Boeing reported its fiscal Q2 2013 earnings this week and there were many sound bites related to the company’s global supply chain capabilities, and more challenges yet to come.      787-8, 787-9 and 787-10 Artwork

The financial numbers were stellar.  Total revenues increased by 9 percent while profits rose 13 percent.  Those were fairly sound numbers when you consider the challenges this aerospace manufacturer has had with the 787 Dreamliner. However, the company warned that it is bracing for potential “draconian” cuts in military and defense spending, which accounted for over one-third of revenues in the past quarter.

One of the very first topics from CEO Jim McNerney in the earnings briefing was to address the recent 787 aircraft fire that occurred at London’s Heathrow airport. He reminded analysts that Boeing was limited about what it can publically disclose. However he did make reference to the UK Air Accidents Investigation Bureau (AAIB) and its post-incident investigation that pointed to the Emergency Locator Transmitter located at the upper rear of the aircraft as a possible cause. This transmitter has been reported to be produced by Honeywell International, and is installed on a number of different aircraft types.  The Wall Street Journal reported last week that people familiar with the investigation indicated that it was unclear if the transmitter triggered the fire or provided additional fuel for the fire. This transmitter is not part of the main electrical system of the aircraft and is powered by its own battery. Examination of the aircraft by AAIB investigators indicated extreme heat generation that appeared to melt through the carbon-fire skin of the aircraft.  Yesterday, the U.S. Federal Aviation Administration and other global aviation authorities issued a directive instructing 787 operators to remove and/or inspect the subject emergency locator transmitter.  Honeywell continues its investigation of the incident.

CEO McNerney once again re-iterated the company’s confidence in the integrity, safety and performance of the 787. He confirmed that all 787 battery system enhancements were completed on both previously grounded operational aircraft and those on the production ramp. There should have been a shout-out to the Boeing tiger teams who completed this exercise under considerable time constraints.

Highlights of other supply chain related news included that Boeing’s commercial airplane backlog of orders now stands at 4800 aircraft.  An extraordinary situation, one that many companies would envy.  The again, it adds considerable stress the to the company’s global supply chain network which has to deliver all of this aircraft according to customer expectations and needs.

The division itself has had its highest output levels in nearly 15 years. The company delivered 169 aircraft in its just completed quarter including the 16 787’s that had been queued during the aircraft’s operational grounding earlier this year.

Boeing acknowledged customer requests to accelerate deliveries “continues at a healthy pace.” The company launched the newest version of the Dreamliner, the 787-10 last month with 102 orders and commitments. Interest in the new 737-MAX continues with 1400 orders to-date. McNerney stated that the company was on-track to increase 737 production to 42 aircraft per month by the second quarter of next year. He further stated that Boeing was positioned to add more production capacity if customers require. In its reporting, the WSJ noted that the 42 number matched that of Airbus in its competitive A320 aircraft, and that exceeding that number would put Boeing in the position of being able to boast of the largest output producer for the category.

Production rates for the 787 remain on-target at the rate of 7 per month, increasing to 10 per month by the end of this year. One other interesting note from the briefing was that total inventories increased by $1.5 billion during the recent quarter, attributed to the anticipation of increased production volumes of the 787.  Apparently, suppliers continue to ship to earlier commitments.

Boeing forecasted commercial airplane deliveries in the range of 635-645 for 2013, which implies an average run-rate of 53 aircraft per month. Next year, that number gets even higher.

One added note.  In the Q&A session, at least two equity analysts had probing questions related to Boeing’s plans for increased engagement with partners and suppliers.  CEO McNerney responded: “If you work with us there is a chance to increase volumes significantly, while helping Boeing in delivering cash and margin goals.” He further indicated that it will take time to work on business equations with certain suppliers that make sense for both partners.  Our interpretation of these statements is a message to suppliers that the potential of high volume Boeing business exceeds current operational frustrations in delivery and payment rates. What comes to mind is the analogy of the automotive industry and its former supplier relationships.  You need to stick with us, despite the financial pain we can incur, because our business is massive.

One of the important observations to keep in mind is that despite the number of very high-visibility negative developments concerning the 787, Boeing stock has risen in value.  That, as our readers know, is extraordinary since major supply chain snafu and disruption tend to have some negative consequences on a near-term company stock price.

However, with this latest briefing, Boeing appears to be warning investors that potential cutbacks in the defense sector can be of some concern.  We speculate that this will add additional pressures to the commercial aircraft business to meet aggressive delivery commitments while continuing to reduce cost.  That’s a tall order for any global aerospace provider’s supply chain network.

Bob Ferrari