Assessing production cuts

The big question being asked by just about everyone with an interest in aviation these days is what are Airbus and Boeing planning for production rates this year and next.

Jobs are at stake in an economic environment where, in the USA, the number of jobs lost since the start of the current recession is equal to or more than the population of Chicago. European labor laws make it more difficult to simply chop jobs, but even so this is a concern.

Suppliers are worried that Airbus and Boeing will cut production rates, hurting their businesses (and leading to more job reductions).

Here’s an encapsulating review of what’s going on.

  1. Both companies currently are firm in saying production rates for 2009 will be maintained. Airbus and Boeing each forecast deliveries of between 475 and 485 this year. Both companies overbooked their sales this year (and next and into 2011, mainly on the single-aisle airplanes), giving some cushion for cancellations and deferrals, but this is rapidly being eaten up. At one point, Boeing had 100 oversales for 737s in 2009. CEO James McNerney acknowledged on the earnings call that this figure had been reduced to 15%, or mathematically about 56 airplanes. In Boeing’s case, catch-up from the 57 day IAM strike is supporting this year’s production stream.
  2. Airbus already publicly said its current rate of 36/mo for the A320 family will not be increased to the previously planned 40/mo. There were plans a year ago to increase the rate for the A330/A340 line to 12/mo from 9/mo. This is gone as well.
  3. Airbus’ John Leahy, the COO-customers, told us in January 2008 that he foresaw a backlog risk of 25%-30% by 2010 due to economic conditions (little did he know then). This encompassed cancellations and deferrals at both companies.
  4. Steven Udvar-Hazy, the sage CEO of mega-lessor International Lease Finance Corp., predicts Airbus and Boeing will chop production rates by 30%-35% by next year. Based on the forecast delivery rates this of 480 airplanes at each manufacturer, the high-end would reduce the rates by a whopping 168 airplanes on a full-year basis, down to 312 per company. The low end is 144 airplanes, for a rate of 336 per company.
  5. Scott Carson, president of Boeing Commercial Airplanes, suggests Boeing may reduce production by 10% next year, with a decision coming in May. On the same 480 delivery forecast, this amounts to just 48 airplanes, a modest amount indeed. We understand that the line most at risk is the 737; the 777 line is thought to be in a stronger position in part because of the delays in the 787 program. Boeing’s assessment includes the assumption that at long last 787 deliveries will begin in 2010 (scheduled for the first quarter). UBS aerospace analyst David Strauss forecasts 26 787 deliveries next year. If he’s right, then the legacy Boeing program deliveries fall to 406 from 480, a reduction of 72 airplanes, or a decline of 15%. There will be a gap of several months between cessation of production for the 747-400 and delivery of the 747-8F (at least as currently planned, absent any stretch-out of the 744 program due to economic conditions). But the 744 rate is only one a month. Assuming the 777 production rate remains intact, then most if not all of the reduction comes from the 737 program. This suggests the 737 rate could come down from 31 a month to 27 or 26 a month. The variable: the 767 program, currently at one a month, was planned to go to 2.5 a month sometime in 2010 because of delays in the 787 program. We don’t know the current thinking, given the global economic conditions.
  6. Aviation Week reported last month that Airbus is considering scenarios to bring A320 production to 30/mo or below. Going from 36/mo to 30/mo is a 17% reduction. If Airbus were to match our math for the Boeing 737 rate outlined in No. 5 for the A320 family, this would be a 28% reduction.
  7. Although Boeing believes the 777 rates are more firm than the 737 rates, Airbus may not view the same thing for the A330 rates. We’re beginning to get anecdotal information that these rates may be reduced next year as well.

What about rate reductions in 2009? As noted above, Airbus and Boeing say these rates should remain solid this year. But we know from talking with suppliers that they aren’t so sure.

Boeing says it needs to give suppliers 12-18 months notice before reducing rates. Spirit Aerosystems, which builds all of the fuselage for the 737 as well as fuselage portions for other Boeing airplanes and parts for Airbus products, says it requires six months notice from Boeing. We assume Airbus is required to provide similar notice periods to its supply chain.

Boeing’s Carson acknowledged publicly that a decision on rates can be expected in May. Mathematically this could allow Boeing to reduce production in November–assuming Boeing stuck to the letter of its contracts to avoid penalties or doesn’t accelerate its decision. We’re getting anecdotal evidence Airbus is already beginning to notify suppliers of rate adjustments late this year.

The situation remains highly fluid. But this is how we see the situation as of today.

6 Comments on “Assessing production cuts

  1. For 737, the wildcards remain Ryanair and Turkish. Both are sniffing around massive narrowbody orders, and looking for bargain basement prices. Boeing might do well to give as much ground as it can, and maybe a little more, and bank on it’s expertise to improve production efficiency and cut costs to maintain margin.

    But Boeing had best carefully asess tha actual gains from a short term production cut, say 18 months or so, followed by a rapid rate increase (very costly). We know the problem is not cancellations, but deferrals. So one could easily say that doing well in a downturn is not the true objective; Being ready for the upswing (for once) should be the real goal.

    On 747-8 I think the proposed rates will hold, if for no other reason than lead times being huge. The -400 to -8 gap is going to be costly, and needs to at least not stretch longer than planned.

    The 767? Well most on order are stopgaps for late 787’s, and were probably sweetheart deals to the airlines getting them for that reason, so look for those rates to hold.

    I think that if there is a false assumption being made, it’s on the safety of the 777 backlog. No news might be good news Or not.

    As to airbus, in the past, they have shown not much inhibition to producing white tails to maintain rates. This is something Boeing never has, and will never do.

  2. From the annecdotal data dept, my wife and I just completed flights on Southwest from Manchester, NH to Sacramento (2/7/09, change planes BWI, one stop in Denver), and back to Manchester from Oakland (2/15/09 change in Phoenix).
    We saw no significant airline activity at any of these airports except by SW.

    At each airport, SW planes filled all their gates all the time, and at Oakland some appeared to be waiting to get to a gate. Their planes were taxing in and being pushed back as fast as they could. Their activity was almost frantic. For example, just prior to push back of our flight from Phoenix to Manchester, a cabin attendant found a young college type trying unsuccessfully to jam a large back pack under the seat in from of him, and quite forcefully directed him to put it in the overhead bin. When he wasted a few seconds trying to find a place near his seat, she told him where to put it, so to speak, making clear that he had to act fast.

    A few moments later this same attendant, a woman standing about 5’8″, was unable to close an overhead luggage door because two bags were sticking out. She simply turned to the multitudes jammed into the plane and yelled words to the effect, whose bags are these, we cannot leave on time until the door is closed, etc. Their owner, a large man much taller than she, finally arose from his nearby seat and jammed the bags into the space and forced the doors closed. It seemed like the push back began even before he returned to his seat.

    That attendant was not going to let a couple of irresponsible shmucks delay the on-time departure of that flight, and apparently was authorized to use very customer unfriendly language to accomplish that goal. Where was she when we needed that kind of tough love at the Fed, the SEC or in the banking industry.

    In addition, every SW flight was near capacity except from Manchester to BWI, which was about 60% full. All SW’s concources were fillied while those of other airlines were often just plain empty. For example, in Phoenix, just to get off the plane at gate C13, we had to move and sometimes push through a congested crowd of people waiting to get on the plane.

    We had a 1.5 hr lay over at BWI, during which time I saw only one non-SW plane land or take off (a Delta Connection CJ). There was more non-SW activity in Oakland and Phoenix (where we had a 2 hr layover), but not much more, mainly US Air.

    Who knows how all this bodes for BA and AB deliveries this year. But the stark disappearance of airlines other than SW is amazing.

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