This is a brief update to our Supply Chain Matters and Expert Community commentary earlier in the week regarding aerospace supply chains remaining stressed, and specifically Airbus’s recently announced setback on its lighter weight and more fuel efficient multi-aisle aircraft, the A350.

In an interview which was published in the November 18 printed edition of the Financial Times, (paid subscription or free metered view) Louis Gallois, the chief executive of Airbus’s holding company EADS, expressed his personal apology for the announced delay of the A350.  He noted that Airbus made the decision to delay the introduction from late 2013, to the first half of 2014, because “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” The Times reports that Airbus concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

The FT interview coincided with Mr. Gallois’s attendance at the Dubai Air Show event, along with all other major manufacturers..  The big headline of that event has been the announcement from Dubai based airline Emirates of the single largest commercial aircraft order, ever.  The airline ordered 50 of rival Boeing’s 777-300 long range aircraft at an estimated list price book value of $18 billion, with an option for an additional 10 aircraft. Deliveries are planned to begin in 2015.  A separate FT published article quotes an aerospace industry analyst as noting that Emirates selected the 777-300 because of the announced delay of the rival Airbus A350-1000, where planned first delivery has slipped from 2015 to 2017.

The European focused headline from the show was the perceived public humiliation incurred by Akbar Al Baker, the CEO of Qatar Airways, directed at Airbus, also reflecting on the delay.  Qatar is the designated launch customer of the A350.  According to a separate FT article, Qatar accused Airbus of “still learning how to make airplanes.”

Tough words indeed, coming from your launch customer.

But reports indicate that Qatar, after some last minute negotiation with Airbus senior management, later unveiled an order for 55 aircraft at list value of $6.4 billion, with a provision that Qatar would be the designated launch customer of the highly popular and new to arrive A380 neo aircraft. That obviously equates to maximum leverage of customer power and bargaining chips.  It’s like the analogy of the enterprise software account manager who makes the largest sale of the year on the last calendar day of quarter or fiscal year-end, with a healthy discount and all sorts of added perks for the customer.

To our earlier commentaries, airline customers, especially the newly emerging and more powerful global high growth carriers, are aggressively augmenting long-term lift capacity and are highly sensitive to aircraft delivery windows. They also practice high energy, savvy negotiation skills that reflect their current presence as aerospace industry disruptors.

Supply Chain Matters offers two additional follow-up observations, post Dubai Air Show.

First, we believe that Airbus should be praised and not chided for its latest actions.  Citing lessons learned from previous public delays of the A380 super jumbo jet and perhaps unstated, Boeing’s current three year delay status with the 787 Dreamliner, Airbus felt it was far more prudent to fix potential supplier quality problems now, rather than later, when the stakes are higher. A public apology coming from the CEO of any company is a bold statement of acknowledgement and commitment to accountability.

Second, airline customers have been patient regarding numerous setback announcements, perhaps leaving their gripes behind closed doors. We get the strong sense, however, that this will change during 2012 and beyond.

It seems that every very passing week brings fresh reminders of added stress in aerospace supply chains. The transfer of supply chain learning and a renewed emphasis on agility, risk avoidance  and operational excellence are now new table takes for all aerospace value-chain participants.

Bob Ferrari

Yesterday, Boeing reported Q3-2011 revenues and earnings, but the real headline concerned a long awaited update on the company’s 787 Dreamliner and other commercial aircraft delivery schedules. Readers will recall that in late August, Boeing finally achieved its long overdue initial milestone for the 787, formal flight certification and first customer delivery.

While the Q3 financial headline was a rather respectable 31 percent increase in Q3 profits, far exceeding Street expectations, the grilling for Boeing executives during the earnings briefing concerned long-term outlook and commercial aircraft production volumes.  Boeing executives communicated production volumes that combine 787 and 747-8 deliveries, making it rather difficult for analysts to differentiate each.  In our July posting which reflected on Boeing’s Q2-2011 earnings report, we noted commentary from Flightblogger which speculated that Boeing’s new lumping of combined numbers just adds to additional speculation as to other stress points in the supply chain. At yesterday’s briefing, the number cited was 15-20 new deliveries of both 787 and 747-8 aircraft for this fiscal year.  Last quarter, that number was cited as a combined 25-30 aircraft this year, and thus a slowing has occurred for some obvious operational or design change reasons.  Another open question has been whether the devastating earthquake and tsunami that struck northern Japan had any previous supply impacts.

What was communicated is that Boeing management is observing “improvements to the quality, productivity and overall condition to the assembly within the production system.” Noted was that 787 production configuration has been finalized, and production volumes are about to transition to a rate of 2.5 airplanes, vs. a prior 2 airplanes per month. Production and delivery of 787’s is being planned to ramp to 10 aircraft per month by the end of 2013. First delivery out of Boeing’s planned second final assembly facility in Charlestown South Carolina was reported to be on-track for next year.

Boeing re-iterated that firm backlog for the 787 remains at 821 units, with an additional 200 contracted delivery options. Also noted was that initial gross margins on 787 program itself is now tracking to “low single digits”, which takes into account the cumulative impact of delays, tooling, and non-recurring costs. Boeing CFO James Bell estimated that the program would reach breakeven by 2021.  Read that statement once again- the 787 program will not reach breakeven for at least 10 years, with current numbers.

Of other interest for the Supply Chain Matters reading audience is that Boeing estimates that the addressable market for the 787 class of aircraft will be 5000 aircraft over the next 20 years.  The first 1100 aircraft represents approximately 10 years of that segment, which leads to the implication that the remaining 3900 aircraft will be produced and delivered in the latter 10 years of the program.  One could speculate that since current order volumes have plateaued, these numbers might be overly optimistic. In any case,  they represent quite a high volume milestone for Boeing and its associated supply chain partners to achieve, given past history.

One other item should be of supply chain community interest. Boeing’s overall inventory level increased by $1.8 billion to a current number of $18 billion.  The inventory rise was attributed to 787 work-in-process, supplier advances and tooling.

In our Supply Chain Matters Q3 Quarterly Newsletter scheduled for distribution later this week, we comment that aerospace supply chains remain under various forms of stress.  In the case of Boeing’s supply chain, there was celebration that after three years of delay and frustration, an important initial milestone has been reached.  Yet, when we examine the current backlog numbers for both Boeing and Airbus, and factor their combined needs to now ramp production levels to extraordinary volumes to meet airline delivery requirements, the notion of complete supply chain synchronization, agility and intolerance to disruption, adds so much more to the implications of that stress.

Bob Ferrari

The Wall Street Journal and other media outlets are reporting that one of the Boeing 787 Dreamliner test aircraft had to make an emergency landing this afternoon in Laredo, Texas, after the crew reported smoke in the cabin during a test flight. The crew of between 30 and 40 Boeing flight-test employees on the plane were forced to utilize the jet’s emergency slides to evacuate the aircraft. . Emergency crews on the ground responded and extinguished the remainder of flames inside the aircraft, with one minor injury reported.

WSJ notes that according to a person familiar with the matter, as the jet was flying at 1,000 feet during the approach to Laredo, the Dreamliner’s crew reported a fire, possibly in the plane’s rear electronics bay. Subsequently, the 787′s emergency auxiliary power unit, known as a ram air turbine, deployed as a result of at least a partial power failure. Some of the plane’s automated systems, including the auto-throttle and cockpit flight displays and electronics-assisted flight controls, were affected, this person said. The pilots also canceled their instrument flight plan and proceeded to land under visual flight rules, possibly because some the flight instruments were knocked out.

While Boeing has predictably declined comment regarding this incident, Supply Chain Matters can’t help but speculate that this is yet more disappointing news surrounding endless delays in the Dreamliner program.   The latest delay was announced in August involving an uncontrolled failure on one of the designated Rolls Royce Trent 1000 engines on a test bed in England, along with other component related issues.  That delayed first customer ship to an anticipated Q1-2011.

The WSJ and other media are reporting that Rolls-Royce, who’s Trent 1000 engine was involved in last week’s mishap involving a Qantas Airways Ltd. Airbus A380 superjumbo jet in-flight failure, issued a statement saying the Airbus incident was unrelated to problems with the Dreamliner’s engine.

More news will certainly surround this breaking development so stay tuned to the Supply Chain Matters blog for further commentary.

There have been many consistent themes in our continuous commentary on Supply Chain Matters and one of the most consistent over these past months has been the supply chain setbacks that have occurred within Boeing’s infamous 787 Dreamliner manufacturing program.  All you need to do is type in ‘Boeing’ or ‘Boeing supply chain’ in this blog’sSearch box, and you get to review the full litany of commentary.  Our latest posting was at the end of July, commenting on the fact that Boeing’s CEO finally admitted the key importance that Boeing has on its supply chain capability, which was a gross understatement of the obvious.

Today there is more disappointing news.  Boeing has now announced that it has to postpone the planned first customer delivery of the Boeing 787 into the middle of the first quarter of 2011.  Mind you, for most of this year, after numerous setbacks and postponements, Boeing’s senior management had been assuring stockholders that first customer ship would occur by the end of 2010.  This latest setback was attributed to engine supplier Rolls-Royce PLC, who’s Trent 1000 engines were specified as power plants for initial customer All Nippon Airways (ANA).  A statement released by Boeing notes that this delay: “follows an assessment of the availability of an engine needed for the final phases of flight test this fall.” The Trent engine suffered a failure while being tested on a test bed in early August.

An article penned by noted aerospace blogger Jon Ostrower on the Flightglobal site notes that compounded issues with workmanship problems with the aircraft’s Alenia Aeronautica-built horizontal stabilizer and its Rolls-Royce Trent 1000 engines led-up to this latest setback. Ostrower also provides details on the subject engine issues.

The most patient of all related to this ongoing litany has been designated first customer ANA, that has had to deal with an anticipated new addition to its fleet that is now three years behind schedule.  The Wall Street Journal noted in its article that ANA called the delay regrettable but added, “However, we trust that the time will be used to deliver the best possible aircraft in the shortest possible time frame.”

We at Supply Chain Matters express praise to ANA for their eloquence, since ANA has every right to be frustrated at this point. (We refrained from using a more down-to-earth six letter term that begins with a ’p’)  The sole purpose of the supply chain , as we know, is fundamentally serving the best needs of customers.

The delay announcement came very late in the evening, Seattle time, no doubt after a very long day of discussion and deliberation among Boeing’s top management. To Boeing’s credit, it has to deliver a safe and reliable aircraft. We have to wonder, however, as to which Boeing executive (s), if any, will suffer the next fall in this latest setback. Suffice it to say, Boeing’s senior management and supply chain teams remain under a very sensitized looking glass. We all need Boeing to succeed, and soon!

Bob Ferrari

Once again, its time for another supply chain related announcement associated with Boeing, but this one should be viewed somewhat as positive in nature The Twitter #supplychain forum was actively re-tweeting articles summarizing the latest remarks from Boeing CEO Jim McNerney, who specifically cited concerns related to supply chain as potentially hampering Boeing’s ability to meet increased new aircraft orders, and potentially hampering future business needs.

I found a Financial Times article (free preview sign-up account may be required) as the most insightful commentary to this story.  The FT article cites McNerney as noting that a industry-wide growth across the entire aerospace industry, including Airbus,  has constrained many of the key suppliers to this industry. Boeing wants to up production of its 737, 777, and 747 models during the next two years, but suppliers are obviously raising cautionary notes.  Unmentioned, and in my view succinct to this situation, is that past delays, setbacks and communication issues on Boeing’s 787 Dreamliner program have made aerospace suppliers rather wary and cautious.  Key suppliers are now faced with important decisions on whether to invest in added capacity, or may demand more financial safeguards from Boeing and other aerospace OEM’s.

Boeing also continues to deal with specific supplier issues.  The FT article notes that it will no longer source aircraft seats from Japan based supplier Koito, after that supplier admitted it had falsified test results on as many as 150,000 seats provided to Boeing.  The company is also coming to grips with previous attempts to outsource major portions of production work to external suppliers without balancing all the various product design, engineering, and production risks, and without a seamless two-way flow of communications and expectations. Boeing also continues in its plans to ramp-up a second final assembly facility for its 787 Dreamliner production near Charleston, South Carolina, and adjacent to its major fuselage assembly supply.

From were we sit, the Boeing CEO acknowledgement of the critical importance that the supply chain will provide to Boeing’s future business is a rather noteworthy acknowledgement that Boeing senior management now gets it- supply chain matters!

Bob Ferrari