The analysts noted that there were no new program announcements from either Boeing or Airbus but that both companies issued very strong signals regarding production rate increases on narrow-body jets. Airbus made no commitment on developing a new engine for its super-jumbo A380, although it did highlight a stretch version of the plane that would add up to 40 seats. The analysts continue to believe that Airbus will launch a re-engined A380 at the Dubai show in November.
Here are Canaccord Genuity’s takeaways for the plane makers:
- Boeing and Airbus want to continue to capitalize on the size of the backlog which leads us to believe that negotiations for a narrowbody rate increase are very far along. Furthermore we expect continued pressure from OEMs on airlines and leasing companies to collect more [pre-delivery payments] sooner, either at [letter of intent] signing, procurement, or at 36 months before delivery.
- While integrating composite structures was the cause for delays a few years ago (787 & A350), the story now is software.
- Although the quantity of orders was only slightly lower than expected there was a more significant drop in the quality of customers. Furthermore, we didn’t gain enough confidence in Boeing & Airbus’ ability to bridge order gaps as the bulk of firm orders were for next gen aircraft.
Following conversations with Rockwell Collins Inc. (NYSE: COL), the analysts remain “confident in the upside from the better than industry commercial original equipment (OE) exposure and growth, upside in the [information management services] business, the improving free cash flow profile, and the slowly improving defense sales environment.”
Canaccord Genuity noted that Spirit Aerosystems Holdings Inc. (NYSE: SPR) could provide a “surprise to the upside” as part of its contract arrangement with Boeing. The analysts said:
It appears that SPR is prepared to pay for much of its capex requirements to take 737 rates up to 52/month, and potentially higher. We believe the negotiations with SPR are a key gate for Boeing and any announcement on taking 737 rates to ~63/month.
Parts supplier Precision Castparts Corp. (NYSE: PCP) reaffirmed its desire for a merger or acquisition or other vertical integration opportunity in its segment. The analysts also noted that Honeywell International Inc. (NYSE: HON) included Precision Castparts among casting and forging industry players that are “struggling to meet rising rates on some of its engine programs.”
Canaccord Genuity’s analysts also said:
Airbus indicated that it expects to make a decision on taking A320 rates up to ~60/month by the end of 2015, with an additional assembly line in Hamburg, if necessary. We also expect an announcement from Boeing that it will take rates on the 737 up to ~63/month by the end of 2015.
If Boeing and Airbus are going to raise production rates on their narrow-body best-sellers, they are going to need to get their hundreds of suppliers up to speed as well. By the time of the Dubai show in November, we should have a better sense of if, when and how all those additional planes are going to be built.