ETOPS rating problems for Dreamliners an ongoing issue ?
Read the behind the paywall NBR article on this and have also read the FAA release when they reduced the ETOPS rating on RR powered Dreamliners.
What is now (sadly) clear is this ETOPS reduction is costing AIR $30-40m per annum as flights to North and South America cannot be undertaken with these aircraft and some flights to Asia are also affected. Asia flights may involve a suboptimal route to stay within range of a diversionary airport to meet new ETOPS requirements.
Thoughts.
1. It is now clear that AIR are not getting any compensation from RR for the flight restriction impact of this amended rating. I think this is extremely disappointing.
2. What's clear from the behind the paywall article on NBR is that RR are really, really struggling with this issue. Originally the engines were all to be inspected by April 2018. RR have over 300 of these engines in service and are now talking 12 months before engines come back...wasn't especially clear in the NBR article but what is clear is this issue is "sticky".
3. The analyst on NBR thought as this $30-40m was a one off its ok to treat it as an extraordinary item and ignore it going forward, (and to be honest that was my thinking yesterday too)
4. Reflecting on this overnight and recalling the text of the FAA ETOPS rating change I recall distinctly that renewal of 340 min ETOPS is by no means a certainty and it is very clear this will take quite some time.
In my opinion there is a chance that the better rating may never be achieved again which would render the dreamliners as sub optimal for AIR's requirements going forward.
More likely it will take several years for RR to prove the newly designed replacement components are reliable. We have discussed on here before how sometimes problematic engines can go on to be exactly that despite changes in components. I think there is a real chance of that.
Best case in my opinion is that extended twin operating rating is restored in about 3 years. Impact in the meantime is about $30-40m per annum, about 3 cps in annual earnings. Obviously if the rating is never restored the impact on earnings is very sticky.
I think there's about a 50/50 chance the rating doesn't get restored. I have lowered my valuation of AIR by 15 cps. I see fair value at $3.20 cum dividend, $3.09 ex divvy. I am okay to modestly increase my stake at $3.20 cum dividend but that's a yield story at that price and its no bargain in my view, just fair value there.
I also think snow leopard made a good point recently on fuel.