Friday, August 8, 2014

Half time 2014 for Boeing and Airbus

The major OEM’s have published their half time 2014 results and we can make an analysis of their half year results together with orders / deliveries and the state of their product lines. We compare Boeing and Airbus on the high end and in a follow up article Embraer and Bombardier on the low end. To make orders and deliveries comparable we include the month of July as the OEMs collected business to be announced at Farnborough mid July.

Boeing had a strong first half 2014. Boeing Commercial Airplanes (BCA) business is now past the initial problems on the 787 program and delivered 48 units January to June 2014 (8 per month) which is the same numbers as for the 777 program. The 737 is now at rate 40 per month with a first half total of 239 deliveries. The 747-8 is at rate 1 with only 6 deliveries and the 767 has stopped as a commercial program with only 1 delivery during the first half year. The commercial deliveries of 342 aircraft drove a 4% increase in company overall revenue and a 5% increase in earnings compared to first half 2013 (both non-GAAP i.e. the core business performance), this despite a Defense, Space and Security side which was down 5% on revenue and down 15% on earnings.

777-9X, 787-9 and 777-300ER in ANA colours

777-9X, 787-9 and 777-300ER in ANA colors

The troubled unit is Boeing Military Aircraft (BMA) which is struggling with its 767 tanker program (KC46A charged BMA with $187 million and BCA with $238 million due to increased development costs) and it is also fighting to not have its major military airplane program, the F18, stop 3 years from now from lack of orders. The military aircraft order drought contrasts with BCA where first half orders was 783 aircraft, mainly 737 but also 777X, where Emirates and Qatar confirmed their orders for 200 777X.

In the same period Airbus logged 705 net orders, mainly A320 (732 units) and A330 (29 units) whereas A350 finished January-June with -70 airplanes after Emirates cancellation. The A380 came out at 14 net orders. Airbus deliveries of 303 aircraft for 1H 2014 drove Airbus group’s results with +6% in both revenue and earnings as we reported previously.

Accounting differences
It is important to know that the profitability of Boeing and Airbus can not be compared by these simple numbers. Boeing practices program accounting for their large aircraft programs. In short this means that the total anticipated costs of the project is calculated (development-, tooling-, production- and warranty costs) and spread over the accounting block (the number of aircraft they plan to sell). The average cost per unit in this accounting block is then used as cost of goods sold (the picture shows the principle for production costs), revenue for goods sold is actual net revenue at delivery.

Program accounting for production costs (from a Boeing presentation)

Program accounting for production costs (from a Boeing presentation)

This means that the high up-front costs for the 787 program is deferred and will be consumed little by little as the accounting block of 1300 units is worked through. In contrast the high initial costs of the A380 is already shown in the earnings of Airbus over the last years, as of 2015 when the production costs shall equal the net price of an A380 (according to Airbus) any gains in paid price over actual production and warranty cost will add to the bottom line of Airbus.  It is important to understand these differences when one looks at Boeing’s and Airbus earnings. It can seem that Boeing is gaining a first look advantage when the costs of large programs like the 787 are spread out outside the year of the cost being incurred but late in a program it works the other way, it lowers profits when a direct accounting method would have shown higher profits. In essence it is just two different way to look at costs and how these shall be best accounted for in large projects.

Product lines
When comparing the present state of the civil aircraft programs for Boeing and Airbus the following picture emerges:

  • SINGLE AISLE: Airbus took an early lead with the A320neo but Boeing has done a good job of catching up both in product attractiveness and sales. It is now a dog-fight for every airline sale and whereas the A320 had an initial lead in overall promised efficiency there is, what we can see, nothing separating the two today after Boeing gradually increased the efficiency gain to 14% over the 737NG. The A320 has a slightly wider cabin but the 737 has the Sky Interior which is more attractive to airline passengers then the dated A320 cabin. We see these programs evenly matched with Boeing having the upper hand in the mid range (737MAX8 vs. A320) and Airbus on the high end (A321 vs. 737MAX9).
  • DUAL AISLE 250 to 300 seats: This has been Airbus turf in the present with the A330 and Boeing’s business going forward with the 787, the 787-9 out-competing Airbus single entry in the range, the A350-800. As the A350 program went into flight test last summer it was clear the A350 had reached a weight increase that made the “cut and shut” A350-800 more than 5 tonnes heavier then the slightly larger 787-9. With this weight deficit our proprietary model showed the -800 could no longer compete with the 787-9. We then modeled an upgrade of the A330 to a neo status with engines from the 787. This was clearly a better proposition and we predicted during autumn 2013 that the A350-800 would have to leave the scene for a revamped A330. We finally put figures on our conviction 29th of December and since then the A330neo got more and more concrete until it was launched at Farnborough as A330-900 (aka A330-300neo) and A330-800 (A330-200neo). Capacity wise the A330-900 vs. 787-9 and the A330-800 vs. 787-8 are more similar then e.g. A321neo vs. 737MAX9 or A320neo vs. 737MAX8, yet still Boeing tries to avoid a direct comparison by pitting the 787-10 against A330-900. The 787-10 has a capacity which is higher than A350-900 and is more than 30 seats larger then A330-900. Our first analysis of the launched A330neo shows it to be close to the 787 in efficiency, close enough so that Boeing now has a more difficult competitor on hand then A350-800 ever was.
    If the customers usage of the 300 seat models is mainly within 10 hours missions there is little to choose in per seat efficiency for a 787-9 versus A330-900, for longer missions the 787-9 is the only choice. The 787-9 is more efficient on a trip level by virtue of lower weight but the cabin changes for the A330neo has bought it at least 4 seats, so on a per seat basis it is very close. The A330-800 can fly the same 15 hour sectors as the 787-8 but this cost the -800 in the weight domain and therefore efficiency. Here there is a clearer efficiency difference but not larger than can be fixed by aggressive pricing. It will be an interesting segment to follow with the new lineup.
  • DUAL AISLE 300 to 400 seats: The competitive landscape is here more complex, there is no single model which is close to the other in payload or range. The entry level contains A350-900, an efficient 315 seater which can fly 15 hour missions. The alternative would be the somewhat larger 787-10 but it will only perform 12 hour missions when outfitted with a realistic cabin and a payload containing any cargo. If your network requirements are within the capabilities of the 787-10 it is clearly more efficient then a A350-900, so much that a A350-900 Regional (a de-papered A350-900 with lower price and due to the lowered max weight lower airport and underway fees) has to be priced aggressively to compete.
    The next step up pits the 777-8X versus the A350-1000. The shorter 777-8X has the same passenger capacity as the A350-1000 by virtue of 10 abreast economy and a more efficient door layout then 777-300ER (4 door pairs like the -1000 instead of 5 for the -300ER). It trails the -1000 in cargo volume capacity (-10%) and has slightly lower efficiency as it uses the engines and wing from the larger -9X. Consequently it has the legs to carry the famous 45 tonnes of payload between Dubai and Los Angeles, a long time requirement of Emirates for a 777-300ER replacement.  In fact the -8X can carry more but the cargo hold will be full before any weight limits are reached (for cargo with normal densities). The A350-1000 could only fill half the free cargo positions for such a trip, it would be weight limited at around 15 LD3 positions filled out of the 30 which would be free after passenger bags are loaded.

    The 400 seat segment has only one player today, the 777-9X. By virtue of being the largest twin available with very good economics and payload-range it has sold extremely well since launch last autumn. Up to 1 of August 2014 243 orders are confirmed, adding the 43 777-8X orders brings the 777X program to a record 286 orders within less of a year of launch. This can be compared to 175 orders for the A350-1000 but there many eventual orders are hidden by A350-900 deposits (ref. United’s recent exchange of 787-8 positions for 787-10 deliveries). Still the success of the 777X program should cause concern at Airbus. When the competition was 777-300ER the difference was so large in favor of the A350-1000 that even long time Boeing customers choose the more efficient alternative, now the pendulum has swung the other way and Airbus is working on schemes to convince its -1000 customers to not feel compelled to add the -9X to their fleets. Such schemes involve using the cabin space more efficiently without compromising the 18’’ economy comfort (smart galley and WC solutions etc). We have modeled this and what a stretch A350-1100 would bring, we are convinced a A350-1100 decision will come before long.
  • VLA segment: There is not much competition in this segment, the market did not accept the 747-8i when the next smaller Boeing model was 777-300ER and this will not improve now when the 777-9X is on the price list. This leaves the A380 as the only alternative for slot restricted hub to hub traffic when a 777-9X can not do the job. If you are Emirates this limitation does not apply, they fill the A38o out of their Dubai hub to more normal destinations. British Airways has now experienced the same customer reactions as Emirates has long known to leverage, when an A380 is available for your trip the passenger selects the cruise ship of the skies in preference to other aircraft, it brings such a difference in comfort. It remains for Airbus to figure out how more airlines shall be convinced that they can fill an A380.

By Leeham Co EU

Filed under: air force tanker, Airbus, Boeing, Bombardier, EADS, Embraer, Uncategorized Tagged: 737, 737 MAX, 737NG, 747-8, 777, 777-300ER, 777X, 787, A320, A320NEO, A330, A330neo, A350, A350-1000, A380, Airbus, Boeing, Bombardier, Embraer
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