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Rolls Royce- Another Potential Weak Link for Commercial Aerospace Supply Chains

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Supply Chain Matters has highlighted some percolating supplier weak links among commercial aerospace supply chains from either financial, operational or product quality perspectives.  Certain key suppliers such as Pratt and Whitney have provided signs of such industry concern. Now, broader industry visibility to engine producer Rolls Royce is likely added.

Rolls-Royce Trent 1000 aircraft engine

Source: Rolls-Royce Image Gallery

This week, Rolls Royce reported financial and operational performance for the December-ending quarter and the headline was a $5 billion annual loss driven by a corruption scandal and negative currency factors, along with signs of premature engine component failures.

Recall that this manufacturer is a prime supplier of aircraft engines for the newest models of wide body, longer distance aircraft such as the Airbus A350 XWB and A330 aircraft and Boeing’s 787 Dreamliner.

The reported annualized loss in the latest year reflects a large, noncash accounting charge from the revaluation of U.S. currency hedges after the British pound slumped. It further includes a £671 million one-time charge for bribery settlements with U.S., British and Brazilian authorities after the company admitted to illegal business practices spanning decades.  Operating pre-tax profitability fell for a third year to £813 million from £1.43 billion a year earlier. Total revenues declined 2 percent to £13.4 billion. Chief Executive Warren East indicated to shareholders and analysts that 2017 will provide another challenging year. Shareholders responded with a reported 5 percent decline in the company’s stock value.

The UK based company has now undertaken a corporate-wide restructuring that unfortunately includes the shedding of positions. A reported 600 manager positions are being eliminated along with upwards of 2,600 job losses in the aerospace division. About 1,800 jobs are further reported as being eliminated in the ship-engine group. The company is forecasting annual savings starting at the end of this year of around £200 million as a result of such efforts.

Further, according to business media reporting, the company is preparing for the introduction of new accounting standards that will impact the reporting of near-term profitability. Rolls-Royce typically sells aircraft engines at a loss and makes up revenues during the operating phase through various pay by the hour servicing contracts with airline operators. The company buffers the early losses by booking some of the assured services revenue early. Under new accounting rules, such losses reportedly will need to be reflected immediately, while services revenue should be accounted for as-delivered.

According to reporting by The Wall Street Journal, costs associated with the Trent 1000 engines used to power Boeing Dreamliner’s have also risen as a result of turbine components degrading prematurely. Other problems include weakness in its business in equipping engines for the regional and business jet sectors where Rolls-Royce is losing ground to rivals.

Thus, as the commercial aerospace industry now enters its next industry inflection point, with overall airline order demand for larger, wide-body  aircraft is now showing signs of contraction, a potential supplier weak link is likely added.  An added irony is that Rolls can likely benefit from added automation of manufacturing and supply chain business processes along with the more leveraged use of advanced technology in areas such as improved sensing of key component operating performance parameters in its engines. Such investments can be difficult when shareholder eyes are focused on near-term profitability.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Predictions- Commercial Aerospace Manufacturing Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months. As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America

Next-up:

Commercial Aerospace Manufacturing Supply Chains  Boeing_787_SC

Once again, for many former and now new challenges, we have once again included commercial aircraft supply chains in our industry-specific predictions for 2017.

Commercial aerospace focused supply chains will have an especially challenging year in 2017 from several dimensions. While Airbus and Boeing both declared that they each exceeded operational performance targets in 2016, the numbers indicate that an industry inflection point is at-hand, one that has implications for the collective industry supply chain ecosystems. The overall demand for larger, wide aisle aircraft is now showing signs of contraction. Added challenges remain in the number of planned new product introductions in the coming quarters, and the industry has now discovered some weak links in supply, namely new more technologically sophisticated aircraft engines and certain other troublesome components.

Our stream of research and observations related to commercial aircraft supply chains have painted a picture of an industry that has created extraordinary levels of product demand streams by designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has 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 are 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, a need to continue to invest in expanded production capacity and innovation capability and now meet shareholder return needs. Suppliers have been buffeted by various OEM demands for larger cost and productivity savings. In the specific case of Boeing, suppliers to the wide body 787 program are now being asked to step-down pricing related to prior volume ramp-up needs as Boeing seeks to better balance new order flows with annual production.

A Declared Industry Inflection Point

Aviation Week, a well-respected and highly followed industry publication made a declaration in an early January 2017 commentary: The End of the Airbus-Boeing Supercycle. (Free complimentary sign-up account required)

This declaration declares:

After a remarkable 12-year boom, world aircraft industry output growth sputtered to a halt in 2016. The market fell 1.2% (in constant dollars) relative to 2015, the first aggregate decline since 2003. While military demand remains robust, most civil segments are feeling the impact of negative macroeconomic and geopolitical developments.”

This commentary further observes:

The jetliner market is just finishing a 12-year supercycle. Airbus and Boeing guidance, until recently, indicated that they expect a 17-year supercycle. That now looks unlikely to happen. For some time now, there has been a disconnect between airliner market prosperity and the rest of the world economy, which is seeing higher instability and slower growth. The jetliner industry, unfortunately, is falling in line with that macro environment.”

While Aviation Week anticipates some modest growth in commercial aircraft deliveries this year, it will be half-that experienced over the past 12 years. Most order growth going forward is anticipated in the single-aisle segment with the twin-aisle market being declared as flat at best. Meanwhile, jet fuel prices are again rising adding more financial pressures on airlines to operate more efficiently.

Implications

For the industry’s respective multi-tier supply chain, the implications of this inflection point are sobering for planning windows through the year 2020. After 2020, the industry may well be in a decline from the current 12-year cycle. 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.

The notions of euphoria in multi-year order backlogs will likely be replaced with more conservative, but far more detailed planning pitting OEM’s and suppliers at-odds with mutual win-win financial performance objectives.  The challenge for Airbus and Boeing will be in implementing increased production automation, higher levels of end-to-end, multi-tier supply chain visibility with far more informed supply chain wide insights and business intelligence.

Other Supply Chain Challenges

New Product Introduction

As was the case in the prior three years, the industry again has important NPI milestones this year.

For U.S., based Boeing, the first 737 MAX 8 is scheduled to delivered to Southwest Airlines in the first-half of this year, followed by 737 MAX 9 model later in the year. This aircraft has been five years in development and will feature a far more automated production process that must now be ramped to expected volumes. An expanded 787-10 Dreamliner, designed to carry more passengers and utilizing more carbon fiber content is scheduled for first flight this spring. For the first time, Boeing North Charlestown facility will have sole manufacturing responsibility for this model.

European based Airbus likewise has important NPI milestones this year. The second iteration of Airbus’s revamped single-aisle family, the A321 neo (new engine option), will enter service in 2017. It will represent the largest member of the updated A320 neo family and has significant dependencies on newly designed, more fuel-efficient engines being supplied by CFM International along with Pratt & Whitney. The 366-seat long-range A350-1000 representing the biggest twin-engine jet Airbus has ever designed, with eventually compete with the Boeing 777-300ER. First customer ship to flagship customer Qatar Airways is scheduled for late 2017 and this airline has had a pointed relationship with Airbus regarding meeting expectations.

Weak or Critical Links

Commercial aircraft supply chains are often described as constantly dealing with exceptions or surprises. Whether it is an unexpected notice of late-delivery from a key supplier, components that unexpectedly slip from meeting highly engineered conformance standards, or having full visibility to events or risks occurring across the extended supply chain.  With the current wave of new, more technologically laden aircraft models, engineering specifications are more demanding and new process technologies such as 3D printing and other additive or automated manufacturing techniques are now present. Yet, amid such an environment, the industry is now hard at work meeting and sustaining higher volume production and supply chain cadence needs.

One of the most critical supply links in 2017 will be that of aircraft engine manufactures, which collectively must now transition revolutionary new designed engines into meeting high- volume manufacturing and customer delivery requirements of aircraft OEMS.

In the single-aisle aircraft category, two prime manufacturers, CFM International (joint venture of Safran Aircraft Engines of France and General Electric Aircraft Engines) and Pratt & Whitney, are prime power plant options based on airline selection. CFM had planned to deliver a total of 100 of its new LEAP engines in 2016, but could deliver but 77. For 2017, 500 LEAP engine deliveries are being planned. For Pratt, a series of highly visible supply chain related challenges related to the new geared turbo-fan (GTF) PurePower engines contributed to a delay in deliveries for the Airbus A320 neo and Bombardier C-Series programs. In 2016, Pratt delivered 138 GTF engines, 62 of which were in the final Q4 quarter. Pratt plans to produce between 350-400 engines in 2017, but some identified component reliability issues have some of these engines designated as spares to support airline uptime requirements. Any subsequent slippage or delivery disruptions from either of these two engine suppliers will likely impact planned OEM deliveries to customers.

In the wide-aisle, long distance aircraft segment, Rolls Royce and its family of Trent engines have served as the workhorses of these larger, more fuel-efficient aircraft. For the past three years, Rolls has been challenged with profitability performance as well as allegations of bribery practices related to sales of various products. Revenues from commercial aircraft engines currently make-up upwards of one-half of revenues, yet Rolls has not been able to control costs related to design and manufacturing.  A new restructuring plan calls for this aerospace engine provider to double production levels by 2020, which is being described as the fastest ramp-up in its history. The company is headquartered in the United Kingdom, and thus any effects of Brexit in terms of currency, trade, or tariff issues are a further open question.

While on the topic of Brexit, the United Kingdom hosts several aerospace providers who serve the technology and equipment component needs of various global commercial aircraft manufacturers. Depending on the outcome of the European Union and British exit terms related to currency, tariffs, taxes, trade and population movement, aircraft model producers may well have to assess any impacts to costs, pricing and added risks.

 

This concludes our 2017 prediction related specially to commercial aerospace supply chains.

In our next posting, related to Prediction Ten, we will dive into consumer packaged goods and beverage focused supply chains.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Update on Pratt and Whitney- When All Eyes Remain Focused on Your Supply Chain

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In October of last year, Supply Chain Matters published a blog commentary: Good and Not So Good News When All Eyes Are Focused on Your Supply Chain. Our commentary focused on ongoing developments involving certain commercial aircraft and aerospace industry supply chains, and specifically aircraft engine manufacturer Pratt & Whitney. We committed to our readers to follow through on this stream of ongoing developments to provide added insights and learning. This week, Pratt parent United Technologies briefed analysts and shareholders on Q4 and 2016 performance and there were even more nuggets of information and learning. pratt-pw1100g-production-line_2_450

Once again, we alert readers to the overall length of this particular commentary, but we want to make sure that full context is presented.

The commercial aircraft industry remains challenged by conflicting goals. They include the ability to more rapidly scale-up overall aircraft production levels. However, that sometimes conflicts with the industry dynamics of OEM dominants Airbus and Boeing in their respective desires 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, process innovation and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings. We will have more to state on this dynamic when we get to our 2017 Prediction deep-dive on unique industry-specific challenges for the coming year.

In response for airline industry needs for more fuel-efficient and more reliable aircraft, Pratt has designed and introduced a revolutionary new geared-turbofan (GTF) aircraft engine.  However, a series of supply chain glitches and volume production ramp-up challenges directly impacted the aircraft delivery production plans of both Airbus and Bombardier in 2016, causing both final manufacturers to now incur some financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link was Pratt. There are others as well, such as interior seats for new wide-body aircraft, but in this new world of ubiquitous visibility, any one supplier can bear the brunt.

In September, UTC, the parent to Pratt, and specifically CEO Gregory Hayes, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers.  Haynes acknowledged the obvious in that Pratt’s airline customers were not happy with the news.  Neither were UTC stockholders who initiated an immediate 2 percent sell-off in the company’s stock. During that time, Haynes briefed analysts and investors on many of the operational details of Pratt’s supply chain challenges which was an obvious indication of high levels of visibility and detailed briefings that the CEO was obtaining.

Also at that time, Hayes indicated that of the approximately 800 parts for the high-level bill of material for the new GTF Pratt engine, five parts were causing the most pain due to supplier challenges in meeting Pratt’s volume production and quality needs. One critical problem was the heart of this new engine, its newly designed aluminum titanium composite fan blade, noted as a breakthrough in material design and expected performance. Initial production yield problems of the fans had averaged an unacceptable 20 percent.

To help our readers follow developments, we reviewed the entire transcript of UTC’s senior management briefing to equity analysts and shareholders regarding Q3-2016 financial and operational performance delivered in October. It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain, hence the title of this commentary stream. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and it’s going to be fixed this quarter.” He later stated that UTC senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway related to process and yield improvements, lead-time reductions and additional added capacity. The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more of Pratt and its supply chain challenges.

We can now update this Supply Chain Matters commentary stream with some highlights of this week’s Q4 2016 and year-end investor briefing.

CEO Hayes declared a solid year for UTC in terms of business and financial results. He praised the Pratt division on GTF accomplishments and reiterated that this engine is now powering 46 in-service Airbus A320 neo’s with more than 82,000 operational hours.

For the year, Pratt delivered a total of 138 GTF engines, 62 of which were in the final Q4 quarter. Moving to the question and answer period with equity analysts, we noted seven specific questions related to Pratt, the GTF engine, and the Pratt supply chain. Among the more detailed information that was shared in executive responses:

  • On the positive news side, executives stressed that Pratt’s supply chain challenges are in a far better state than that of June last year. Production yields on the critical fan blade are now up to 80 percent production yield, a new partner manufacturing facility begins production this quarter and excellent progress is being made in opening a second facility in Michigan scheduled to begin production at mid-year. Reiterated was that Hayes monitors such numbers from his Pratt division on a weekly basis.
  • There have been some issues with GTF in-service reliability, specifically the engine’s combustor liner and an oil seal. Regarding the combustor, issues are related to what was described as harsh operating environments of which India was specifically cited. Hayes indicated a component re-design is underway and will be retrofitted in operating engines later this year. Premature failure of an oil seal was noted as supplier related, with a fix identified with a modified seal available by May. Hayes characterized these issues as “typical of a new product introduction.” Hayes emphasized that the engine’s fuel burn performance metrics are being met right out of the box, its revolutionary designed geared-turbo fan is performing as designed, and again stated his confidence in the Pratt leadership team to resolve any supply chain or component related issues.
  • In addressing this year’s production plan for the GTF, Pratt plans to build 350-400 engines, 50 of which, (roughly 7 percent of production) will be designated as spares to support customer uptime while the above described component performance issues are addressed.
  • One analyst from Bank of America Merrill Lynch specifically questioned whether this was the fifth iteration of the combustor design. Hayes emphasized that not all airline operators are experiencing combustor performance issues, only those in harsh operating environments. The overall timeline for the combustor seal was described as three design iterations. The first 17 engines had the first design which Pratt was aware had to be upgraded because of durability issues. The ‘B” version was described as not having met expected life in harsh environments and thus the third design is expected to be in-place by the end of this year. Again, spares will be made available to airline customers as these component design changes are completed.
  • This same equity analyst asked a follow-up question. If the GTF engine has 30 percent fewer parts, does that translate to a goal that these engines can be sold a breakeven profitability at introduction? Hayes reply was that Pratt is currently losing money on each GTF engine that is shipped, but that is the reality of commercial aircraft engine development. Returns come in later years, and in the case of GTF, that is planned for the 2018 time-period. Another analyst continued to probe on breakeven expectations.

 

We have highlighted the above year-end UTC briefing summary statements to provide our readers reinforcement as to how visible supply chain challenges can become in today’s world of ubiquitous information and especially on how investors and equity analysts can now hone-in on supply chain vulnerabilities. The supply chain indeed matters, and investors are becoming more well informed to this tenet.

We expect many Supply Chain Matters readers to have added impressions or feelings regarding UTC’s latest supply chain related disclosures. Questions such as whether Pratt teams were aware of combustor or oil seal issues earlier in the program or whether pressures to meet first and subsequent customer ship milestones were overriding.  There may be other questions related to multi-tiered supply chain visibility or early-warning from suppliers. That is not for this specific commentary to address. Certainly not without speaking to those with knowledge.

As noted in October, operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. This is where the learning comes in.

The looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast of today’s industry supply chains.

Bob Ferrari

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

 


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.


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