EADSY - Boeing Suffers Big Loss On Air France-KLM Blow

2023-09-27 14:28:17 ET

Summary

• Boeing's stock has lost momentum due to supply chain issues and continued problems at Spirit AeroSystems, overshadowing positive news such as higher Boeing 737 MAX deliveries.
• Boeing is losing out on orders to Airbus in campaigns where they go head-to-head, such as with Air France-KLM.
• Air France-KLM is favoring Airbus for its fleet plan, with Boeing losing its single aisle share and Airbus dominating the wide body segment.

Boeing stock has significantly lost momentum this year due to continued issues in the supply chain which are affecting the defense business. And on the commercial airplanes side, continued issues at Spirit AeroSystems ( SPR ) are keeping results down. All of this casts a major shadow on the positives such as higher Boeing 737 MAX deliveries, positive order news, the return to service of the Boeing 737 MAX in China and higher production rates for the Boeing 787 Dreamliner.

When it comes to orders, Boeing is not doing bad with big orders from United Airlines (UAL) (announced late last year), an big order from Air India for more than 200 airplanes and a big order from Ryanair that's pending approval. On top of that, there are supplemental orders from Air Canada and Qantas. However, on campaigns where Boeing goes head-to-head with Airbus ( EADSF ) the company is suffering painful losses. The orders from Air France-KLM are an example of that.

A Fleet Plan In A Different World

In 2019, Air France-KLM presented its fleet plan. It can be seen as a fleet plan in a different world. Boeing was still at the early stages of the Boeing 737 MAX crisis and pandemic is a word that many still had not used. In that plan, KLM would absorb Embraer E2 family airplanes for KLM Cityhopper, while in the wide body fleet the Airbus A330 and Boeing 747 would be removed in favor of the Boeing 787, thereby simplifying the fleet.

Transavia would phase out the Boeing 737-700 and Air France would see its regional carrier phase out the Embraer E145 and ATR72-600 while phasing the Airbus A340 and Airbus A380. At the time, no decision on a single aisle replacement had been made but Air France seemed to be positioning for a stretched variant of the Airbus A220 while looking for a replacement to its A320ceo family fleet.

Boeing Is Dominant In The Air France KLM-Fleet

I have analyzed the Air France-KLM fleet where the regional and freight airlines are integrated with their associated parent company. What's clear is that in the Air France fleet, Airbus is the sole provider of the single aisles excluding the regional airline while Airbus and Boeing share the wide body market at a 1:3 ratio, meaning that Boeing is having the upper hand here. Overall, in the Air France fleet, Boeing has a 30% share compared to 57% for Airbus and the remainder is for Embraer and Mitsubishi.

In the KLM fleet, Boeing provides the single aisle solution with a share for Embraer as well but no share for Airbus. In the wide body segment, Boeing is even more dominant than in the Air France wide body fleet with an 86% and 14% for Airbus for a total share in the KLM fleet of 58% for Boeing and just 6% for Airbus.

For Transavia, the fleet is all-Boeing.

This brings the single aisle share for the entire group to 44% for Boeing and 29% for Airbus while in the wide body segment, Boeing dominates with a 74% share and 26% for Airbus. In total, Boeing has a 54% share and Airbus has a 28% share with the remainder primarily going to Embraer.

Bad News For Boeing

The bad news for Boeing is that it has lost out on the Boeing 737 replacement cycle with KLM and Transavia. Both of these airlines will be operating the Airbus A320neo family and on top of that comes the selection of 50 Airbus A350 family airplanes which can certainly be seen as a blow to Boeing as KLM's initial plan was to adopt a Boeing-only widebody.

The deal is valued between $7.85 billion and $8.6 billion plus 40 options valued between $6.3 billion $6.9 billion, bringing the potential value to $13.85 billion and $15.5 billion using market values.

Currently, there are 30 Airbus A220-300 with options for 30 more, 100 Airbus A320neo family airplanes plus 69 Airbus A350 airplanes with just five Boeing 787 on order. So, Boeing is set to lose significantly.

In the Air France fleet, the single aisle share for Airbus will increase modestly as the airplanes on order will be used to replace Airbus airplanes. Possibly Air France will look at its 30 purchase rights to be exercised to replace its Embraer fleet but for now I have kept that fleet in the future fleet. The Boeing 777-200 and Airbus A330 airplanes will be replaced by 33 Airbus A350s which will reduce Boeing's share in the wide body fleet from 66% to 50% and the overall share in the Air France fleet will drop to 21% from 30%.

KLM is where big changes are set to happen with Boeing completely losing its single aisle share and Airbus getting a 38% share while a total of 35 Airbus A350s likely will be absorbed to replace the current Boeing 747-400 freighter fleet, the Boeing 777-200 and the Airbus A330 dropping Boeing's fleet share from 85% to 54% with the Boeing share in the entire fleet dropping from 58% to 23% while Airbus climbs from 6% to 41%.

At Transavia, the current order size suggests a 50:50 fleet share but it's more than likely that the 60 options that Air France-KLM has will be exercised making Transavia all-Airbus over time.

Looking at the share development in the fleet, Boeing is losing big. Its single aisle share will drop from 44% to 15% while Airbus will provide nearly 60% of the single aisle fleet. In the wide body segment, Boeing will see its share decline from 74% to 52% and Airbus will climb from 26% to 48%. The overall share for Boeing will drop to 54% to 27% while Airbus climbs from 28% to 40% and most likely after exercising the options that the company has to buy 60 Airbus A320neo family airplanes, Boeing's share will drop to just 18%.

How Boeing Could Lose This

That Air France would lean toward Airbus hardly comes as a surprise. That Boeing would look at Airbus for its Boeing 737 fleet is a bigger surprise, but there are two very clear reasons for that. The first one is that Schiphol Airport is facing challenges accommodating the growth ambitions of KLM as the government is looking to cap the number of flights allowed. For KLM, this means that they had to look at bigger airplanes. The Airbus A321neo then quickly comes in the picture while the Boeing 737 MAX 10 is too late to the market to facilitate Boeing's needs. The Airbus A350 might be too much airplane as an Airbus A330 and Boeing 777-200 replacement but it's a highly capable airplane. In the past, Boeing has won some orders because the competition provided too much range capability which comes at a cost in dollar value for purchase as well as efficiency. The Airbus A350 family is more a pure Boeing 777 replacement than the Boeing 787 which provides a Boeing 767 replacement as well as a replacement to the lower end of the Boeing 777 segment. This is where Boeing might have lost it as the Boeing 787 does not cover replacement for bigger airplanes such as the Boeing 777-300ER and the Airbus A350-1000 is more precisely positioned to provide that replacement. Boeing simply could not deliver in time and the Boeing 787 for once was not enough airplane for a customer.

The second reason why Boeing could lose this is that Air France-KLM is aiming for a unified fleet. The company no longer lets fleet decisions be made on airline level. The former CEO of KLM, Pieter Elbers, resisted this change and that for a long time put Boeing in the top spot to still provide the bulk of KLM's replacement needs. With the decisions now being made at the airline group level, Airbus is favored as Air France heavily leans toward Airbus and is the bigger airline in the group.

The only advantage Boeing had in this was the in-house maintenance capability for the Boeing 787, but adding Rolls Royce to the KLM maintenance portfolio also offers value to its maintenance business. So, what was an advantage for Boeing was also a pitching point for Airbus and Rolls Royce.

The Last Chance For Boeing

For Boeing, there's one chance left and that is the Boeing 777-300ER replacement. It seems that with 40 options for the Airbus A350, Air France-KLM is hedging its chances. It could exercise those orders to eventually replace the Boeing 777-300ER or it could consider the Boeing 777-9, which also is not certified yet. Air France-KLM is keeping the Boeing 777-9 in mind as a possible replacement for the Boeing 777-300ER and that seems to one of the last opportunities apart from a top-up order for the Boeing 787 to remain at least somewhat meaningful in the fleet in the coming decades, but for now Boeing suffered a big loss.

Conclusion: A Painful Loss For Boeing

The only conclusion that can be drawn is that when it comes to Air France-KLM, Boeing lost everything they could possibly lose leaving hopes on a Boeing 777-300ER and incremental orders for the Boeing 787 over time to support growth as the only chances to maintain and slightly grow the fleet share. Even without Air France-KLM, Boeing will do well in terms of recovering its balance sheet so I'm maintaining my buy rating. But we have yet to see a major campaign where Boeing wins back a customer in a head-to-head competition and what the Air France-KLM order shows is that even long-standing relations can diminish over time as company structures change and product development stalls.

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