C.M.O. 12.15.2009
Credit Market Overview
December 15, 2009
Today is the day! After over two years of component problems, delivery delays and almost every other snafu that could befall its delivery, Boeing (BA) has set today for the first test flight of its new 787 Dreamliner. The actual flight should be approximately 4-5 hours in duration taking off from Paine Field in Everett WA, where BA is based and ultimately landing about 30 miles away at Boeing Field, just south of Seattle.
The 50% of the 787 that is made of composite material has caused the most consternation with “delamination” occurring in where the different components are joined together by things not so composite like nuts and bolts and rivets.
BA’s executives had drawn a line in the sand saying the plane would fly in 2009 and had originally targeted 12/22 as the date although in building planes like flying in them, early is always better than late.
The company has orders for 840 of the big birds, a record for a new aircraft with All Nippon Airways scheduled to take delivery in 4Q10 and other customers after that. UAL Corp.’s United Airlines is has agreed to buy 25 787’s which would be the first new planes the airline has purchased in 11 years along with an option on 25 more.
What might seem as a risky purchase with the economy still taxiing down its own runway seems a bit less so when you factor in the discounts of up to 40% that big buyers can negotiate. With a list price close to $10BN for the planes that’s a discount not to be discounted. “They are clearly buying at the bottom of the market, which is always a smart thing to do”, said John Leahy, COO of Airbus, whose company received a similar sized order for its A350 wide-body.
Getting the plane in the air is not the end of the journey but more a milestone as 12 months of tests lie ahead for the six test planes in subzero temperatures, dessert heat, high altitudes and emergency situations. All of these need to be completed to FAA standards before delivery can be made to ANA.
While many things have gone wrong for BA during the development of the 787 there is one thing that has gone right and that is Uncle Sam or at least one of his employees. Bob Morin, Vice President of Transportation at the U.S. Export-Import Bank.
Long before the government started putting its guarantee on a variety of bank debt obligations the Ex-Im Bank has been guaranteeing loans for Boeing customers allowing the company to keep the planes rolling off the assembly line.
Aviation officials say that without the Ex-Im’s help BA would have been forced to cut production this year which, in turn, would have hurts hundreds of the company’s suppliers, put thousands of skilled jobs at risk endangering billions of dollars in export contracts.
To get an idea of just how important the Ex-Im bank is to BA, last year about 40% of the banks total business were Boeing deals.
Klaus Heinemann, CEO of Dutch airplane lessor AerCap Holdings NV, might have put it most succinctly when he said, “Of course it’s government intervention, but it’s government intervention that works extremely well”.
It would seem the entire transportation sector is wishing BA well as the Dow Transports closed at a new high for the year yesterday.
BA’s CDS have just about dropped from the sky closing at 105bps on 11/27 and 67 last night. The stock started moving higher a bit earlier, touching $47.22 on 10/28 and closing last night at $56.05.
UAUA has been gaining altitude recently as well with the stock touching down at $6.33 on 10/28 before hitting the afterburners to close at $11.52 last night. Not quite a double but close enough for government work. UAUA’s CDS landed at 2048bps on 9/24 and have stayed on the ground since providing a solid runway for the stock.
Enjoy the week.
Jim Delaney
