Boeing Adjusts Production
Decision To Amend Rates Nothing New
Further Adjustments For Boeing/Airbus On The Cards If Industry Still Sits In Quagmire
Boeing’s decision to adjust production from the middle of next year is hardly surprising. What will be of interest is what the company makes public in its first quarter earnings call on April 22, 2009 and how the company decides to manage key programs like the 747-8 and 787 Dreamliner - the latter of which should be in service by the time these production cuts kick in.
While production on the 747-400 line slows to an end (in terms of actual deliveries), the transition to the 747-8F and 747-8I means that the lack of production rate increases earmarked for late 2010/early 2011 allows Boeing to better match customer deliveries to the general state of the market. With the bulk of all 747-8 family orders for the freighter model, the collapse of the cargo segment means that until a meaningful rebound in traffic occurs, keeping production floating at less than two airplanes a month is probably better than customers cancelling their orders altogether.
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At present, no cancellations on the 747-8 family have occurred and its not entirely out of the realm that some customers may have already negotiated deferrals farther out than 2010 or 2011.
One key element of Boeing’s announcement was this:
“Because the 747 program is currently in a loss position, the reduced earnings associated with the factors above will be recorded for most units in the 747 backlog.“
CEO Jim McNerney’s comments earlier this year about the 747 drew huge (and largely incorrect) assumptions that the 747-8I would be scrapped. On the contrary, Boeing still intends to stick with both 747-8 models and reinforced this by commissioning Altitude Aerospace to deliver new interiors for the 747-8I and launch customer Lufthansa.
Arran Aerospace’s MD Doug McVitie delved behind the numbers to provide a better explanation than those found on certain news outlets.
“The 747-8 is still in the R&D pre-production phase, first flight is another five months away, first delivery is not due before 3Q10 and since the bulk of aircraft payments is due on delivery, the program is still obviously cash-negative. Why then does Bloomberg lead off in the second paragraph of its latest creative-writing exercise with, “The company will take a charge of 38 cents a share [...] because of lower output and weaker-than-projected pricing”. What’s a lower output than zero/month?
According to Boeing, and they are being transparent here, 82% of the charge is due to an aircraft that’s not in production today. According to Bloomberg, 100% of the charge is down to supposed production cuts 14 months from now and lower pricing. Dear, oh dear…
And exactly what production cuts anyway? Did anybody at Bloomberg check? Doesn’t look like it, but then, aircraft production rates are not Bloomberg’s strong suit,” says McVitie.
The issue with the 767 becomes slightly more opaque - particularly as deliveries of the 787 start in earnest next year. As of March 2009, there were 67 767’s left to be built - production runs around one airplane a month and may end up having some orders switched to either 777’s or 787’s if customers can acquire earlier slots for increased capacity as a result of other airlines renegotiating deliveries in lieu of the current economic climate. Cancellations at this stage seem somewhat premature for the 767, given that the type has secured fresh new orders as a result of the 787 being delayed by almost two years.
Of course, the “next on the chopping block” is the venerable 737 family - but with a plethora of 737 customers able to shuffle delivery slots for later than planned acquisitions, the door again remains open for other customers to speed up their 737 deliveries to phase out older and less efficient airplanes. Critically, the ease with which Boeing can adjust 737 production indicates their prowess of managing one of their most successful airplane programs in its history, despite having a phenomenal backlog of over 2000 units - even more interesting is that the 737 has yet to suffer any order cancellation thus far in 2009. In contrast, Airbus has had 14 cancellations of its A320 family so far this year.
And while all of this goes on, to suggest that both Airbus and Boeing have buffered themselves for the future is perhaps a premature view. One certainty is that before the end of the year is out - we’re guaranteed to see yet more production changes to other widebody jets - and with it, the threat of losing more aerospace jobs as a result of the downturn is something that may not be avoidable.
17 comments April 10th, 2009
