Boeing Adjusts Production
April 10th, 2009
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.
Entry Filed under: Airbus, Arran Aerospace, Boeing, Boeing 737-700, Boeing 737-800, Boeing 737-900ER, Boeing 737NG, Boeing 747, Boeing 747-400, Boeing 747-8 Intercontinental, Boeing 747-8F, Boeing 747-8I, Boeing 767, Boeing 777, Boeing 777-200LR, Boeing 777-300ER, Boeing 777F, Boeing 787, Boeing 787 Dreamliner, Boeing 787-3, Boeing 787-8, Boeing 787-9, Boeing Commercial Airplanes, Doug McVitie, Scott Carson
17 Comments Add your own
1. boeing investor | April 10th, 2009 at 10:31
SPEEA / IAM - Your jobs are on the line.
And its YOUR fault.
(Some would say…)
2. ikkeman | April 10th, 2009 at 13:27
Boeing investor - Airbus produces airplanes using much higher levels of union labour… are they worse off than Boeing?
I’d say the problem is with those that invested in Boeing and forced the company to over-focus on short term results such as dividents. Since aviation is not a short term business, this leads to unrealistic plans and predictions.
At least IAM/SPEEA have a vested interest in the long term viability, and thus profitability of the company…
(some would say…)
3. boeing investor | April 10th, 2009 at 13:32
Yes ikkeman I am aware of that - but then you didnt factor in the European States having vested interests in Airbus and parent EADS.
That aside - the strike last year shows that union militancy days are ending if not completely over.
Its just a matter of time before Boeing backs its bags and leaves WA state for all its post 787 airplane programs.
4. Falcon | April 10th, 2009 at 15:28
In the press release Boeing state they are lowering the 777 production rate from 7 to 5. Looking at the 2008 numbers up to the strike Boeing “only” produced about 6 month. Where is Doug McVitie’s outcry about Boeing being “inconsistent and disingenuous”?
5. Chris Wallace | April 10th, 2009 at 15:43
I admit to being surprised about the 777 production cuts, since that plane is still popular. I suppose with oil prices now back to more reasonable levels, the demand to replace 747-400s has lessened.
Not surprised about 747 production not being increased since world cargo traffic is slowing. Still, some operators are retiring older dedicated and converted freighters so demand still exists, if lessened.
The 767 backlog is split roughly 50-50 between passenger and freighter models, but with 5X holding most of the freighters, I could see a shift to more passenger models being produced at the moment.
6. skeptic | April 10th, 2009 at 16:55
I think the main casualty of last year’s strike will be the 737RS program. Boeing would have to be daft to build it in the “strike zone”, unless the get a no strike agreement from the union, backed up by heavy financial penalties in the event of a wildcat strike. Texas, South Carolina, North Carolina, and Alabama all have much more favorable labor-management relations.
The IAM hurt itself more than they want to admit after last summer’s temper tantrum.
7. boeing investor | April 10th, 2009 at 21:58
I agree with skeptic - the 737 RS will not be made in Rention.
Wichita already makes the fuselage for the current 737 and would be a great venue.
8. keesje | April 10th, 2009 at 23:28
“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.”
Altitude is a brand new un proven off spring from the consistently loss making techical division from ANZ.
The #1 retrofit / MREO is .. Lufthansa Technik, with hangars all over the world that could do the job.
Why does McVitie think LH passed on this “golden opportunity” ?
I think the more likely / stronger MRO specialists passed on Boeings RFP.. Why is it not done by Boeing itself anyway? Where are the 777’s fitted?
9. Mike M | April 11th, 2009 at 02:19
>>>Lufthansa Technik, with hangars all over the world that could do the job.>>>
Did you ever stop to consider it was Lufthansa who asked Boeing for Altitude etc??
You know, customer requests and all that?
I imagine the answer to be a resounding NO.
10. boeing investor | April 11th, 2009 at 03:58
“I think the more likely / stronger MRO specialists passed on Boeings RFP.. ”
You think way too much and KNOW next to nothing. Bring forth some evidence these specialists “pass on” the RFP (if one was actually ever issued by LH).
“Why is it not done by Boeing itself anyway?”
The same reason IFE/engines/landging gear options isnt done by Boeing - its a customer specified order for interior components - it’ll be delivered to Boeing by Altitude and fitted in the factory in seattle.
Who’se making the A350 interior?
Oh yeah an UNPROVEN company called BMW who have delievered ZERO airplane interiors so far.
11. Chris Wallace | April 11th, 2009 at 14:46
Altitude is providing just some components for the First Class cabin of LH’s 747-8Is. There is plenty of work not just in First Class, but also Business Class and Economy on those planes for LH Technik and other suppliers to provide.
12. Ed | April 11th, 2009 at 19:52
It seems Boeing has a good grasp on the future of commerical aviation, as well as the future of Boeing. That is not to say EADS/Airbus does not, but it seems Boeing has a slightly better relationship and understanding with its customers.
Setting new production rates of all Boeing models is not done in a vacumn. My guess is Boeing has had long conversations with each and every customer, then made a business decision to set, or adjust the new production rates.
Boeing is also well committed to building the new B-747-8I/F. The B-767 line has a good enough back order to last some 5 years, long enough to work out the USAF KC-X program compitition/re-bid problems. Then again, Boeing may not even offer the KC-767AT (B-767-200LRF) in the next compition. While it is clear that EADS is stuck with only offering the A-330-200F (they will not offer the KC-30A, A-330-200MRTT again), as the next Airbus freighter, the A-350-900F will not even enter production before 2016. Of course Boeing could counter an A-350-900F tanker proposal with the B-777-200LRF, B-747-8F, or even a new B-787-800F tanker proposal.
The new USAF tanker will be a huge program for whoever wins the bid.
Boeing seems to be looking at the 2013-2014 time frame before even thinking about resuming today’s production rates of the B-737NG, B-747-8, B-767 (if it still in production then), B-777, and B-787. By then Boeing will also have a firm idea on the B-737NG follow on airplane, perhaps the Y-1.
OTOH, Airbus, still seems to not understand the future of aviation, as they are reacting to today’s economy, and not one of 5-10 years from now. The A-380 program is still in turmoil, the A-350 program still doesn’t have a frozen design, and the A340 program is, for all intents, dead. EADS only has the current A-320 and A-330 programs going well for them. I hope they soon wake up and smell the coffee. The EU needs them.
13. Raoul | April 11th, 2009 at 21:30
Last Thursday, Boeing stock closed at 39.15, up 2,28, a significant rise given the market conditions.
Upon the close of the market, Scott Carson makes his 777 rate reduction announcement, and brings further bad news of charges against earnings for Q-1, due to heretofore unknown airplane pricing schemes giving customers deep discounts on soon to be delivered aircraft.
This cause Boeing stock to drop 1.35 in limited after hours trading.The markets were closed on friday due to good friday market holiday.
There is little doubt Boeing stock will take a severe beating on monday. Boeing, combined with GE (engine provider for 777) another DOW component, may well drag the entire DOW, perhaps even the entire market down. Standard and Poors promply put Boeing’s credit rating under watch for potential downgrade
So what does Boeing do?
Implements an ad hoc rule preventing employees from selling Boeing stock, or anyone else’s at the thursday closing price, OR the opening price monday.
Transactions from employee 401K plans will only be accepted at the prices established at the close of the market on monday.
Ot would seem that Boeing wants it’s employees to sit back and potentially suffer huge losses from their retirment accounts, for no reason other than PURE SPITE.
Boeing executives continue to enrich themselves via stock bonuses and options, which they dump the same day they are awarded:
http://finance.yahoo.com/q/it?s=BA
Such insider activity indicates that they have no confidence in the company, or even their own words and actions. They simply convert the stock immediatly to cash and run away from Boeing as fast as possible.
There has not been a single open market purchase of Boing stock by any Boeing executive or member of the board, save ONE instance, in fifteen or more months.
And there will always be, in my mind, the extraordiary clairvoyance of Boeing’s CEO, James McNerney, who made a particularly timely sale of 8,588 shares on 2-Jan-09 at $45.25 per share, for a cool $388,607.
This coming after some very suspect activity in the options market concerning Boeing stock futures, that very temporarily caused a pop in the price of Boeing common stock.
Yet Boeing’s management demands, no FORCES it’s employees to take losses on the Boeing stock they own via their 401K VIP accounts.
14. ikkeman | April 12th, 2009 at 00:25
boeing investor | April 10th, 2009 at 13:32
Do you claim the US has no vested interest in keeping it’s biggest defence contractor alife? Why is the WTO case still Going?
That aside - the current systemic crisis shows the way the financial markets operate is bankrupt.
Your closing statement is an indication of what lies at the very heart of the trouble.
Short term vision and no commitment.
15. boeing investor | April 12th, 2009 at 02:58
ikkeman - firstly the biggest US defense conctracor is Lockheed martin, second is Boeing.
The WTO issue has nothing to with the US’s vested interest other than to stop loans for Airbus’ airplane program launches.
Re, my closing statement - its reality and is more to do with long term visiion, even if you disagree - the fact remains that Boeing has largely had it with unions who ask too much and do very little - this production cut should weed out some of that when the axe falls on jobs.
16. Vero Venia | April 12th, 2009 at 12:45
The 737 production will be under pressure as well. But Boeing’s decision not to increase 737 production rate seventeen months ago has been positive. ( http://www.ainonline.com/ain-air-transport-perspective/single-publication-story/article/boeing-feeling-good-about-production-plans-1/?no_cache=1 )
However, a lower 737 production rate is very likely to be decided in the second half of this year.
Cutting production is not a sin. It is a question of adapting the offer to the demand. If there is an oversupply, aircraft market value plunges.
http://verovenia.wordpress.com
17. ikkeman | April 12th, 2009 at 20:39
firstly, I stand corrected. LM is ofcourse the company with the biggest share of the gov’t pie -still the US has a vested interest in Boeings continued existence.
WTO case has everything to do with whether Boeing or Airbus recieve more gov’t support. The fact neither case has come to a resolution indicates neither plaintif has any interest in seeing it’s particular form of support put to any restrictions.
There are places in history and even the modern world where no unions exist. It’s te same places where you find child labour and sweatshops.
exchanging a highly trained, intelligent and proud workforce just because they’re smart enough to get organised is poor business sense. just look at those places without unions - are they doing any better??
I do agree, Boeing management has had it with the unions - but then again, it’s widely recognised Boeing is a poorly managed company.
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