For the commercial aircraft industry and its respective supply chains, a consistent track record of new aircraft development and production release program delays unfortunately remains the same.
To add to its other program woes, Airbus announced this week that initial delivery of its planned A350-1000 model long-range aircraft will slip another year. The initial test flight, originally scheduled for about this time, is now not expected until after September. Indications are that initial deliveries of this new aircraft to launch customer Qatar Airways are not expected until the second-half of 2017.
In a statement, Airbus indicated: “.”We have adapted the A350-1000 schedule to ensure we fully satisfy our customers’ requirements for a mature aircraft from day one.” The manufacturer further added that it would put adequate resources in place to achieve program milestones.
According to business media reports, the first three test aircraft are currently in the final assembly stage. From that fact alone, we suspect that delays have more to do with the readiness of the supply chain to be able to scale to initial productions levels. To date, Airbus has reportedly booked 181 orders from 10 airline customers for this new model, the largest long-range aircraft offering for Airbus.
The 1000 model is the longest-fuselage version of Airbus’ new A350 family of wide-body jetliners. With this design and configuration, the aircraft can accommodate a range of from 366-440 passengers, which means lots of seat per plane. An ongoing constraint in wide-body supply chains has been availability of airline seats in-volume. Powering the A350-1000 will be a higher-thrust Rolls Royce Trent XWB engines from which will allow this largest model to attain even greater levels of fuel efficiency. Newer models of more technologically advanced aircraft engines have had their share of ongoing ramp-up problems as-well.
The program itself has had its ups and downs including in December of 2014, an announcement of a last-minute sudden delay in the initial delivery to launch customer Qatar Airways only to change that two days later. Since that time, the European based aircraft producer has experienced continual delays in its ability to support planned volume production of this model. As noted in a related posting last week, subsequent deliveries of new A350 model aircraft remain impacted due to adequate supply of cabin seating and interior equipment. Plans called for delivery of a total of 50 aircraft in 2016, but Airbus has managed to deliver only 10 so far this year due to the supply delays. There are a reported 40 of this aircraft in various stages of final assembly and Airbus has augmented production with added work stations to get late delivered cabin equipment installed as quickly as possible.
The ongoing tense customer relationship among Airbus and Qatar that dates back to the scheduled initial delivery of the A350 family now takes on more dimensions since Qatar had contracted for initial deliveries of the 1000 model starting this month. No doubt, Qatar’s candid and direct CEO will have the last word regarding this latest delay announcement.
While the latest Airbus program delay was probably motivated by prudence in assuring complete readiness of the supply chain, it does reflect and industry track record of continually underestimating the scope of program and supply chain challenges. With more and more major system components being outsourced to global based suppliers, aerospace supply chains seem to constant underestimate the ramifications and added requirements for increased design and production process coordination with major suppliers. What has not helped is an industry environment where booked orders far exceed available capacity placing more pressure of suppliers to meet aggressive milestones from multiple global manufacturers. Add to that, increased pressures for reduced costs and higher efficiencies and you get the picture of conflicted goals and priorities.
The A350 situation does not currently compare with the ongoing delivery delays with Boeing’s 787 Dreamliner program that has now amassed a reported $28 billion in ‘deferred production costs” because of continued multi-year delays in customer deliveries. None the less, the track record of missed program milestones and lack of supply chain readiness continues across most manufacturers.
This week, a prominent auto parts supplier experienced an explosion at one of its factories in central Japan, injuring four people. News of such an incident of supply chain disruption would not be considered unusual in these times of global-wide supply chain activities. However, considering the Japan location and the major automotive OEM customer being Toyota, it may well be noteworthy.
The factory where the explosion occurred was operated by Aisin Advics Co.is a major supplier to Toyota Motor for automotive braking systems. The explosion occurred at the supplier’s production plant located in Kariya, Aichi Prefecture, near one of its paint lines. On Monday, the supplier indicated that it was still in the process of evaluating the extent of the damage which had the potential to impact the supply chain of its customers.
As Supply Chain Matters and other business media has indicated, Toyota had already suffered production delays as a result of two major earthquakes that impacted southern Japan in April. A body factory and a die-casting plant, both operated by Aisin Seiki Co., and located in Kumamoto region, were damaged as a result of the quakes, and Toyota had to suspend nationwide production operations for upwards of a week because of this disruption. A fire at a steel production plant operated by Aichi Steel Corp. also impacted Toyota.
Coincidentally, Aisin Advics is owned by Aisin Seiki Co. and thus may well be versed in supply chain risk mitigation and business continuity planning..
The overall impact of the April earthquakes came to more light this week in the release of the Nikkei Japan Manufacturing PMI for May. The May reading of 47.7 in production and manufacturing activity represented a 40 month low. According to the panelists that are polled by Markit Economics, the earthquakes had a detrimental effect on production output prompting an economist to indicate:
“The aftermath of the earthquakes in one of Japan’s key manufacturing regions continued to weigh heavily on the goods producing sector.”
Depending on the extent of damage involved in this latest factory fire incident, the Japan automotive manufacturing sector and specifically Toyota will have another supply chain business continuity effort underway in the coming days.
In February of 2015, Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America at the time, was involved in a supply chain expose. Over a year later, the retailer continues to struggle with the customer and financial impacts of that disclosure.
A broadcast report from CBS News’s 60 Minutes program turned a public light on the retailer’s supply chain in terms of sourcing and product composition. The 60 Minutes report indicated that:
“Much of its (Lumber Liquidator’s) laminate flooring is made in China, and as we discovered during our investigation, may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.”
During its investigation, the news networks placed hidden cameras and conducted interviews of the company’s flooring suppliers. Employees of three Chinese mills indicated they were using core boards with higher levels of formaldehyde to save the retailer up to 15 percent on price. Three mills further admitted on camera to falsely labeling products as CARB 2–compliant.
By May, the flooring retailer announced that it had suspended all of its China sourced laminate flooring products. The retailer further disclosed that a Special Committee composed of independent directors, with the assistance of third party advisors, had been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor. In its public update, the retailer indicated:
“From early March through May 1, 2015, BHC sent approximately 26,000 testing kits to nearly 15,000 Lumber Liquidators customers and approximately 11,000 of those testing kits were returned. As of May 1, 2015, over 3,400 testing kits from approximately 2,600 households with laminate flooring sourced from China had been reviewed and analyzed. Of those households, over 97% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization as protective against sensory irritation and long-term health effects.”
However, those actions, although relatively swift in nature, were not enough to convince consumers, and since that time, amid continued fallout, several top executives have departed including the CEO at the time of the incident.
For the quarter ending in March, the flooring retailer reported its fifth straight quarter of revenue declines and much deeper loses than expected. Same store sales declined nearly 14 percent in the recent quarter. The Q1 loss was reported as $32.4 million compared to a year-earlier loss $7.8 million. Expenses climbed 20 percent due to a $16 million charge related to a securities class action and a $13.5 million increase in in legal and professional fees.
The company shares have not lost more than half of their value over the past 12 months.
Once again, there is a need to focus on some takeaways. In its apparent zeal to reduce its lumber costs allegedly by 15 percent, the retailer appears to have paid a far higher price in customer loyalty, in subsequent added expenses and in shareholder value. With no recognized U.S. or global wide standards for indoor formaldehyde concentrations, the retailer was subject to varying consumer perceptions as to the overall safety and standards related to certain lines of flooring.
One year later, Lumber Liquidators remains under the looking glass, providing yet another example of how a supply chain focused disruption or snafu can have much more lingering effects
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.
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