In the light of our previous posting related to Airbus and Boeing continuing to experience supply chain production scale-up challenges, we turn some attention to new news related to Bombardier’s C-Series program.
For the past several years Supply Chain Matters has highlighted Bombardier’s C-Series aircraft program, particularly challenges related to gaining market attraction as a viable alternative to more technology advanced single-aisle commercial aircraft needs. This effort placed Bombardier in direct competition with the Airbus A320 and Boeing 737 for new commercial airline orders. In 2013 Supply Chain Matters declared that the C-Series could indeed be a competitor.
A series of multi-year program setbacks and lack of substantial customer orders have resulted in building financial loses and questioning whether the aircraft would indeed make any mark. The aircraft is powered by the new geared turbofan technology provided by Pratt & Whitney which has experienced its own start-up design and production challenges. Upwards of $3.2 billion have already been written off from the program. Now, there are some signs of life amid some important new orders.
Last week, Delta Airlines agreed to acquire 75 of the CS100 model aircraft with options for an additional 50 aircraft, along with agreeing to serve as the U.S. launch customer. Delta additionally has the option to convert some of the latter orders to the large CS300 model. The firm order was valued at $5.6 billion in U.S. dollars and was characterized as possibly providing some measure of street credibility for the C-Series program. In announcing the order, Delta’s CEO indicate that the airline’s decision brings the C-Series as a third option in the mainline aircraft marketplace.
Deliveries are expected to begin in the spring of 2018 and Delta now represents Bombardier’s largest commercial aircraft customer. Delta announced a new order for Airbus A321 jets as well. Industry watchers and executives indicate that Delta was able to negotiate a very attractive financial deal for the C-Series jets. According to Delta, the CS100 will provide better fuel efficiency and a 30 percent improvement in maintenance costs over Delta’s existing Boeing 717 aircraft fleet.
Last week Bombardier reported year-over-year revenue and profitability declines. According to business media reports, the C-Series is not expected to reach a break-even cash flow basis until 2020. The company remains saddled with a large debt load as-well.
With the new Delta order, the diversified transportation equipment manufacturer has secured 325 firm orders for both the CS100 and CS300 aircraft, including airline customer Lufthansa and its Swiss International unit. According to business media reports, the company is still awaiting a commitment from government owned Air Canada for 45 jets, amid some threats of violation of World Trade organization prohibiting direct subsidies of aerospace by domestic governments. The company is seeking financial aid from Canada’s federal government but those talks remain uncertain. Bombardier has raised $2.5 billion since October after agreeing to sell almost half of its take in the C-Series program to the Quebec government as well as selling a stake in its train-making operations to a Quebec pension fund.
Supply Chain Matters has previously noted signs that commercial aircraft supply chains supporting both Airbus and Boeing may indeed be faltering in their ability to scale-up current and future production volume output commitment milestones. The first clear sign came in February when Boeing transmitted a supply chain shock wave by warning that total 2016 production output and deliveries would be lower than that of 2015.
Last week, both commercial aircraft global producers announced their Q1 financial performance which included ongoing challenges related to supply chain challenges and expected performance for 2016 total delivery commitments.
Airbus CEO declared that 2016 has turned out to be the challenging year that was anticipated. Aircraft deliveries, cash and earnings were noted as heavily loaded towards the end of the year. While total revenues matched year-ago levels, net income and free cash flow were considerably below Q1 year ago levels. Further noted in the context of supply chain:
“The A350XWB ramp-up is progressing with the focus on bottlenecks in the supply chain, reducing outstanding work and controlling recurring costs. This is increasingly challenging. The target for a monthly production rate of 10 A350s by the end of 2018 remains unchanged. Five A320neos were delivered in the first quarter to two customers. Pratt and Whitney is committed to supplying new engines for aircraft delivery from the summer of 2016. The engines are expected to be delivered at the right level of maturity to enable the NEO (new engine option) ramp-up in the second-half of 2016. Overall, the A320 ramp-up preparation continues despite temporary supply chain challenges that are expected to be recovered at year-end.”
From or lens, such candid detail from a CEO related to the global producer’s most critical new product introductions is a clear sign of concerns related to various supply chain challenges.
In May of 2015, we noted that Airbus conducted an operational review of its crucial A320 supply chain amid a backlog of 5100 booked customer orders, many of which were for the new engine option version. In February of 2015, the company indicated that it had plans to increase the monthly production rate to 50 aircraft per month by early 2017, while evaluating an even larger cadence amid existing production of 42 A320 aircraft per month at the time.
In December of 2015, Airbus had to delay the initial A320neo delivery fulfilment milestone. Airline customer Lufthansa stepped-up at the last minute to serve as first delivery customer after former designated launch customer Qatar Airways refused to take first initial delivery because of last-minute operating limitations of Pratt’s new geared turbofan, PW1100G Pure Power aircraft engine. Lufthansa did take delivery of the first A320neo aircraft in January, but without any ceremony, fanfare or appearance of the “neo” decal on the aircraft. The explanation for the delay provided by Lufthansa was added technical acceptance and documentation needs required from engine manufacturer Pratt & Whitney as well as Airbus. Subsequent industry reports pointed to an engine cooling recycle issue for the engine when operated in dry high heat desert climate operational conditions.
Reporting on last week’s Q1 financial performance from United Technologies, the parent of Pratt, The Wall Street Journal provided somewhat more detail related to the new geared turbofan engine. Reported was that Pratt was changing its production process to eliminate a cooling issue with the engine when operating in high heat climates between flight cycles. That correlated with the reports in January regarding performance and certification needs related to the new engine. The production change is expected to be completed by June.
Regarding the A350XWB, there were previous reports of supply challenges related to the aircraft’s seats and interior cabin features among other supply issues.
In Q1, Airbus delivered 125 aircraft to 49 customers. Deliveries included:
103 A320 aircraft including five A320neo models
13 A330 aircraft
4 A350 XWB aircraft
5 A380 aircraft
As of the end of March 2016, commercial aircraft order backlog was reported as 6716 aircraft orders, of which, nearly 81 percent consisted of the single aisle A320 family of aircraft. That equates to over 13 years of production at current quarterly output levels.
Boeing’s Q1 Performance
Boeing reported higher revenues but lower profits for its Q1 financial reporting. Total revenue increased 2 percent from the year-earlier period while core operating earnings decreased 21 percent, missing analyst’s profit expectations for the first time since 2011. Boeing incurred an additional $243 million pre-tax charge related to a new U.S. Air Force tanker development program that has been plagued by product design and subsequent production delays.
The Commercial Airplanes business segment reported that revenues decreased to $14.4 billion, a six percent decrease from the year-earlier period primarily from lower delivery performance.
Boeing executives have increasingly pointed to operational cost challenges brought about by a more competitive industry new aircraft pricing environment. In addition to reduced deliveries, Boeing had recently announced specific job cuts and cost reduction efforts involving cuts of more than 4500 positions by June. Boeing had indicated that the commercial aircraft business segment expected to initiate about 2400 of these cuts via attrition and approximately 1600 through voluntary layoffs. The cuts included “hundreds” of managers and executives which would indicate a trimming of organizational hierarchy. Boeing continues to maintain pressure on current suppliers for cost cuts and productivity increases. Yet, During Q1, Boeing purchased an additional $3.5 billion of the company’s outstanding shares leaving $10.5 billion remaining under the current repurchase authorization to be completed over the next two years. Boeing has additionally taken steps to leverage more revenue from service parts revenues involving proprietary part designs taking away some revenue opportunities from major suppliers.
In Q1, the latest quarter, Boeing delivered 176 commercial aircraft that consisted of:
121 737 aircraft
23 777 aircraft
30 787 aircraft
1 747 aircraft
1 767 aircraft
Order backlog remains described as robust at $480 billion with over 5,700 commercial airplane orders. At current Q1 product volume that backlog equates to a little over 8 years of customer order backlog.
Thus, for the two dominant manufacturers of commercial aircraft, supply chain challenges have once again come back as concerns amid an environment of robust order backlogs. Each has different manifestations and supplier challenges, and each reflects on internal operational scale-up as well. More and more, challenging product design among the most critical supply components, including aircraft engines will continue to be the linchpin towards achieving required production scale-up milestones.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Equipment and capital goods manufacturers have increasingly re-discovered new and growing revenue opportunities that reside in added services and service parts sectors related to in-service equipment. Such opportunities are especially pertinent across commercial or defense focused aircraft which have operational service that spans many years of service. However, when an industry dominant such as Boeing decides that it wants to take more control as well as revenue cut of all service parts, the financial implications and subsequent impacts will reverberate among all key suppliers.
Today’s edition of The Wall Street Journal reports such an implication as Boeing elects to secure a new source of revenue beyond building aircraft. (Paid subscription required) The report indicates that whereas in the past, Boeing’s largest suppliers such as Spirit AeroSystems or Rockwell Collins could sell respective manufactured parts directly to airline and aircraft operators for in-service service replacement needs, the OEM elected in late February to prohibit suppliers from directly selling proprietary service parts, along with suspending licenses to suppliers to sell any such proprietary parts to its customers. The WSJ characterizes this development:
“It is the most aggressive move to-date in Boeing’s year-long effort to assert control over distribution-and the resulting revenue- of parts.”
According to the report, Boeing is looking to nearly triple revenues associated with commercial and defense aviation parts and services business by 2025.
Supply chain teams in these sectors know all too well that margins on service parts can far exceed those for original equipment production needs. According to the WSJ, it can be upwards of 4X more than what Boeing pays for the part to support initial production. Suppliers will often forego margins on supply contracts to a customer such as Boeing with the expectation that multi-year margins can be garnered in service parts needs over the operating life of an aircraft model.
In a highly regulated industry such as commercial or defense focused aircraft, certain structural or key operating parts have designated service-life provisions which must be adhered to, thus assuring ongoing component stocking and service part demand needs.
The WSJ report further links these moves to Boeing’s ongoing Partnering for Success initiative addressing added cost control opportunities among existing suppliers. According to the report:
“Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised (supply) contracts were complete.”
The report cites a Credit Suisse aerospace industry analyst as indicating:
“The economics of being a Boeing supplier could be facing their greatest challenge yet.”
While airlines themselves have become increasingly concerned by the rising prices of service parts charged by suppliers, by our Supply Chain Matters lens, this revised strategy by Boeing does not necessarily address nor mitigate that trend. It obviously takes away profitability opportunities for suppliers while adding yet another intermediary in the service parts supply chain.
One of the most promising service management opportunities related to commercial and defense focused aircraft resides in the leveraging of Internet of Things (IoT) focused technologies that would allow operating equipment the ability to communicate service and replacement needs based on operating environmental conditions. Rather that static, fixed maintenance schedules, the opportunity is for the equipment itself to self-diagnose its parts replacement needs.
Many original equipment manufacturers are thus positioning to take advantage of such technologies in new service focused business models. That includes aircraft engine producers such as General Electric and CFM International. With this latest move by Boeing, a new participant is added to the overall business model, a participant that must share the same technology tenets being promoted in automated performance monitoring and service dispatch. Add the notion of IoT platform providers positing for their portion of the overall business model via platform adoption and subsequent dominance, and the picture begins to turn to one we have witnessed before with breakthrough technology. Every participant attempting to position for leveraged control of a promising new business model while target customers have to determine what all of this implies for added efficiencies or cost savings.
The dilemma of commercial aircraft supply chains that presented multi-year order backlogs and insatiable demand for more fuel-efficient technology-laden new aircraft has met the reality of more educated and aggressive airline customers, coupled with rapidly changing economic times. These forces are inserting their influence on aircraft pricing, delivery expectations and operating service needs.
Boeing is now responding to these needs by aggressive supply chain cost and headcount reductions, and now, demanding its proportional cut of service parts revenues. In essence, like too many supply chain dominants, the picture is again moving the need of cost reduction or added revenue needs down the supply chain.
More and more, the notion of we are all in this to share industry growth opportunities together reverts back to the supply chain dominant as the ultimate long-term benefactor.
Respective suppliers will obviously have to determine their own response strategies. Larger suppliers will be able to find means to remain resilient to such changes while smaller suppliers may feel the bulk of the pain. In the long-run, the party that ultimately controls the customer relationship along with product and process design ends up to be the eventual winner.
In mid-February we alerted Supply Chain Matters readers that Boeing’s Commercial Aircraft business was planning job cuts as part of a cost-cutting drive. The party line for this action was a response to rising competition from Airbus along with pressure from customers for lower pricing on new aircraft. In February, the aerospace firm indicated that it would utilize a combination of attrition and voluntary layoffs to primarily trim its executive ranks.
Today, The Wall Street Journal and other business media are reporting the announcement by Boeing that it plans to cut more than 4500 positions by June. Boeing is acknowledging to media outlets that in its commercial aircraft business segment the firm expects to initiate about 2400 of these cuts via attrition and approximately 1600 through voluntary layoffs. The cuts include “hundreds” of managers and executives which would indicate a trimming of organizational hierarchy. When considering previous reductions of 1200 positions, the overall reductions are expected to reduce Boeing’s overall employment by roughly 5 percent. The company has further indicated that any involuntary separations of unionized workers “would only be utilized as a last resort.”
Further included in expected cost cuts are reductions in inventory levels, improved productivity and significant cutbacks in business related travel. How these forthcoming cuts will impact the broader supply chain is yet to be determined.
Regarding our last update, there still appears to be no word concerning a U.S. Securities and Exchange Commission (SEC) has launching of a probe of Boeing’s accounting methods related to both the 787 Dreamliner and 747 programs.
In September of last year, we updated Supply Chain Matters readers on the official opening of the Airbus’s first-ever commercial aircraft manufacturing facility in the United States. The $600 million plant, located near Mobile Alabama is designed to produce various Airbus single-aisle aircraft specifically for the U.S. market.
Airbus announced this week that the first aircraft produced at the U.S. facility flew for the first time on Monday. The brand new A321, destined for JetBlue Airways, took off from the Mobile Aeroplex for a 3 hour and 26 minute checkout flight where tests were conducted on engines, systems and structural performance. According to Airbus, more than 300 employees at the Mobile facility cheered as the aircraft lifted-off.
Following this maiden flight, the aircraft is scheduled for a few more additional weeks of final production before delivery to JetBlue, per the schedule noted last year.
This plant was original announced in 2012, when the state of Alabama offered Airbus a package of what was reported to be $100 million in incentives. Planned production for the new facility includes the A319, A321, and A320 models, as well as the new A320 Neo model. As noted in our September commentary, plans for this U.S. facility call for of a production rate of 40-50 single-aisle aircraft annually, and while that volume level equates to nearly all of Airbus’s monthly production level from all of its global production facilities, it does represent a significant anchor for a U.S. manufacturing presence.
Supply Chain Matters extends our Thumbs-up salute to Airbus U.S. manufacturing and supply chain teams for this noteworthy accomplishment