This posting is another reader update regarding the supply chain aspects related to the Boeing 787 grounding crisis.  Our previous Commentary Eight was published earlier this month, and we know can note some somewhat positive news.

On Friday, the Federal Aviation Administration (FAA) approved the design modifications for the Boeing 787 Dreamliner battery system, setting the stage for the return of operational aircraft. After roughly three months from the mid-January global grounding of the 787 because of safety concerns related to its battery systems, the stage is now being set for returning all grounded aircraft into service. During this coming week, the FAA will issue instructions to various aircraft operators for making the necessary aircraft modifications.

Boeing has already pre-staged repair kits for the approximately four dozen previously operational 787 aircraft and will now begin dispatching designated technical teams of assist operators in making the necessary modifications to the lithium-ion battery system. According to the FAA, it will also have teams of inspectors at all modifications locations inspecting the changes and signing-off with proper work completed. Reports indicate that other global regulators are expected to follow the FAA lead but at slightly different timetables. Boeing hopes to have all 787’s flying by mid-May.

To summarize the overall impact of this grounding incident on Boeing, one can turn to a quote from an article printed in The Wall Street Journal last Thursday: “…. The extended grounding has cost Boeing hundreds of millions of dollars, tarnished its reputation and infuriated airline customers after they stuck with the company through years of unrelated product delays.”  Our readers will certainly add select partners in the Boeing supply chain to that list of infuriated. According to media reports, Ray Conner, CEO of Boeing Commercial has indicated that the company invested over 200,000 hours of engineering, design analysis and testing directly related to the current design modification.

After all operational aircraft are successfully returned to service, Boeing will have to quickly turn its attention to a long line of staged finished Dreamliners that have continued to roll off the final assembly line since January. That number could be 50 or more by May.  These aircraft will also have to be retrofitted with the newly approved modified battery system.  Boeing has already sought FAA permission to conduct multitudes of additional test flights to check on fixes to all of these aircraft.

This next phase needs to include restoring the confidence of the flying public in the safety of this aircraft. According to the WSJ, Boeing has elected not to take on the primary role, as originally planned, but to assist operators in various local public relations efforts designed to rebuild confidence in the 787 as a safe airplane.  Many avid flyers have probably viewed the photos of the previous charred and somewhat melted battery compartment.

As we have noted to numerous other Supply Chain Matters commentaries, Boeing’s prior challenge, prior to the current grounding incident, was to operationally ramp-up the 787 production schedule to levels not seen by the Boeing supply chain.  It will, no doubt demand flawless planning and synchronized execution.

This current grounding incident has the potential to add further delays to the longer-term operational ramp-up milestones, and we trust that the Boeing supply chain team will collectively rally to achieve its required milestones later this year and in 2014.  There is much work to be done, cultural, organizational, technical and physical in scope.

We again extend our best wishes.

Bob Ferrari

Supply Chain Matters has previously commented on the notions of how supplier capabilities in continuous product innovation can be both an asset, and perhaps a threat.  We have noted the notions of threats in the high tech and consumer electronics sector where contract manufacturers continually innovate and move deeper into the value-chain of products. China alone has declared aggressive goals for moving upstream in high tech supply chains including more global brands.  It is therefore a matter of time and/or opportunity as to whether vertically-integrated supply chain capabilities of certain contract manufacturers will motivate them to assume a brand presence.

A recent New York Times commentary featured on CNBC.com relates to Mitsubishi Aircraft Corporation, who for decades has assumed the role of supplier for various aerospace supply chains, and is now about to unveil a sleek new 90 passenger MRJ regional jet.  It represents Japan’s bid to assume an OEM brand after almost 70 years.

Source: Mitsubischi web site

The article’s author observes that the Mitsubishi comeback has something to do with being an increasingly outsourced supplier to Boeing, designing and supplying vital parts of aircraft components. A third of Boeing’s 787 Dreamliner is sourced among Japan based suppliers, which includes Mitsubishi Heavy Industries which is responsible for producing the 787’s carbon-fiber wing structures. According to the article, in addition to supplying 35 percent of the value-chain components within the 787, Japan based suppliers are responsible for 21 percent of the 777 and 15 percent of the 767 family of jets.

Interesting enough, the new regional jet features little of the advanced carbon-fiber composite materials of the Boeing or Airbus new models. Neither will it feature lithium-ion batteries for backup power needs. Mitsubishi has relied on ongoing financing from the Japanese government to become a higher profile supplier in aerospace, and is now pinning its hopes on a revival of a Japanese aircraft brand.

Mitsubishi boasts that its soon to be unveiled jet will deliver 20 percent in fuel savings compared to similar sized competitive offerings such as the Embraer 190. It will also compete with Bombardier, COMAC and other global OEM’s in the regional jet segment. The aircraft will leverage new engine fuel saving technologies from Pratt and Whitney along with a thinner wing structure. The company has booked 165 firm orders to date and has goals to land upwards of 5000 orders over the next twenty years, which the article opines as somewhat unrealistic.

Even more interesting is the observation that this supplier must continue to protect its presence and stature in Boeing’s increasingly more ramped-up aircraft output supply chains while becoming a brand to itself.  This will be a rather interesting business case to follow in the unfolding months since it could provide additional signposts on how suppliers transform themselves to both brand owners and key suppliers.

Bob Ferrari

It has been roughly three months since the January grounding of all operational 787 Dreamliner aircraft because of thermal runaway conditions related to this aircraft’s installed lithium ion batteries.  In our previous Commentary Seven penned about a month ago we noted that once U.S. FAA authorities give the go-ahead to Boeing to make its new engineering changes, such changes would take a minimum of 4-5 weeks to complete if everything were to go according to plan. Boeing received FAA approval to go-ahead with its proposed engineering changes on March 12 which included a new series of in-flight tests. Reports since our last commentary now indicate that Boeing has included a newly redesigned battery charging system in its new collection of engineering changes.

Source: Boeing web site

On Friday, Boeing indicated that it had completed its testing of the redesigned lithium ion battery system.  The Wall Street Journal reported that all of the testing methods were approved in advance by the FAA along with the testing methods. After weeks of ground testing, FAA officials accompanied Boeing representatives on a reported “uneventful” two-hour test flight.

The process now enters the final approval stage among Boeing and the FAA.  Some, including ourselves, speculate this regulatory approval stage may drag on since FAA administrator Michael Huerta and U.S Secretary of Transportation Ray LaHood remain focused on insuring that all theories related to root cause of these battery issues have been identified and addressed.  Other global based regulators such as Japan remain focused on their own separate reviews and need to sign-off on the proposed fixes.

The WSJ further reports that Boeing is moving ahead with preparations to ship to all affected air carriers special upgrade kits that will include modified batteries and associated new component parts that will make-up the modified lithium-ion battery system.  Boeing has further marshaled teams of specialized technicians who will be dispatched to the various affected air carrier maintenance sites to help with the installation process.

Boeing is optimistically anticipating a mid to late April timing of the approval and go-ahead process but other industry watchers are indicating June as a more realistic timetable for re-certification of the 787, given the ongoing uncertainties among regulatory administrators.  At least one airline, United Holdings has moved ahead with its operational scheduling and not included its new 787’s supporting flights until mid-June.

Since the grounding crisis occurred in early January, Boeing has been maintaining its production schedule of completing ten 787 Dreamliners per month, which have been staged in field staging areas. Once approval is granted, these staged aircraft will have to be expeditiously refitted with the modified battery system and delivered to awaiting customers.  Suppliers within Boeing’s global chain have also been long anticipating a return to normalized customer delivery schedules so that supplier payments can return to normalcy. One published report is also indicating that at least one 787 customer is requesting alternative sourcing of the lithium ion battery.

Participants in the Boeing 787 supply chain, who have undergone continuous challenges since the start of this program, desperately need to assume an environment of synchronized execution to complete the aggressive monthly delivery needs of over 800 overdue customer orders. We all trust that Boeing will move beyond the current lithium battery incidents to move toward that milestone.  Then again, this program has had a history of unfortunate setbacks.

Bob Ferrari

The biggest news this week in the civilian aerospace industry was Airbus landing a deal from Indonesia based Lion Air for more than 200 new single aisle passenger jets. This order has a value of $24 billion at catalog price, but the industry typically discounts

Source: Airbus web site Lion Air Airbus A320

for larger orders.

The headlines in business media focused on two primary story lines.  The first which was part of The Financial Times reporting was that this deal was the biggest in Airbus history, announced amid much fanfare and ceremony, as well as the third major commitment for A320’s in as many weeks. The Wall Street Journal’s headline reflected that Lion Air had previously been equipping its fleet with Boeing aircraft and this deal represents a shrinking group of airlines that exclusively feature a Boeing fleet.

There is a supply chain connotation to these headlines, one that Supply Chain Matters has been focused on for some time.  Capacity and delivery times within the industry are stretched, while airlines require timely delivery of more fuel efficient aircraft in order to gain a competitive edge. Long term industry forecasts and the realities of over-stretched global supply chains are becoming a reality to customer buying dynamics.

Articles in Bloomberg and FT came the closest to pointing these out.

Both point out that Lion Air, Indonesia’s largest airline has emerged as a key rival to Malaysia based AirAsia, Asia’s biggest discount airline. Lion is now establishing routes in direct competition. The region they both serve will account for 33 percent of global passengers by 2016 according to figures from the International Air Transport Association. Lion Air already has 700 planes on order, with plans to order another 300. AirAsia placed its order for 200 Airbus A320 Neo aircraft in 2011. Both airlines are in a race for market domination and customer attractiveness.

Lion Air’s current order calls for 60 current generation A320’s, 109 of the newer A320 Neo, and 65 A321 Neo’s. Our view is that the 60 ordered current generation aircraft are the hedge to insure Lion air has aircraft to meet its operating plans over the next five years. In its reporting FT cites analysts as validating that Lion Air’s order with Airbus was motivated by needs to expand at the quickest pace.

Bloomberg quotes Airbus CEO acknowledging that: “it’s getting tight for deliveries.  I have only a handful of delivery slots for 2019.  We are looking at whether we can increase that rate.” It hints that production rates for the A320 may be accelerated beyond 42 a month flowing this latest order, but concerns about the ability of the Airbus supply chain to sustain higher levels remains a question.

Both Airbus and Boeing have issued long-term aircraft delivery forecasts that imply an average industry supply chain delivery rate of 1400 to 1700 aircraft per year, and a near doubling of the total aerospace market fleet over the next 20 years. To date, the average annual delivery rate for Airbus during the past three years has been just shy of 500 aircraft while Boeing annual aircraft delivery rate for the past three years is an average of 473 aircraft. With large numbers of booked customer orders in backlog, supply chains that are stressed for capacity and resources, and customers seeking timely deliveries, the dynamics of this market are now showing.  Orders are garnered not just on aircraft innovation and most attractive cost, but on most timely delivery.

The latest Lion Air order is the latest demonstration on the paradigm shift that places supply chain delivery and consistency in execution as a rather important determinant for selecting an aircraft supplier.

Bob Ferrari

It is again time to update Supply Chain Matters readers on regional jet maker Bombardier, its C-Series aircraft program and associated supply chain challenges.

We first introduced our readership to the C-Series program in October of 2010 under the headline of C-Series Joins in the Global Supply Chain Outsourcing Perils of Aerospace. We noted that Bombardier was taking a huge strategic gamble on the

Source: Bombardier web site

supply chain deployment and market launch of the new C-Series aircraft which was originally scheduled for 2013.  The C-Series supply chain is global in scope. Major components such as fuselage wings and tail are sourced in China, Ireland, Italy, and other countries.  All of the major components are to be shipped to Bombardier’s final assembly facility outside Montreal’s Mirabel airport for final integration. Thus the program has huge dependencies on synchronized global logistics and execution.

The aircraft is a 100-150 single-aisle passenger aircraft that is the cornerstone of the company’s plan to compete head-on with the likes of Boeing’s 737 Max and the Airbus A320 Neo for advanced commercial aircraft that can deliver compelling fuel efficiencies for airlines. Besides it lightweight carbon fiber design, the other major innovative aspect of the C-Series is the designation of United Technologies, Pratt and Whitney unit’s new PurePower Geared Turbofan™ engine as its power plant, which utilizes a complex gearing system that spins the front and rear turbo fans at different speeds. This innovative engine has a promise to deliver considerable fuel savings. Product marketing claims 15 percent cash operating cost advantage and 20 percent fuel burn advantage over the competing Boeing and Airbus models. Bombardier executives are also quick to note that the C-Series utilizes conventional batteries rather than the lithium ion batteries that have caused troubles for Boeing’s Dreamliner plane.

As The Wall Street Journal describes in its reporting: “The unveiling of the single-aisle CSeries marks the first time since 1987 that any company has rolled out an all-new plane in the smallest category of mainline passenger jets.” It has been reported that development costs for this new regional jet are near $3.4 billion, thus the stakes for market acceptance and program profitability are very high.

In our last Supply Chain Matters update on this program in November 2011, it was noted that Bombardier’s target was to have 200 to 300 orders between first maiden flight and first delivery in 2013. The main market for the C-series was identified as China where anywhere between 20 to 30 percent of the global fleet could eventually be located. Since that time, China responded with an aircraft program of its own. In a November 2010 Supply Chain Matters commentary, we observed that China based, state-owned aerospace manufacturer COMAC has embarked on a program of innovation and cost competitiveness for narrow aisle aircraft Which features a C Series program. (Coincidental, of-course)  In order to insure strategic options were covered, major component aerospace suppliers such as General Electric and United Technologies jumped-in with strategic development and relationship programs with COMAC and its other China based supplier partners to insure options were covered in China’s aerospace market segment for regional jets. COMAC garnered orders from several of China’s state-owned airlines because of its unique role for contributing to China’s strategic plan for competiveness in aerospace, and continues its declaration that it will provide a compelling alternative offering for the global market.

Last week, Bombardier conducted an unveiling event for media and analysts and announced that theprogram is making excellent progress. However, the program itself has now slipped about six months from its original milestones. First flight of this new aircraft will be conducted by the end of June 2013 with first aircraft delivery expected to be in the first half of 2014. Pratt recently received certification from Transport Canada for its first engine design, and Bombardier project teams are concentrating on achieving a safety-of-flight permit for initializing the test flight phase of the program. Also announced was an extra capacity model developed for airBaltic that will increase CS300 seating to accommodate up to 160 passengers.

In last week’s unveiling, Mike Arcamone, president of Bombardier Commercial Aircraft stated for reporters that Bombardier is aiming to capture 50 percent of the 100-to-149 seat aircraft sub-category over the next 20 years – an estimated $430 billion market. According to a published report by Reuters, at list prices, the 110-seat CS100 is expected to cost $62 million and the 130-seat CS300 $71 million. In contrast, the Boeing 737 MAX costs $82 million and Airbus’ A319 Neo costs $88.8 million. Thus far, the current tally of firm booked orders currently stands at 148, not including an order of an additional 32 CS300 from a Russian customer.  One of the airlines that placed a firm order is reported to be Germany’s Lufthansa. Bombardier remains adamant that it will meet its target of 300 firm orders and at least 20 customers by mid-2014, when the jet enters service. It will need to do so in order to meet profitability goals for this program.

In its reporting last week, The Wall Street Journal noted that both Boeing and Airbus teams were working hard to ensure that the C-Series would not gain any market traction. Boeing’s vice president of marketing is quoted as indicating that the market is moving away from the C-Series. While the firm orders for both rival makers certainly would confirm that perception, the one uncertainty is the past and current track records of both Airbus and Boeing in delivering innovative aircraft programs to original milestones.

Thus, in our view, the C-Series may still have a trump card if it can deliver to current first ship milestones without any further delays.  As noted in our commentary nearly a year ago, a highly uncertain global financial climate, aerospace industry supply chains that have taxed overall supplier capacity and the dynamics within both China and Russia may well either alter or enhance the widow of opportunity for the C-Series program.  Bombardier’s supply chain must therefore execute flawlessly with little margin for error.

The aerospace segment will be the one to watch over the coming months as these market and global supply chain dynamics continue to unfold. We continue to wish Bombardier and C-Series program teams well in their endeavors.

Bob Ferrari

©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.

It is again time for another Supply Chain Matters update to the Boeing supply chain challenges related to the ongoing grounding of all operational 787 Dreamliner aircraft because of thermal runaway conditions related to this aircraft’s installed lithium ion batteries.

In our previous Commentary Six, published just over two weeks ago, we noted the public presence of Boeing CEO Jim McNerney in acknowledging that an expeditious resolution of the lithium ion battery issue was critical to restoring the brand image of Boeing. And indeed, Boeing continues to communicate to government investigators that it has an internal plan developed to address battery issues with hopes to have grounded airplanes operational by perhaps the April time period. However, Boeing battery supplier GS Yuasa elected to take a slightly different public posture regarding proposed fixes to the battery issues.

The CEO of Boeing’s Commercial Airplanes unit has communicated that once U.S, regulatory agencies decide to approve Boeing’s proposed fixes, the aircraft maker is prepared to move “really fast” in final testing and modification to each of the 50 grounded Dreamliners.

However, the regulatory investigative process investigating the two previous battery fire incidents continues to drag on.  On Thursday of last week, the National Transportation Safety Review Board (NTSB) issued its interim investigative report that drew no conclusions as to the root cause of the battery fire problems. The NTSB report noted that in the Boston based incident, the batteries experienced dramatic power fluctuations and other failures that battery designers considered practically impossible. The report further indicated that the various electronic components connected to the battery did not exhibit any failures or defects, thus adding more inconclusiveness to a potential root cause of the battery fires. The NTSB called for forum to be held in mid-April to “better understand the risks and benefits associated with lithium ion batteries, and illuminate how manufacturers and regulators evaluate the safety of new technology.” Indeed the regulative investigative process may well conflict with Boeing’s need for an expeditious resolution.

Also on Thursday, U.S. Transportation Secretary Ray LaHood was quoted in The Wall Street Journal and other business media that he wanted a thorough review of the Boeing plan and that he was going “to ask a lot of questions” regarding the plan.  According to other reporting from WSJ coverage, Secretary LaHood has privately raised questions about Boeing’s proposal and has urged a go-slow regulatory approach “to get to the bottom of what happened, why it happened. And what we can do to prevent it.”

Thus, there really is no conclusive timetable as yet to address when the 787 can be returned to normal operating status.  If U.S. FAA authorities give the go-ahead to Boeing to make the new engineering changes, it is reported that such changes would take a minimum of 4-5 weeks to complete if everything were to go according to plan.

Meanwhile, Tom Enders, the CEO of EADS, parent of rival aircraft OEM Airbus, in a report published by The Financial Times on Friday, called on the entire aerospace industry to learn the lessons from development problems of the Airbus A380 and Boeing 787. In his visit to the U.S. last week, Mr. Enders acknowledged that both companies got “carried away” in introducing new technologies that turned out not to be “as mature as they should be”. In the FT report, Mr. Enders was noted as expressing relief that the A350, the rival to the 787 “in terms of utilizing more breakthrough materials, was two years behind Boeing and was able to learn from the (Boeing) experience.”  Airbus has already elected to drop its original plans to utilize lithium ion batteries as backup power on the A350. Mr. Enders hastened to wish Boeing good progress in resolving the lithium ion battery issues.

Thus, Boeing’s supply chain continues to face continued uncertainties as the regulatory and Boeing’s internal technical investigative processes remain at odds as to a definitive timetable for resolution.  Existing production levels of 5 Dreamliner aircraft per month remain in place while finished planes are moved to idle storage awaiting return to operational status.  Airline customers and suppliers are increasingly seeking financial compensation while plans to ramp-pup 787 production to ten per month by the end of the current year remain jeopardized by potential design retro fitting. The comment from EADS CEO Anders is added fodder to the debate on balancing innovative technology with what OEM’s may define as proven technology.

The most interesting counter-intuitive aspect of this ongoing 787 grounding crisis has been the resiliency of Boeing’s stock price. There have been validated academic studies indicating that in the past, when a public company encounters a highly visible supply chain snafu, the results are often reflected later in erosion of stockholder equity. Boeing stock closed today at $83.94 per share, roughly 10 percent above the $77 level at the initiation of the 787 grounding. Obviously, a majority of Boeing investors have confidence that the ongoing challenges will result in a positive outcome.

Bob Ferrari