Leeham News and Analysis
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Leeham News and Analysis
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Mitigating risk, lessons learned as Boeing heads into MAX, 777X production
Aug. 12, 2015, © Leeham Co. Mitigating risk and taking lessons learned from across the entire 7-Series families are key to improving productivity, cutting costs and
Greg Smith, chief financial officer of The Boeing Co. Source: Boeing.
preparing for the transition from the 737NG to the MAX and from the 777 Classic to the 777X, the chief financial officer of The Boeing Co. said today at the Jefferies Global Industrials Conference.
Greg Smith told the conference, which was webcast, that putting all new airplane development under one department enables a common understanding of what’s going on across the product lines and therefore the new product lines benefit to reduce risk and create efficiencies.
The lessons learned from the 787 lines in Everett and Charleston “are very encouraging,” Smith said. “We are getting better learning from those efficiencies that transition to other parts of the business.”
Boeing is shutting the 787 surge line in Everett because production on the line is more inefficient than the main Everett and Charleston lines.
“The surge line has reached a point where it’s more inefficient than efficient,” Smith said. “We’ve reached a point of maturity in production where it’s clearly not needed. Getting the maturity of those two lines up gives you the confidence to shut down the surge line.”
This opens the space to begin production of the 777X in 2018 and 2019, avoiding disruption for the current 777 Classic line and mitigating risk. Similarly, the decision to begin production of the 737 MAX on a separate line at the Renton factory avoids disrupting the efficiencies there, particularly as 737 production prepares to go up in rate.
Still, Smith said getting costs down and efficiencies up on the 787 line remains a challenge.
There is no question that getting the costs down on the 787 per unit is major objective, he said. “Not all the expectations we’ve set internally have been met” but the company is making progress.
Smith said there are about 1,100 projects relating to productivity and flow time, ideas that originated internally or from supply chain. “Now that we’re stable, we can look at these efficiencies that you can’t see when you’re going up every six months in rate.”
Demand remains robust
“It’s pretty robust demand around products and services. A lot of it goes to growth but a lot of it goes to efficiency. Our competitor brings efficiency. These are very efficient aircraft. Forty to 50% of market is coming from replacement. Operating costs and life cycle improvement is significant and driving demand to all of us,” Smith said.
“I feel pretty good about the backlog,” Smith said. Boeing looks at the diversity by customer, by geography and replacement. “We’re not seeing a slow down in demand.”
Smith also said that the current fuel price environment isn’t having an effect on demand.
“You go back over time and look for a correlation between oil prices and orders and you won’t find it. It goes back to technology we’re bringing to the market,” he said. These are the fundamentals that give “confidence you’re bringing the right product to the market.”
Leeham: Still, Smith said getting costs down and efficiencies up on the 787 line remains a challenge. There is no question that getting the costs down on the 787 per unit is major objective, he said. “Not all the expectations we’ve set internally have been met” but the company is making progress.
And that is the official line. I can only imagine what the real story is.
Leeham: “It’s pretty robust demand around products and services. Forty to 50% of market is coming from replacement. Operating costs and life cycle improvement is significant and driving demand to all of us,” Smith said. “I feel pretty good about the backlog,” Smith said. “We’re not seeing a slow down in demand.” Smith also said that the current fuel price environment isn’t having an effect on demand.
I sense a slowdown coming in the growth of the world economy. And even if the backlog is huge the new orders are not coming in at the same pace this year. Perhaps we are at the beginning of a general slowdown. But it’s still too early to tell.
Normand
You read my mind. I believe we will look back at this point with wonder. As the increasingly frantic central banking actions of the past 7 years create greater and greater perversity of effect across the globe something is highly likely to give.
In this industry the impact of an economic cold will be felt massively. I get the feeling that all OEMs across the board see an urgent need to batten down the hatches and create FCF. Some of the backlogs (not all of course) could disappear with a few well chosen bankruptcies/ order cancellations.
One significant benefit to airline wellbeing is of course fuel costs falling. The flip side being that the urgent need for a cash strapped airline to replace the gas guzzlers is substantially reduced. An example being the a340. Even now they are still a substantial fleet in operation, even coming off an extremely high fuel cost environment. Maybe they will be given an extended life.
There appears to be a realisation that order booking is not the only answer and production efficiency is the new focus. All that money spent on development has to be recouped urgently in the event that the economic position deteriorates.
Don’t know about you guys but I see more and more empty seats every time I fly.
I can’t remember the last time I saw an empty seat (almost not joking here)
of the last 5 trips I took (consisting of ~23 flights total) better than half had the airline bumping people or handing out $300-500 travel vouchers for taking a voluntary bump. and all the rest were near capacity too.
As I posted I was thinking I was being a tad selective as I was getting off the second of two flights packed. Perhaps my travels in CIS To Kaz and the like recently have skewed my judgement. Guessing they are down to th oil and gas downturn there. I was getting 5 rows to myself. My bad 🙂
All the usual buzz words but the reality is that its not the structure it is the execution and the execution has all been to undermining the union, moving jobs out of Washington state regardless of the impact on the company.
What are the real goals?
Things like shutting down the surge line is code for we can’t do what we need to with what we have so we will come up with something that justifies what we do.
or the part about a lie repeated often enough becomes the truth, at least with the Board.
So I don’t believe any of what they say, even if some of it actually is true, there is no way to sort out that from the lies until after the fact.
So productivity is important. Maybe you can squeeze it out of every stakeholder using power relationships, although you might run up $30 billion in excess costs trying that approach.
Maybe you can build a strong problem-solving culture into the program from the beginning, where each stakeholder’s interests are respected.
There might be a lesson to learn in there, yet.
That $30 bill is only Boeings share of the supply chain , dont forget the wing builder in Japan and the fuselage plant in Italy. Is that another $20 bill ?
“We are getting better learning from those efficiencies that transition to other parts of the business.”
[Edited as contrary to Reader Comment rules]
Considering the $24 million loss Boeing is still taking on every 787 produced, and the insignificant reduction in loss on 787 production between the 1st and 2nd quarters, Boeing really has a tiger by the tail here. They obviously underestimated the cost of production and overestimated the learning curve on productivity, so they have a huge backlog, but no obvious way to close the gap between costs and revenue. Their statements that increasing the production rate to 12/month is going to close such a large gap seems extremely unlikely since they’ve already been delivering 11/m this year. The 787 is technically a great airplane, but it also seems to be a financial black hole. You have to wonder how they will extricate themselves from this situation.
“Their statements that increasing the production rate to 12/month is going to close such a large gap seems extremely unlikely.”
Equally unlikely is their statement that the Dreamliner will be cash flow positive in 2015.
And if it turns out they do… well, they will be lying.
The marketing baloney is strong with this one.
I think unit cost reduction will come from engineering solutions rather than labour productivity solutions.
By the looks of things the 787 is and will be a true test case for adoption of new technologies.
I wish Boeing well and look forward to rate 16 on the 787 in the near future!
“I think unit cost reduction will come from engineering solutions.”
Yes, and engineering solutions come from engineers. That’s why you have to take great care of your engineers. After all Boeing’s reputation can largely be imparted to the past accomplishments of its highly talented engineering workforce.
Don’t forget the value added by the Powerpoint rangers in Chicago!
I don’t think unit cost reductions on their own will pick up the slack regardless of what engineering solutions are sought. I have played with Javier’s numbers a lot (I think a lot of us know the fascinating learning curve work he has done, my personal thanks). I think personally it is all about the initial pricing of the product which was so divorced from reality. I would be very interesting in hearing from anyone as to the current pricing they are achieving after the early giveaways. I am guessing that the a330neo is putting up a strong fight on every sale and by driving down the price and bleeding Boeing white on each sale.
The hubris of underbidding. How much would they lose if they cancelled the contracts for several hundred 787s and resold them at higher prices?
The question is what is the b787 worth to airlines? A fantastic engineering feat but not probably worth as much it has to be. Unless you have a specific long-thin need then you could opt for a 300er at near cost. A a330 neo or ceo again at massive cost savings. Both offerings with a proven track record and with a whole support infrastructure built around them.
There appears to be a place for the a350 on the basis that the investment is considerably lower and the replacement pool is large (early and not so early b777s and a340 as well as b747 and a330 if trading up or down on capacity or range) . Couple that with early maturity of design and operation it should make money.
I think we are looking at the need for a massive write down to bring the Boeing books into line with reality, similar to the a380 issues but of an order of magnitude larger. In fact you could argue (tongue in cheek) that Airbus benefit from the lack of a380 orders as Boeing will be destroyed by their order backlog where the cost completely outweighs the prices achieved. Break even in 2016? Does anyone believe that?
“Break even in 2016? Does anyone believe that?”
The expression “break even” is misleading in this case. We should use “cash flow positive” instead; which does not mean the same thing. To figure out when a particular aircraft programme will break even we would need the total R&D cost plus the total manufacturing cost for a certain block of aircraft, say 1200 ship sets for example. Anyway, we will never know what the 787 R&D will have cost. What we are interested in finding out at the moment is when the 787 will start to contribute to the cash flow. That will only happen when the average manufacturing cost over a large block will be lower than the amount of money the company will obtain when the block of aircraft will have been delivered. For example if the average manufacturing cost is 250M and the average selling price is 225M the cash flow remains negative by 25M. And the forward lost will keep increasing until the manufacturing cost will start to be lower than the selling price. McNerney had promised that this would happen in 2015. But we learned recently that the 787 is still 25M negative cash flow per aircraft. And it looks like it will remain that way for some time. Boeing appears to be struggling with this issue and it could take longer than they had anticipated. In short Boeing is loosing money on each aircraft it delivers to a customer. Put more bluntly, the 787 is still bleeding cash. And at the following rate: 25M X 11 X 12 = 3300M (3.3B) a year. That’s a lot of money, even for a big company like Boeing.
Sorry I meant breakeven in the colloquial term not in the strict definition. So to redefine as ‘free cash flow positive on the project’ although I am sure a few more adjustments to that definition are probably necessary.
Anyway how will a loss per aircraft of $20m suddenly disappear. The learning curve suggests that any learning effect reduces the cost base at an ever reducing rate. The 787 has been ‘learning’ for a few hundred units already and at the suggested range of rates (83%~87%) a considerable flattening of the curve will already have occurred. Further there seems to be a little bit of sleight of hand where management are taking credit for an accelerated learning effect on the 9 by separating it from the 8.
The learning rate on these new aircraft b787/a350 appears to be a bit lower than the historical industry average (maybe too early to tell), although scope for production enhancements are probably greater and hence the learning effect may be more enduring.
In my view it is difficult to take the comments made by Boeing commercial at face value sometimes
Simple arithmetic:
$ 30 billion deferred 787 costs spread over another 900 planes is $ 33 million per unit.
B was losing about $20 million per plane last quarter.
Therefore the required cost improvement to break even on the 787 is $ 53 million per unit.
Good luck! Or is it good bye?
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Simple arithmetic indeed, but also simple accounting. Of course Boeing does not have a 30B debt for the 787 on its books in the sense that it owes that money to the banks. It is just an accounting trick that makes Boeing’s quarterly reports look better than they should. And that has for effect of keeping the stock price high. It is a rather artificial measure that does not reflect reality. But it’s fine as long as everything goes well and cash keeps coming in via alternative revenue sources like the 777 and 737, along with other military and space programmes. But if it is going to take longer than expected to make the 787 cash flow positive there is a possibility that it will still be in the red when other programmes like the 777 will no longer be as lucrative as they are at the moment. Of course the new 777X will eventually become cash flow positive in due time, but we still don’t know when this is going to happen exactly. But what worries me is that two negative curves could eventually coincide for a period of time: the 787 learning curve and the 777/777X transition period. For in my view it might take a few more years for the 787 to become substantially cash flow positive. And that could bring it dangerously close to the time the 777 Classic revenues will have started to decline. It will also take a few additional years for the 777X to become cash flow positive. In other words Boeing might not be able for some time to make much money on the 787, if any, and much less than now on the 777 (old and new) for a certain period of time. Of course the 737’s backlog will continue to bring the cash Boeing needs to pay its employees. But that is not going to last for ever. However successful the 737 is at the moment I don’t think it will remain a bestseller for ever. And that brings me back to that 787 forward lost. Like I said at the beginning that accounting trick is fine as long as everything goes well. But when revenues start to decline it becomes increasingly difficult to absorb such a big deficit. Some people suggest that Boeing should take the hit now instead of trying to absorb it gradually like it does at the moment. That is what Airbus is doing because they work with different accounting rules in Europe. There might come a time though when Boeing may no longer be in a position to take that hit. In other words it could be fatal.