"Winging IT" Scrapbook Redux

Going back almost four years is an exciting adventure. The Earth Wind and Fire edition is poetic and so seventies, it has become a classic assembly of metaphors put to music coming from a Chicago theme.

Redux: May 13, 2013

787 Returns On Investment Earth Wind and Fire Edition

Who Let The Bears In The 787 Room??

Perspective is the operational word for 2017. A point of view is for the coming of a wide bodied order downturn. This perspective have sent the 787 bulls to pasture. Forbes reports that the 787 market may enter a diminished order season going forward. They are correct on several fronts.

By Hassan Ali on Apr 20, 2016 at 12:54 pm EST

·      Elongated time for low fuel prices.

·      Scarcity of long range routes

·      Making other under preforming financial investments within the micro markets

The fuel price commodity has troubled the immense expansion for buying wide-bodied aircraft when a customer can purchase and refurbish the last generation aircraft such as the 767 or the A-330 instead of buying the 787. Those older frames have life and can make money before they must land or before falling out of the sky from aging. The airlines can fly the cheaper way consuming low fuel prices without using an immense capital outlay for its fleet. The debt servicing is considerably less for older and prior generation aircraft than a 787. Secondly having its largest operational cost reduced, coming from low fuel prices, is an opportunity for airlines to mop up profits during this cheap fuel period. How long the low fuel cost remain is how long the wide bodied bear market will last.

Airlines who rushed to fill long range legacy routes and newly created routes because of the aircraft's extended range capabilities, are now in thin company with having few remaining opportunities. After Boeing has delivered 500 of its 787's, the long range route availability disappeared shrinking opportunities. As exampled by "Etihad", who has already gathered up the Gold nuggets laying on the ground found in the market place. It still has a huge backlog of undelivered wide bodied aircraft and is considering deferrals when managing its impending inventory. The collective mindset from prognosticators, "the market is slowing but will come to stop by 2020". 

The reality of that position is very apparent, but does not take into consideration other innovative decision making from the airlines. One condition exists from the above paragraph's comment. The age of the newly renovated prior generation aircraft will have to retire close to the time the time fuel prices begin to rise, and demand will then return with a full force for hundreds of wide-body orders.

Forbes Quote: "Etihad has 61 outstanding 787 orders, the highest total for any carrier. Etihad has been investing heavily in other airlines, which have continued to lost money.  “We hear the ‘D-word’ (deferral) surfacing with Etihad’s order for 787s,” 

Hamilton writes:

"The second and third biggest customers are Aeroflot with 22 orders and Norwegian with 19. Hamilton says Aeroflot raises questions and Norwegian is engaged in very rapid expansion Some other customers are from troubled areas of the world."

Some airlines have taken aggressive investment schemes when buying out weaker performing airlines or ancillary businesses in hopes of expanding its market share. At this time that strategy is back firing in the current slowing of the market. This condition is sopping up hundreds of millions of investment dollars and weakens any airline's financial ability for making new aircraft acquisitions. Once again, "Etihad is a good example as it has mopped up investments for its "other" ventures costing millions where it has not produced the desired outcome of profitability coming from those types of investments.  The "micro market" with this definition, is a market composed of different airlines who is a customer of the giant manufacturers such as Boeing or Airbus. The macro market is a Boeing Manufacturer who represents a worldwide supplier for all airlines.      

Many airlines are now taking a more cautious approach towards buying wide bodies at this time due to low fuel pricing, opportunity, and financial resources. The trend line for both Boeing and Airbus "wide bodies" is going flat and will recover after 2020 which is a little more optimistic than the Forbes article. The premise coming from that opinion is the wide bodied market stalls in 2020. 

Winging It is looking at other aspects in play, where older equipment which is being worked during this fuel price down-turn period will begin to be retired by 2020, and the lack of availability of prior generation aircraft will cause the purchase prices on that class of aircraft to increase. A market condition will exist forcing airlines to change its business strategy where the 787 comes back into prominence. The market pressures causes a different business model which would include buying new 787 types of aircraft after 2020 and beyond.

Over the next three years Boeing will too have market pressures coming to them in a macro sort of way. The will (must) address the MOM issue once for all and the sooner the better. Boeing needs a complete family of aircraft it has divorced from so long ago when it dropped the 757 and the 787-300.

Having a MOM model line in place will fill the demand for the next ten years regardless of the micro market antics. It will become a replacement aircraft for all those aging and renovated prior generation aircraft after 2020. 

Finally, Boeing needs to react during 2017 as if the fuel prices "never" increase or financial cycles will swing as often as recessions occur. The routes found in the middle of the market are so numerous it would be near impossible to keep up and fill them all even during a soft economy. The wide-body segment has a very sensitive risk exposure going forward where the slightest change in that market can immediately affect it for some time going forward. The MOM position is more risk adverse than the Wide Bodied class. Take a few market risks (enumerated by the above bullet points) off the table and then a robust buying spree begins again for the wide bodied aircraft segment after 2020.

Boeing 787 2016 Numbers With January Update

Boeing has posted its numbers for all of its commercial types and this “Winging It” segment features summary 787 score card with Boeing data. Earlier on January 1, 2017 a similar post charted a pre Boeing 787 summary as a guess on what the 787 book would look like, however with Boeing's reveal of 2016 here is the updated summary for the 787 program starting in 2017 and closing 2016.

Fig. 1

Pay As You Go F-35

Ever wonder how many F-35's are delivered in total? "Winging It" has and it has come down to a very convoluted and confused process. The military would rather not have everyone know how many F-35's are flying at any one time but there is a back door going through appropriations or contract signings in which an interested party could surmise the flying count and mark the progress of the F-35 program as a whole. 

Below is the Low Rate Initial Production (LRIP) contracts and count basis by the year, where assumption makes the case for flying copies of the F-35 (A,B,C versions).

Winging It Table from various sources:

Fig. 1

The notation comes with several assumptions applied to the end count of 2016. One assumption asserts Lockheed continues building the F-35 without ever stopping for contract approvals. This is done with stop gap payments from the government to Lockheed for the reason of maintaining an efficient program where a stoppage would cost the government billions more to restart the program. With the Government own cost estimations imposed on Lockheed. LRIP 9 was a force on the contract by the US Government. It is difficult to actually know the 2016 production count with LRIP contract uncertainty in play.

However, when LRIP 9 was signed the table assumes that those units proposed have been built and delivered. LRIP 10, is another story and is the biggest LRIP bundle to date having 90 coming from all types. It is certain Lockheed has not as of yet delivered any of those LRIP 10's. It should be the last LRIP contract before high rate production begins for the F-35.

Waiting on Airbus Before Commenting On Its Use of Whiteout

Boeing unleashed a barrage of numbers today. The key numbers are the order book value and the Delivery Book Values. Before mentioning those numbers it is important to note...

Winging It calculations*:

668 net orders (92B)

748 Deliveries (116B)

*List prices are used where actual prices for each purchase in not available at this time. Typically the actual price can be up to 50% of list prices and is used by both Boeing and Airbus. Using list prices for calculation makes it an apple to apple comparison.

The billions in deliveries concern stockholders today and the orders today concern stock holders of the future.

Winging It is working out those numbers with a grand chart of both categories using Airbus as a comparison.

The net delivery billions and units numbers will determine the world's largest manufacturer of aircraft and once again it seems to be Boeing all the way.

Not withstanding a generous application of white out Airbus can hope to breach the Boeing bragging rights.

Fox news tends to cipher a $98B billion delivery total.
Winging It came up with 116B using available List Prices".

The order in dollars totals are also a guesstimate and Winging IT will provide its usual list price "estimation". The main thing is that estimations are in play until final exclusive income statements are revealed by both giants. "White out" will follow soon after each will compare to one another. Numbers will change according to promotional information needs of each other. A whole staff meeting will occur making out how one loses and the other wins in the game of World's largest. Boeing has Airbus in the bragging jail house at this time as it cannot and will not come close to Boeing's delivery quantity of 748 units. 

Boeing delivered enough of its high priced wide bodies to bury Airbus in the 2016 round of value. Both had respectable and close single aisle numbers, but the wide body arena is where Airbus lags and will continue to lag for some time into the future.  Airbus will not breach fifty A-350's during 2016. Boeing exceeds with 137 units of its 787's during 2016.  That number gives Boeing an almost 22 billion dollar advantage over Airbus' paltry $10 billion delivery of its A350 during 2016. That extra 22 incremental billion Boeing has over Airbus will show up somewhere in the book-keeping department. The big question can Boeing keep this up for the next five years?

If orders continue to trickle forth from Boeing customers it will drain the Airbus back-log before the A350- delivers its first five hundred A-350's. Airbus has a dismal wide body order book in the last three years coming after the initial order surge when the A-350 was first announced.

The Boeing four corner offense from basketwork fame in the past century was dominate as the single aisle competition can only manage a tit for tat game going forward. The wide bodied market place is slowing and it will hurt future aspirations for both Airbus and Boeing has going forward. Boeing can and will milk the clock until fuel prices rise.

The Era Of Airline Expansion Is Drawing Nigh Replacement is The Future

What has Airbus and Boeing wrought? An era is closing before this decade ends. The era of "expansion" in the airline market place. The last ten years has seen the airline industry eagerly purchase wide bodies in great numbers, expanding the business reach not over continents but around the world. 

The advent of the Boeing 787, 777X and the A-350 is going into a pausing purchase phase as airlines are currently seeking renovated air frames from the millennial era of the 2000's. The low oil prices, higher new technology costs, and its filled world routes converge causing a slower demand for those types. Most used aircraft which can fill legacy markets such as European and North America passenger service begins afresh with a certain intensity for renovation.

One case in point is the Emirates condition. Tim Clark, Emirates CEO, ordered a preponderance of A-380's during the last dozen years and it has a substantial wide bodied high tech aircraft yet to be delivered with few route options available. Near term new orders from Emirates will be a one-for one aircraft exchange. For every wide body aircraft retired, a new generation aircraft will replace it as it tries to seek new routes for its inventory. 

Emirates has few options to expand and has relative few older aircraft needing a renovation or retirement. Additionally, Emirates is the Poster Child for the future of market place conditions for most all airlines operating successfully today. Currently Emirates has a massive wide bodied order pending between choosing Airbus or Boeing. The trigger for the order is a higher fuel price status at this time. It is rumored before 2017 closes, Emirates will make a long term order to the delivery cycle with Boeing.

Fig. 1 Emirates Wikipedia reference

As one can observe in the above figure, Emirates has firmly landed into the fleet replacement mode as it still remains to receive 224 wide bodies with too few routes for which to place those already ordered aircraft. Higher fuel prices would cancel any notion of renovating what is in place with fleets having older models and only if the lower fuel prices continue for another three years. 

Emirates is not the type of company for flying older renovated equipment. It will just slow orders and deliveries of its already placed order backlog. Emirates is the "Gold Standard" for Airline expansion.

By 2020 a projected fuel price increase will shake-up the slump of wide body orders across the board as airlines will once again dump inefficient inventory, and then opt for new aircraft replacement and fleet expansion.

On December 11,2012 Winging It said, Watch Ethiopian Airlines For The Money!!!

On December 11,2012 Winging It said, Watch Ethiopian Airlines For The Money!!!

"After reading this old Winging It link on LiftnDrag blog, the article goes on to state watch Ethiopian Airlines, because they are best positioned to take advantage of the 787 on its long legged routes. Little did I know, they would have one 787 catch on fire at London Heathrow, and benched it indefinitely until a resolution is found, or did I know they would increase its profitability by 178%, and recognize the 787 directly affecting the bottom line by so much! Even with its older aircraft inventory in play every day. If it sounds like crowing, then so be it, its crowing a little. I can't help but get a little excited on a long shot Airlines on a winning horse, The 787.

Article Quote: December 11, 2012

" Another look is for Ethiopian Airlines in what the 787 does for its bottom line.  They will be a good case study, since they own such a smaller number of aircraft and fly long routes. The 787 will have an immediate impact from its operations, where you will see how it drives the bottom line at the end of next fiscal year.  This is a manageable study of its business plan and bottom line. You may gain a distinct appreciation for the 787's financial impact on Ethiopian  Airlines."

Today the news announces four years later this snippet.

Ethiopian Airlines Sets Yet another Year of Growth Milestones

“2016 has been an exceptionally challenging year for the African Aviation industry. Commodity exporting countries in general and oil-exporting African countries in particular have been hit hard by the global decline in commodity prices. As a result, demand for air travel has been suppressed and the shortage of foreign exchange has severely affected the financial performance of airlines in the continent. Yet, at Ethiopian, we are very proud of the new heights Ethiopian has flown in the year: we celebrated our 70th anniversary, inaugurated the largest and the finest Aviation Academy in Africa and a state-of-the-art In-flight Catering facility which is the largest in the continent of Africa... ”

The 787-8 Make-over Is Needed

Having Delta eliminate its 787-8 legacy order held over from the Northwest Airlines merger, signals a great need for Boeing to reinvent the model, or just let it tumble into obscurity. It only has about ninety 787-8's remaining to be delivered, even if all of its customers have the resources currently in place for a purchase. The problem still remains that none is ordering the 787-8 except a few customers here and there that have placed an order like Tanzania Airlines last December. At best, the analyst will remark, "Tanzania is in trouble and could cancel orders when the time comes to deliver the 787-8".

• There lies the problem beneath the order numbers. Boeing has reached the back side of its 787-8 order book and it needs rejuvenation of new orders at a steady pace. Therefore, it needs something outstanding coming from the 787 program that is not yet tapped for potential customers.

• Another problem is financial resources spent on a model without knowing whether it will make a difference in the market place. The upgrades need to be transferable to the 787-9 or 787-10. When any upgrade would not interfere with motivations for buying its family of aircraft. The answer for the 787-8 sales quandary is found with several customers and how they use its 787-8's. 

Jetstar and American Airlines have immensely invested in the 787-8's and should be consulted on how it will be moved to further buy the 787-8. Boeing is working on that answer already. Jetstar ordered 11 and it now has 11 in its inventory. American ordered 20 and has received 17 with only three more to go. The key with these exampled customers is they are both a continental based 787-8 customer and knowing what would move to ordering more 787-8's is important.

• Another query is a further investigation coming from the 787-300 data before it was canceled. Boeing had long prepared this statistical data and it knows the market response for the 787-300 when it was still under consideration. 

The 787-800 appears to have painted itself into a corner with a dying interest with its market fit. There are no life lines on the horizon. The 787-8 has become a tap hole going into a new model and technology. This brings me to the last bullet point.

• The time has come to build the tween-er not from a 787-300 platform but from the 787-8 platform. There would be two classes of 787-8's in play having the same body and similar passenger capacity. The passenger capacity would not exceed 240 on the Continental (C Class) and about 250 with a Long Range Class (LR).

Boeing is keen on using what it has already paid for at this time. They could sell five hundred C models spanning one continent limited to 5,000 miles. The upgrades come from cabin enhancements. An eight across 30 row seat map would give the passenger room. Additionally Boeing should sell another two hundred 787-8LR's seating up to, but not ever exceeding 290 passengers. The renewal must vitalize the 787-8 model concept with minimal investment and more importantly not change a “build process” costing billions. The other problem is finding a launch customer buying two variations for its fleet, and that point at this time is what is stopping Boeing. The Orient is an obvious customer region for having a launch customer.

The "Build it and they will come", axiom does not apply in this case. Boeing must reignite market heat offering a 787-8 combination and find a new Middle of the Market A-321-NEO killer at the same time. They must find customers who will launch it!

If Boeing doesn't find customers for the concept enhancements then it will retire the 787-8 by the end of this decade from starved out sales. 

The 787 2016 Before Boeing Numbers Recap

The Pre Boeing 787-2016 Numbers Analysis is a daunting task when not knowing what cards Boeing may hold, since it has not announced anything but the Delta cancellation of 18  Dreamliners during the last month. Those were 787-8's and it hurt the backlog and order book. However, they is plenty of good new on the horizon for the order category. There are several large 787 orders hanging in the market place one of which may come from Emirates and Tim Clark. That announcement should come in the year 2017. There are some additional orders from the Chinese market which have yet to be confirm but are hanging on with MOU's.

The chart below (Fig. 1) main thing is the strong production year of 137 Dreamliners for 2016. Looking at the 694 in backlog illustrates a twofold impact. If a customer orders a Boeing wide body it could receive it before an Airbus placed order. Secondly, Boeing demonstrates a resiliency in the market place outpacing Airbus over the last several years over Airbus. Airbus since the beginning of 2013 has booked only a net of 162 A-350's. Boeing has booked a net 382 of its 787 family of aircraft.

This represent a greater than 2-1 booking pace over Airbus even long after it had announced selling its wide body.  

Fig. 1

Fig. 2, represents net numbers starting in 2012, marking the beginning of the delivery cycle for the 787 aircraft. Noting the order to delivery comparison over this time period shows almost a 1-1 book to bill rate. Five hundred 787's are billed and 427 are booked, returning a .85 book to bill rate. Ideal is a ratio of 1 after the backlog has been established. When first entering the market, the desirable rate should be well above the number 1 as production has not yet started until years later. In Boeing's case the .85 ratio is a measure at full production while having a healthy backlog. Boeing with a few great years could maintain a 1-1 ratio is it takes on another 150 ordered 787's in the next several years. That would be a Boeing sales goal.

Fig. 2

The ninety day moving average is a production efficiency number. Guidance was established in the first quarter of 2016 at 12 per month. The month of January 2016 only delivered seven 787's and it reached 12 a month by March 2016. However, fourth quarter 2016 only delivered 11 a month during this time period. Boeing also exceeded 12 a month pace during the 2nd and 3rd quarters of 2016.

Fig. 3

The Year Over year chart below demonstrates a steady growth of the program with predictable changes in both delivery and order dynamics. The latter being typically inconsistent.

Fig. 4

Fig. 5

Fig. 6

Fig. 7

Mach 1.6 Is Possibly The Sweet Spot

Have you ever wondered about modern fighter jet speed? An assumption by many, "is the faster a fighter jet goes the more dominant it becomes as a fighter". In some cases that may be true but in other cases it may be a useless feature because the battle energy required comes from a slower speed in close quarters.

The F-35 development has startled many observer of having a top speed of only Mach 1.6 which falls below the faster breed of fighter going Mach 1.8 and higher with 2+. The answer may come from battle space efficiency, stealth and performance. What the F-35 gives up from being Mach 1.6 it will add on from being a far more efficient and invisible aircraft. In other words going fast would delimit the F-35's capabilities for which it was designed.

There may be a different assumption in play having the F-22 combined with having a F-35 commonality. The F-22 is the muscle where the F-35 is the brains when flying in formation. A flying formation of two F-22's combined with four F-35, communicates a need for further F-22's on order to complete with intense and purpose of total aerial combat.

The congress is looking to upload another 200 F-22's when money is found. If completed, then the F-35 becomes more deadly than its first take would suggest. It won't need to go Mach 1.8 as the F-22 goes Mach 2.0+ with stealth capabilities. The F-35 computers hook-up with the F-22 systems and sends it into combat with an autonomous pilot at the controls. Both the F-35 and F-22 become a greater force.

I would suggest that is the military thinking of synergism of both systems with each other. The F-35 is in its sweet spot at Mach 1.6 where its stealth makes it stay within its optimal capabilities of design and it can now operate from its most capable position given its multi functions. In other words, the balance between brains and muscle makes the F-35 a formidable and untouchable aircraft. Having the F-22 as its wing man makes the F-35 unreachable. No other nation has this type of one-two punch in its own formations. The F-35 is the screw driver and the F-22 is the hammer.