Boeing Increases Production and Insourcing Efforts as Backlog Rises

by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.

The market for large commercial transports continues to rise following a brief downtick in 2015-2016.  At the 2018 Farnborough Airshow, both Airbus and Boeing generated an impressive number of orders and commitments. All told, the over 1,400 aircraft orders placed was the biggest total since 2013, with Airbus garnering 431 orders and Boeing “winning” the show with 676.

Boeing’s fuel-efficient 737 MAX narrowbody accounted for the majority of the company’s order book at the show.  But widebody aircraft all saw a bit of a resurgence following somewhat sluggish sales of late, with Boeing securing commitments for 55 777s, 52 787s, and five 747-8Fs.

Much of Boeing’s widebody success came in the air cargo market: besides the five 747-8Fs, 48 of the 777 commitments were for 777F freighters.  A strong global economy and rapid growth in e-commerce are combining to foster robust growth in air cargo traffic, which is resulting in increased demand for new freighter aircraft.

Adding in the air show totals, the company has a rough backlog of more than 6,600 airliners – primarily the new 737 MAX – to build over the coming years.  At current production levels, Boeing’s backlog would last well over eight years.

In terms of deliveries, Boeing produced 763 aircraft in 2017, compared to 748 in 2016.  As it looks to 2018, the company expects to deliver 810 to 815 jets as it pushes its assembly lines – as of June 2018, the company had delivered 378 aircraft and was 26 jets ahead of last year’s delivery figures. As a CNN Money report put it, Boeing will have to complete one aircraft about every 11 hours.

As they seek to ramp up production, both Airbus and Boeing are pushing their extensive global supply chains to the limit.  The pressure on supply chains to meet the demands of delivering highly engineered components in increasing quantities and on just-in-time schedules will be intense.  Cracks in this system have appeared in the past, producing a ripple effect through Boeing’s assembly lines and leading to delivery delays.

In response, Boeing has begun insourcing work.  The company has acquired several operations, adding back some of the capabilities it had abandoned under old strategies. Brought back into the fold has been production of actuators, nacelles and aircraft seats.  The company has also launched a new avionics business. More recently, Boeing partnered with Safran to form a new APU joint venture, which will compete against Honeywell and Pratt & Whitney Canada.

Overall, the growing clout of merging Tier I contractors, such as the pending UTC/Rockwell Collins, is forcing these moves as Boeing works to keep costs under tight control.

Despite these problems, production at Boeing has risen 50 percent over the past 10 years.  Now the company is planning another 35 percent jump in production – from 42 single-aisle aircraft a month to 57 by 2019.   In April 2018, Boeing announced plans to increase its 767 production rate to three jets per month from 2.5 beginning in 2020 due to strong air cargo growth.

Managing these increases in a way that avoids disruption will be tricky, as oversight and communication between Boeing and its subcontractors will be critical in making the process work.  Airbus already discovered this when deliveries of its new A320neo were delayed over late Pratt & Whitney PurePower engine deliveries.

Perhaps Boeing’s biggest project in 2019 will be the pending tie-up with Brazil’s Embraer.  Driving the merger talks is the move by Airbus to take a majority stake in Bombardier’s CSeries commercial jetliner, which was recently rebranded as the A220-300.  A teaming between Boeing and Embraer will allow the two firms to better compete against the A220 family, which has been the focus of several trade disputes in both Brazil and the U.S.

The process had moved solidly ahead at mid-year, with Boeing and Embraer signing a non-binding Memorandum of Understanding to establish the partnership. The MoU lays the foundation for a new commercial aircraft entity majority owned by Boeing at 80 percent, with Embraer holding 20 percent. In addition, both companies plan to create another joint venture later on to promote and develop new markets and applications for defense products and services, especially the KC-390 multimission aircraft, based on jointly identified opportunities.

Once complete, the new Boeing/Embraer venture will make a solid match, as it will round out Boeing’s aircraft offerings.  There is very little competitive overlap between the two product lines, consisting only of some indirect competition between the E195-E2 and the 737 MAX 7.  The combination will also provide Boeing with an immediate and extensive presence in the business jet market, an arena in which the U.S. company currently competes only at the top end with its corporate-configured 737s.  More importantly, the tie-up would also enable a comprehensive and broad-based attack on the Airbus A220 family, with the E190-E2 and E195-E2 challenging the A220-100 version, and the 737 MAX 7 and 737 MAX 8 battling the A220-300.

Defense markets, meanwhile, are rapidly moving upward.  A resurgent Russia, continued trouble in the Middle East, and heightened tension between the U.S. and North Korea are driving increases in defense spending around the world.

In July 2017, the Trump administration ordered a government-wide review of the U.S. defense industry that would lead to suggestions of any changes that could help strengthen it. In addition, heated rhetoric over NATO partner country defense spending will probably lead to increased procurement. The outcome of these factors will likely help U.S. firms across the board, and potentially fuel increased defense spending in the years ahead.

Such a shift could be good news for Boeing’s defense business, which has suffered lately.  In response, the company has consolidated and restructured its defense operations, even shifting its divisional headquarters to the Washington, DC, area.  Further, Boeing has decided to move its defense services and support work out of the high-cost Seattle, Washington, area to the lower-cost regions of St. Louis, Missouri, and Oklahoma City, Oklahoma.  With many of Boeing’s defense programs complete or slowing, the move seemed a necessary one.

The firm’s current defense programs will not be able to make up the lost revenue.  For example, the KC-46 tanker has razor-thin margins and is being hammered by cost overruns that Boeing must bear.  Further, the company will fight tooth and nail for the few procurement programs remaining.  In early 2016, a protest by Boeing and its partner Lockheed Martin over the selection of Northrop Grumman for the Long-Range Strike Bomber (LRS-B) was denied.

As a result, Boeing is now excluded from all next-generation military aircraft design and manufacturing work.  C-17 production is complete, and the company’s F/A-18 and F-15 programs are winding down, with nothing to replace them.  Speculation was rampant at one point that Northrop Grumman might be acquired by Boeing as it seeks to maintain a role in the lucrative military aircraft market.  However, the Pentagon would likely not look favorably on such a deal, should it materialize, owing to fears over reduced competition.

The next big competition, for the USAF T-X trainer, is moving toward a decision sometime in 2018.  A Boeing/Saab team has developed a clean-sheet design to meet the service’s requirements.  This bid will need to build in the cost of developing a new aircraft, but by going with a new design, the team will be able to tailor it precisely to the T-X program’s requirements.  Recent news reports quoted Boeing and Saab as stating that they expected to market their design globally regardless of a USAF win.  While the global trainer market is strong, a win in the U.S. would give the program tremendous economies of scale.  Further, many nations will follow the U.S. lead in trainer selection, especially if they currently operate F-35s in their fleets.  As rival contractors have dropped out of the competition, it appears that this program will be a shoot-out between Lockheed Martin and Boeing for the prize, with Leonardo’s offering being a long shot.

While the big contract opportunities currently reside in the U.S., many smaller contracts are in competition around the globe.  The aforementioned regional tensions are driving increased defense spending globally, especially in the United Arab Emirates, Saudi Arabia, South Korea, Japan, India, China, and Russia.  Where and when it can, Boeing will be competing – either alone or in partnership with regional firms – as it seeks to maintain its position as one of the world’s top aerospace and defense companies.

For the over 15 years, Richard has authored Forecast International’s Defense & Aerospace Companies series, Volume I (North America) and Volume II (International) services. The two books provide detailed outlines and analyses of major aerospace and defense contractors.

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