BA CEO Dennis Muilenburg and BCA Chief Engineer John Hamilton testified at the Senate and House hearings on the 737 MAX. Here are our quick thoughts:
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RTN and NOC hosted 2Q19 earnings calls today. We recap the reports here and show estimate changes on p. 2.
BA hosted its earnings call today (10/23/19) after reporting a not-awful quarter, all things considered. BA formally cut production rate on 787 (from 14/month to 12/month, for two years) and 777 delivery rate to 3/month both in 2020. The 777 rate cut was already in our model, but we didn’t have 787 going to 12/mo until 3Q21. BA cited WB market weakness from China trade (787) and production delays (777). Historically BA hasn’t been in front of these issues, so this is a solid change and BA is wise to use the current negative backdrop as cover to make these rate adjustments.
BA reported 3Q19 earnings. All in, we think it’s a slight positive relative to suddenly negative expectations. BA is still assuming a 2019 RTS for the MAX, though this is an accounting assumption and not commentary on the regulatory process, which is hard to predict. BA took a charge of $900M – in the accounting block and not a period charge – which is less than we expected and slightly surprising. This implies a 50bp hit to MAX margins, by our math, over the accounting block of ~3,100 planes.
AUSA kicked of its annual three-day event on Monday, 10/14. All defense primes and many defense contractors were present, along with several high-profile officials including Army Secretary McCarthy. We attended, too. Much of the products on display were aligned to the Army’s six modernization priorities, and the overall tenor at the conference was positive/optimistic.
BCA delivered 63 planes in 3Q19, five fewer than our forecast driven by hurricane disruption at its North Charleston facility and customer timing (to a lesser extent) but partially offset by some more 767 deliveries. Overall, mix was modestly negative pressuring margins. At BDS, there were 77 total deliveries (49 new and 28 remanufactured/renewed) driven by more Apache deliveries (both sequentially and year-over-year basis) and tracked ahead of our expectations. Overall, we’re trimming our 3Q19 sales to $19.3B (from $20.0B), EBIT margin to 7.2% (from 7.6%), and EPS to $2.19 (from $2.35), but we’re largely maintaining our full-year 2019 estimates since we view the 3Q19 BCA delivery softness as weather-related disruptions that will be resolved in 4Q19.
The U.S. Trade Representative (USTR) plans to implement tariffs on a broad range of EU exports starting on 10/18/19. (The U.S. requested a procedural meeting with the WTO on 10/14/19 to formally approve the countermeasures; WTO authorization is automatic.) This notice shortly follows WTO’s decision this morning (10/2) authorizing the U.S. to impose $7.5B of tariffs as countermeasures to compel the EU to end its non-WTO compliant subsidies to Airbus. Although today’s WTO ruling caps a 15-year trade dispute filed by the U.S. in 2004, the EU has a parallel challenge also with the WTO. In that case, the WTO determined the U.S. provided non-WTO compliant subsidies to Boeing, and one piece – the Washington state tax break valued at ~$100M per year – remains in effect. Among U.S. airlines, we believe tariff talk is impacting current order negotiations, but we believe most U.S. airlines with Airbus planes currently on order still have far more questions than answers.
The WTO is expected to formally authorize a U.S. request to impose tariffs on various EU exports this week. The WTO arbitrators met Monday (9/30) to finalize their decision on the tariff amount, expected to total ~$7.5B per year. This determination caps a 15-year trade dispute between the U.S. and EU over illegal subsidies the EU and four member states (France, Germany, Spain, and the UK) provided to Airbus, notably enabling the company to develop and launch the A380 and A350.
On Saturday (9/14), a series of drone and missile attacks debilitated Saudi Arabia’s oil industry after strikes on Saudi Aramco’s Abqaiq oil processing facility and Hijra Khurais oilfield removed ~5.7M barrels a day of crude production, representing roughly half of Saudi’s daily capacity. Houthi rebels in Yemen claimed responsibility, but U.S. intelligence refuted that claim and instead blamed Iran for launching more than 20 drones and at least a dozen ballistic missiles. Saudi officials, however, aren’t ready to assign responsibility to Iran citing insufficient evidence provided by U.S. intelligence that Iran was the staging ground.
Last week, BA announced two separate 777 orders: first with KLM for two 777-300ERs, and second with China Airlines for six 777Fs. Neither of these are new orders. The KLM order was previously booked on BA’s orderbook as unidentified and the China Airlines order was a finalization for the remaining three planes of an agreement announced earlier this year at the Paris Air Show. Still, identifying the customers firms it up a bit and they underscore BA’s efforts to firm up orders and shore up its 777 bridge especially since the late 2020 target for the 777X entry into service (EIS) looks increasingly aggressive, in our view. Even without the latest door incident (discussed below), we see EIS timing getting pressured by 1) the GE9X engine redesign that pushes first flight from 2019 to 2020 and 2) a potentially longer and more thorough certification process given the public scrutiny following the MAX crash and subsequent grounding.
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