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Airbus and Boeing Report 2016 Year-End Operational Performance Amid an Industry Inflection Point

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Once again, both Airbus and Boeing declared that they each exceeded operational performance targets in 2016 but the numbers would indicate an industry inflection point is at-hand, one that has implications for the collective industry supply chain ecosystem for the next several years.  Boeing 737 Max Production Line

Airbus

Airbus announced the delivery of 688 completed commercial airliners among 82 customers in 2016 representing an 8 percent increase over 2015 delivery performance. Of the total, upwards of 79 percent of total deliveries originated in the A320 aircraft line-up, including 68 of the new, more fuel-efficient model A320neo (new engine option).

During 2016, Supply Chain Matters highlighted some significant challenges related to delayed deliveries of the innovative new Pratt & Whitney geared turbofan engine featured on the neo model. Pratt had to cut back its original delivery commitment of 200 to 150 because of several supply and production challenges. With announcement of the final delivery number, we can now estimate that customer deliveries of 71 percent of the A320 family aircraft came in the second-half of the year. In the month of December alone, 66 A320 model aircraft were delivered, 45 in the new engine option. That would seem to imply that Pratt made the bulk of its revised engine delivery commitments promised for the end of the year. In its year-end announcement, Airbus indicated that it has now commenced deliveries on both engine variants of A320neo, to include the CFM International LEAP 1A as well as the Pratt PW1100G model engines.

Another noteworthy data point related to deliveries was the 49 A350 XWB aircraft delivered in the year.  This model was dogged with component supply shortages related to interior seating, lavatory, and other interior components throughout the year. The fact that Airbus actually delivered just short of its 2016 goal of 50 A350’s in 2016 is a testament to detailed planning and collaboration with key suppliers.

The European aircraft producer further achieved a total of 731 net orders from 51 customers, eight of which were new. That included a mix of 604 single-aisle and 124 wide-body aircraft.

At the close of 2016, Airbus’s overall order backlog stood at 6874 aircraft valued at $1,018 billion at list prices.

Boeing

U.S. based Boeing announced the delivery of 748 completed commercial aircraft among 100 customers, taking the industry title of highest delivery number. Of that total, 65 percent of deliveries (490) originated in the 737 single-aisle model. The 2016 delivery performance of 748 represented a decrease of 762 aircraft delivered in 2015. Boeing made a management decision earlier in the year to throttle-back the production delivery rate for 2016 to control costs and boost profitability.

A continued challenged program remains that of the 787 Dreamliner, which recorded a total of 137 completed aircraft in 2016, two more than the 135 total delivered aircraft in 2015, despite achieving break-even profitability of this program. Keep in-mind that airline customers pay the bulk of an aircraft’s negotiated price at time of delivery.  The leading-edge designed 787 Dreamliner was first unveiled in 2007 representing the most fuel-efficient aircraft at the time, and a planned more innovative replacement for aging 777 operational aircraft. The aircraft was originally planned to enter service in 2008, but first flight did not occur until late 2009. After a series of highly visible snafu’s related to explosions with its lithium-ion batteries resulting in a several month FAA grounding, the Dreamliner did not enter full operational service until 2011, and today, two separate production facilities produce finished aircraft. Boeing has now elected to shelve plans to increase monthly delivery rates from 12 to 14 monthly.

Chicago based Boeing reported a total of 668 net orders in 2016 worth $94.1 billion at list prices, well below the 768 net orders booked in 2015. This represented the company’s weakest year for new order growth, a sign taken by Wall Street that the prolonged boom in aircraft sales may be waning. Boeing actually secured gross orders for 848 new jetliners but experienced cancellations of 180, the majority of which were from customers switching from wide to narrow aisle aircraft. The company’s new order rate considerably lagged in the second-half of the year, and ultimately led to sudden senior management leadership change for the Commercial Aircraft business arm.

 

Our stream of Supply Chain Matters commentaries related to commercial aircraft supply chains have painted a picture of an industry that is designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels is clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns.  Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings.

All of this is about to change and a declared industry inflection point is at-hand. We will dive deeper into this inflection point when we drill down on 2017 Prediction TenIndustry-Specific Predictions coming at the end of this month.

For the industry’s respective multi-tier supply chain, the implications of this inflection point are sobering in terms of planning windows through the year 2020. The decline of new order flows for higher margin wide aisle aircraft place the major emphasis on narrower margin single-aisle aircraft that must produce higher volumes to meet financial business objectives.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Unsettling News Flows from the Commercial Aircraft Sector

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As industry supply chain professionals look forward to the Christmas and New Year holidays, some industry supply chains continue to manage tireless efforts toward meeting 2016 end-of-year production milestones. At the same time, industry supply chain senior executives must look to the coming year for business, process and technology investments required to meet line-of-business and functional business objectives.

One industry that Supply Chain Matters has continually brought reader visibility to is that of commercial aircraft industry which finds itself in the current two-fold position of having to make 2016 end-of-year production milestones while having to grapple with other challenges for the upcoming one or two years, all with a current record backlog of booked airline customer orders.

What is more interesting, however, is that both are approaching these challenges from different overall business objectives.

Boeing

We, along with other business media have noted that Boeing’s ongoing business goal seems to be focused on increased profitability and shorter-term shareholder returns. As an example, this year, the company will repurchase $7 billion worth of its shares to buoy its  stock price, and plans to set aside an additional $14 billion to repurchase shares over the next two-plus years.

Boeing has also communicated its belief that there has been a recent decreased interest among airline customers for wide-body aircraft orders. Business media on the other hand points to customers with a more wait-and-see perspective towards the newly announced 777x model aircraft as well as increased price competition from rival Airbus in the wide-body category. When President-Elect Donald Trump took to social media to publicly chastise Boeing for the ballooning replacement cost related to the new Air Force One aircraft, the CEO of American Airlines commented that he was not at all surprised by Boeing’s high wide-body prices.

Last week, the Seattle Times reported that: “The worst-case scenario that Boeing outlined six-weeks ago for cutting production of the large 777 jetliner in Everett has become the reality.”

The aerospace manufacturer has indicated that it does not have enough booked orders for the current model 777 to sustain the 2016 production rate of 8.3 aircraft per month.  Readers may recall that a new 777x model is scheduled for market introduction in 2020 and the aircraft manufacturer had previously had an objective to land additional customer orders for the older but highly popular 777 to maintain current levels of production capacity until the new model production build kicks-in.

Boeing had already implemented a reduction to 7 aircraft per month in November, and now plans to cut 777 production to five per month by August 2017, and to 3.5 airplanes per month in 2018, as plans for the first six 777x prototype flight test aircraft commences.

The Times report indicates that such cuts involving the lucrative wide-body aircraft will inevitably mean job cuts among the 777 workforce. Indeed, The Wall Street Journal and other business media have issued reports today indicating Boeing is planning a voluntary layoff program to start in early 2017, with the possibility of compulsory job cuts if voluntary needs do not meet expected headcount reductions.  The company has not detailed the full extent of further job cuts its expects to be implemented in 2017.

The timing of such announcements is obviously not the best, coming just before the holidays.  Recall that a new CEO for Boeing Commercial Aircraft, Kevin McAllister was recently announced and became effective in late November. We highlighted a Seattle Times commentary noting that former commercial CEO Ray Connor had precipitated a sharply negative turn in Boeing’s relationships with its various labor unions. Much of this animosity came during plans to source manufacturing and supply chain related strategies for the company’s next generation 777X aircraft. It would now appear that another round of animosity may be in the cards with the latest announcement of headcount reductions.

Airbus

Rival Airbus has its own growing set of production challenges, but driven mostly by supply shortfalls. The Toulouse based manufacturer’s goal in 2016 has been to ramp-up production levels as much as possible and take advantage of what it believes is a competitive time-to-market opportunity in the global market,

The recent Europe edition of The Wall Street Journal reports that the aerospace producer continues to struggle to meet its target to deliver 670 new aircraft this year. To make or surpass that target, the company must deliver a record 94 aircraft this month.  Delays continue to be attributed to specific component supply shortfalls.

The most visible has been the ongoing laggard delivery of the new Pratt & Whitney geared-turbo fan aircraft engine used to power the new A320neo aircraft. The latest update from parent United Technologies was that Pratt was making progress in catching-up but there are still what is described as a “handful of parts out there that we’re chasing.” Likewise, the wide-body A350 production schedule has been impacted by reported delays in aircraft seats and toilet doors.

On the new aircraft front, the European aerospace producer’s largest twin-engine long-range aircraft, the A350-1000 will slip its planned November 2017 maiden flight plans until the second-half of 2018.

The President of Portugal’s TAP airline indicated to the WSJ that its order for new A330neo wide-body aircraft has slipped an additional three months. The aircraft was initially promised for the end of 2017, but has now slipped to March 2018. Airbus declined to comment regarding this delay by the WSJ points out that the aircraft will feature new engines made exclusively by Rolls Royce.

Two commercial aircraft focused supply chains driven by different business objectives and plans, each exhibiting operational, tactical and somewhat strategic focused setbacks.

The challenge continues.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Pratt and Whitney Unionized Workers Ratify New Five Year Labor Contract

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There is an update to our Supply Chain Matters streaming commentaries related to aircraft engine producer Pratt & Whitney. In October, we published a Pratt focused commentary with the theme of the good and not so good news when on eyes are focused on your supply chain. Over the weekend, unionized workers ratified a new five-year labor contract assuring some longer-term stability regarding the firm’s workforce.

The pact was approved by two labor unions representing upwards of 2600 production related workers at Pratt facilities in East Hartford and Middletown Connecticut. With these new labor agreements, Pratt can move forward in addressing ongoing challenges to double existing production levels of its new geared-turbo fan (GTF) engines.

According to published reports the new contract provides for 2.5 percent wage increases in each subsequent year of the contract along with enhancing certain pension focused terms among existing employees. As a concession to management, new workers hired after January 1, 2017 will be enrolled in a defined-contribution retirement plan as opposed to the traditional defined-benefit plan that existing workers currently have.

With this settlement, commercial aircraft OEM’s Airbus and Bombardier can breathe some sigh of relief in that Pratt can now move forward with its short and longer-term delivery commitments to match current delivery commitments for both the new Airbus A320 neo and Bombardier CS family of aircraft, both programs of which have been impacted by engine technical and production shortfall challenges involving the new GTF engines. Airbus has especially been impacted for current delivery commitments of the new engine option A320. The initial challenge comes in just a few weeks since Pratt must deliver on its end of 2016 delivery commitments, followed by a near doubling of deliveries planned for 2017.

This news is somewhat of a contrast to parent United Technologies other business division, heating and air conditioning unit Carrier, which made lots of headlines last week in a confrontation and subsequent agreement with President-elect Donald Trump regarding the movement of upwards of 1000 jobs to Mexico.

Bob Ferrari


Airbus Announces Corporate Restructuring and Headcount Reductions with Some Supply Chain Management Implications

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Airbus announced plans to trim its overall workforce by as many as 1164 positions in a new iteration of a corporate-wide restructuring initiative. These positions were described as support and office roles and the company hopes to make such cuts relying on voluntary departures, early retirements and relocations. Airbus currently employs upwards of 136,000 people globally.  Airbus A319neo

According to a report by the Financial Times, duplicate functions will be eliminated in research, communications, human resources and other group services.  The multi-nation firm further indicated that it would transfer 325 positions to complete the relocation of headquarters staff from former centers in Paris and Munich to Toulouse. The Associated Press quotes an Airbus spokesperson as indicating that 640 of the job cuts will be in France, 429 in Germany and the remainder in Britain and Spain.

Also announced is that 230 new positions would be created to help this aerospace manufacturer embrace digital technologies. As Supply Chain Matters highlighted in previous commentaries, Airbus is aggressively moving toward broader visibility and quicker decision-making related to its overall supply chain. Initiatives such as the Airbus Digital Control Room now serve as the heartbeat of its supply chain, providing a singular information and resolution control hub to manage issues occurring across the multitude of multi-tier suppliers that support Airbus’s production volumes. Other efforts related to digital supply chain and Internet-of-Things (IoT) enabled active devices are also underway.

Airbus CEO Tom Enders indicated that the restructuring would quicken overall decision-making, provide additional cost savings and narrow the profitability gap with rival Boeing. Airbus must develop a final plan with respective labor unions which is expected to occur by the middle of next year.

The current restructuring is part of a multi-year, shareholder backed initiative to reduce French, German and Spanish government involvement in company decision-making. Fabrice Bregier, who heads the commercial jetliner unit now serves in the role of chief operating officer that includes leadership responsibilities for overall supply chain efforts supporting both aircraft and other group activities.

Principal rival Boeing had previously announced headcount reductions in February and March amounting to 4500 positions, also involving a corporate-wide restructuring.


WTO Rules Against Boeing Production Related Tax Incentives

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A World Trade Organization (WTO) panel has ruled that upwards of nearly $6 billion of prior tax incentives provided to Boeing improperly excluded foreign competition. According to a report by the Associated Press, these incentives that were set to be awarded between 2024 and 2040 apply to the production of the wings to be part of Boeing’s new 777x wide-body aircraft. Boeing 787 production line

In late 2013, Boeing issued RFP’s among multiple U.S. states seeking proposals to source final production and assembly of the new 777x aircraft, which is being designed to carry upwards of 400 passengers on long-haul flights. At the time, Boeing’s threat to source design engineering and production outside of Seattle was part of an effort to seek supplemental longer-term concessionary agreements from various labor unions on longer-term wage and benefit costs. Lobbying efforts were also initiated with the State of Washington which resulted in a package of tax and other incentives valued at $9 billion through 2040 to keep the bulk of the 777x program activities in the state.

This development represents the latest round of commercial aircraft related trade disputes among the United States and the European Union with Boeing and Airbus being the major accusers. The EU voiced its concerns to the WTO over the State of Washington’s tax incentive benefits to Boeing shortly after they were announced, claiming that a total of $8 billion in incentives were prohibited subsidies and needed to be rescinded by the WTO.

In its most recent ruling, a WTO panel opted to deny the overall EU claims, but did focus on the specific incentives related to the aircraft’s wing production. The Financial Times reported that this is only the fifth time in the WTO’s history that it has defined a subsidy as “prohibited.” Two months ago, the WTO found that the EU had failed to unwind billions of dollars in unlawful subsidies to Airbus. That ruling could allow the U.S. to impose tariffs on European goods.

A statement from the EU Trade Commissioner indicated: “We expect the U.S. to respect the rules, uphold fair competition and withdraw these subsidies without any delay.” Boeing on the other hand indicates it will appeal the ruling and again characterized Airbus as being non-existing without “$22 billion in illegal subsidies from the EU.”

This ruling comes on the immediate heels of the unexpected election of Donald Trump as PresidentElect of the United States, with a platform for the U.S. to become more hard lined on global trade policies. That will likely amplify the rhetoric and subsequent actions related to this recent WTO ruling.

The battle among both aircraft manufacturers on opposite sides of the ocean has been long noted as the most contentious rivalries involving global trade and the overall sales of commercial aircraft among multiple foreign countries. All came to a head in 2011 when the WTO ruled that both companies had collected billions in unlawful assistance and incentives. In the wake of a rising threat from China’s heavily subsidized aircraft sector, Airbus CEO Enders has since called on his U.S. rival to initiate talks on a new global settlement for government support which would benefit both sides of the Atlantic.

The announcement further comes on the heels of the sudden departure of Boeing’s overall head of the Commercial Aircraft business unit to be replaced by a General Electric Aerospace executive. Business media reports regarding this sudden senior executive move point to deep animosity among Boeing’s labor unions over the process of 777x production sourcing and ultimate plant selection.

 


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