Wednesday, August 17, 2011

Wedbush Securities says implications of the Long-term Narrow Body Market Less Attractive, Raising Stakes for Next Gen Wide Body Aircraft

Neelam Mathews
Aug 17, 2011

U.S based Wedbush Securities says while it views Boeing’s decision to launch the 737RE as a positive, it has become “increasingly skeptical about the longer term opportunity in the narrowbody market  as industry  capacity  increases.” 

“We view the  competitive  intensity surrounding the recent American Airlines order as indicative of future trends, where pricing will increasingly be challenged and customer loyalty reduced.”

“Boeing will try to minimize the scope creep as much as possible to ensure that it can have a plane on the market in the 2016-2017 time frame at a competitive price.  As a result, we continue to see a substantial R&D reprieve in the 2012-2014 time frame, even with Boeing doing, as we expect, both the 787-10 and an accelerated 777 refresh,” says the report.

Considering the fact that we see no turn in an increasingly competitive outlook for narrowbody aircraft, and increased pressure on narrowbody profits, it is clear that both Boeing and Airbus will have to increasingly focus on widebody aircraft for profit upside.  “We believe it will be increasingly difficult for Boeing to maintain the price premium it has enjoyed in the narrowbody market, especially in the 2015-2030 time frame.  Even with a new composite narrowbody from Boeing, now expected in the 2025-2028 time frame, it will be difficult for the company to regain a pricing premium if industry capacity is close to where we expect it to be by that time.  We expect the company to continue to improve the 737 cost structure, especially as it expands in the Renton facility up to potentially 50 aircraft/month.

“We believe Boeing will ultimately produce its 737RE at the Renton facility.  By moving the P-8 line to Boeing Field, the company will gain capacity that will support 737 rates up to 45-50.  Keeping 737RE production at Renton will help maintain margins.The timeframe now for the composite NSA has shifted to 2024-2028. We can appreciate the increased risk level associated with financing and growth, but we see little risk to the 2011-2015 delivery outlook.” 

The WS model starts with the assumption that narrow body production rates will largely follow the build plans outlined by Boeing and Airbus. It assumes that Airbus will eventually get up to 44 aircraft in production a month on the A320 just before the A32-neo is rolled out in 2016. 

The risk for both Boeing and Airbus is increasingly going to be the availability of production slots to sell, says the report.  “We can appreciate the desire to add capacity, as the current narrow-body production lines are generally sold out through 2015-2016.  However, unless there is a substantial drop in orders, we do not expect the backlogs to go down significantly, but we see limited upside in terms of the low 40s in terms of monthly production for both Boeing and Airbus, unless they want to start to significantly work off their respective backlogs.”

The spike in 2011 A320neo orders is clear.  Since the neo’s inception, Airbus has booked 923 firm A320neo orders. “We believe Boeing, once it gets final Board of Director’s approval for the 737RE, will aggressively be back in the game. We expect final 737RE approval at the October Board meeting, at the latest. 

Moreover, based on our analysis, it is increasingly difficult for Boeing to justify spending the $10-$15 billion on a new airplane in a market that is facing a changing supply-demand equation, with significant capacity coming on line, and the lack of flexibility in market shares.  We estimate Boeing will spend between $1 and $2 billion on the 737RE, with a significant contribution from CFM (GE and SNECMA) as well. 

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