon fibre reinforced polymer (CFRP) wing with folding wingtips and a new General Electric GE9X engine that slashes engine specific fuel consumption (SFC) by 10%.
Together, the 777-9X will burn 20% less fuel per seat than the 777-300ER with a 15% lower cash operating cost (COC), while providing airlines a perfect mix of capacity and frequency catered to Asian and Middle Eastern airlines whereas the 353-seat 777-8X will cater for ultra long-haul flights with its 9,480nm (nautical miles) range. The 777-9X will also offer a slightly better seat-mile cost than the A380, Aspire Aviation understands, without the significant financial risk in ordering the A380 in an ever more uncertain global economy, let alone its mediocre revenue cargo volume.
While these are enticing features for airlines in light of stubbornly high fuel prices, Boeing should not give further “breathing room” for the A350-1000 which United Airlines has ordered 10 more examples, taking the total to 35. Boeing still has a solid foundation on which to build 777X’s success, as indicated by this week’s order from All Nippon Airways (ANA) for 3 additional 777-300ERs and it has already given the A350-1000 enough “breathing room” in postponing its entry into service to the second quarter of 2020 from mid-2019, according to Aspire Aviation‘s sources at Boeing, as well as orders from British Airways, Air Lease Corporation (ALC) and Cathay Pacific for 18, 5 and 26 A350-1000s, respectively.
Therefore outsourcing the supercritical 71.1m (233.4ft) long 777X carbon fibre reinforced polymer (CFRP) wing to Japan makes sense, since it not only reduces production costs which in turn enhances Boeing’s ability to offer discounts to 777X customers, but also serves to retain some of Boeing’s most loyal customers – Japan Airlines (JAL) and All Nippon Airways (ANA), in picking a local supplier that creates jobs and thereby preventing Airbus to unlock them.
As it currently stands, Boeing is likely to increase the engine thrust rating of the GE9X again from the existing 102,000lbs of thrust in the upcoming customer meeting in September, Aspire Aviation‘s multiple sources at Boeing confirmed. Separately, Boeing may also further increase the 787-10’s maximum take-off weight (MTOW) from today’s 250,830kg (553,000lbs) level to improve its payload/range capability.
In stark contrast to Boeing Commercial Airplanes’ bright future, the defence side’s one is still uncertain, with the approach on how to achieve another US$500 billion in defence budget cuts under the sequestration on top of the US$487 billion of cuts that have already begun being debated by the US defence secretary Chuck Hagel.
“While it’s still early in the congressional process, the defense and space markups appear neutral to Boeing at the top level. That said, neither the president’s request nor the congressional bills reflect sequestration level spending limits. We think there’s more to come on sequestration more than we’ve seen so far. We are prepared for it margin-wise, anticipating some pretty draconian kinds of scenarios and we are not out of the woods at all. We’re just entering the woods,” Boeing chief executive Jim McNerney warned.
That said, the cost cuts and the diversification of source of defence revenue will help cushion any eventual impact on the Pentagon’s high-priority programmes such as the KC-46A aerial refeulling tanker, of which international customers account for approximately 40% of Boeing Defense, Space & Security’s (BDS) current backlog. This is highlighted by Boeing’s approval to commence production on a further 12 C-17 airlifters in anticipation of fresh international orders and the possibility of it selling 100-200 KC-46A-based international tankers.
In conclusion, while Boeing is likely to face headwinds at its defence unit, its persistent focus on cutting costs using the “One Boeing” approach is yielding results demonstrated by the P-8A Poseidon anti-submarine and intelligence, surveillance and reconnaissance (ISR) aircraft that has just received a US$2.04 billion contract to build 13 more examples yesterday.
In this lean and mean profit machine, however, Boeing Commercial Airplanes (BCA) will be the engine driving its growth. That is, perhaps, the only certainty in an uncertain future.
Categories: Airbus, Airbus Group, All Nippon Airways, Boeing, British Airways, Cathay Pacific, CFM, EasyJet, Emirates Airline, Etihad Airways, General Electric, International Airlines Group (IAG), Japan Airlines, Rolls-Royce, Singapore Airlines, United Airlines, United Continental Holdings Tags: 737 MAX, 737 MAX 7, 737 MAX 8, 737 MAX 9, 747-8, 747-8F, 747-8I, 777X, 787, 787-10, 787-8, 787-9, A320, A320ceo, A320neo, A350 XWB, A350-1000, A350-800, A350-900, A380, Air Lease Corporation (ALC), Airbus, All Nippon Airways, Boeing, CFM, Dreamliner, EasyJet, Emirates Airline, Ethiopian Airlines, GE9X, General Electric, GEnx, GEnx-2B, Japan Airlines, KC-46A, Leap, LOT Polish Airlines, Qatar Airways, Rolls-Royce, Steven Udvar Hazy, Trent 1000, Trent 1000-TEN, United Airlines, United Continental
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