Boeing 777 Japanese suppliers see rate cut in 2016: BAML

May 26, 2015: Key Japanese suppliers on the Boeing 777 program have told Bank of America Merrill Lynch they expect a production rate cut in 2016, BAML aerospace analyst Ron Epstein reports in a note published earlier today.

Epstein cites BAML’s Japanese industrial analyst Takahiro Mori in his own note dated May 21. Mori also wrote that Boeing is cutting pricing to its supply chain in Japan, putting additional squeeze on profits.

BAML 777 Rates

Click on image to enlarge. Source: BAML image, Leeham Co. caption.

“We attended results briefings held by Jamco, which manufactures aircraft interiors, and SinMayawa Industries, which is one of the manufacturers of Boeing parts. Both companies are suppliers to Boeing and are likely to be affected by Boeing price cuts,” Miro wrote. “We also expect Mitsubishi Heavy Industries and Kawasaki Heavy Industries…to be negatively affected. Cuts in production of the 777 from 2016 are likely to weigh profits down from FY2/17,” he wrote.

“Information is now availalble on the volume Japanese suppliers plan to provide to Boeing over the next 12 months,” Mori wrote in his note. “The output is likely to be cut from FY3/17 (April 1, 2015-March 31, 2016). “The (current) order backlog will be delivered by 2020, when the new 777X will be delivered…so annual production is unlikely to stay at 100 aircraft. Cuts in production will lead to lower profit.”

The BAML note is significant because, as far as we know, this is the first time major Boeing suppliers have given an aerospace analyst guidance on 777 production rates.

We checked with another major 777 supplier, which is also planning on 777 rate cuts, though not as early as 2016. This supplier continues to monitor sales and doesn’t see 777 sales picking up to sustain the current production rate of 8.3/mo.

Boeing CEO told aerospace analysts at its investors day earlier this month production rates will be maintained at the current 8.3/mo (100/yr) because feathering in the 777X production will be the equivalent of two or three 777 Classics. The assertion was met with skepticism on Wall Street, this column, and, according to our information, within Boeing Commercial Airplanes.

 

 

24 Comments on “Boeing 777 Japanese suppliers see rate cut in 2016: BAML

  1. If this is a surprise to anyone, they have not been paying attention.

    Hopefully the production rate can be kept above 4-5 per month late this decade. There will be additional orders but there are no guarantees the current backlog stays intact, conversions and cancellations will be there.

    Many 737NG and A320CEO slots are being “rescheduled” by airlines into MAX and NEO slots.

    “Boeing CEO told aerospace analysts at its investors day earlier this month production rates will be maintained at the current 8.3/mo (100/yr) because feathering in the 777X production will be the equivalent of two or three 777 Classics. The assertion was met with skepticism on Wall Street, this column, and, according to our information, within Boeing Commercial Airplanes.”

    There are limits to the amount of non-sense even your own people will accept. .

    • I think the way they worded it comes out as gibberish, but what this really means is that staffing and work effort within the factory will remain level even though the total # of birds out the door will come down in a fairly direct ratio of 2 or 3 fewer -300ERs for every 1 -X produced early in the manufacturing startup

      this should be seen as good news for the workers at Boeing, (who are usually the first to get hosed) being spun to make sure stock price governed management bonuses do not get impacted in the interim

      how quickly that ratio goes from 3-1 down to 1-1 is going to be primarily a function of the learning curve at the wing factory and engine readiness, as the FAL work is not going to be a whole lot different from today’s 777

      • I think you have hit the nail square on the head here Bil. I think the delivery rate will fall to 5 to 6 per month, but the labor rates will say the same. From a perspective, BA is telling the truth, to the production teams, but the financial analysts will see things differently. Unless there is a parallel line that is going to be spun up just to handle the “learning curve” builds of early 777x, how can the “777x…equivalent to 2 or 3 classics” be accomodated?

    • I think you have hit the nail square on the head here Bil. I think the delivery rate will fall to 5 to 6 per month, but the labor rates will say the same. From a perspective, BA is telling the truth, to the production teams, but the financial analysts will see things differently. Unless there is a parallel line that is going to be spun up just to handle the “learning curve” builds of early 777x, how can the “777x…equivalent to 2 or 3 classics” be accomodated?

    • “Boeing CEO told aerospace analysts at its investors day earlier this month production rates will be maintained at the current 8.3/mo (100/yr) because feathering in the 777X production will be the equivalent of two or three 777 Classics. The assertion was met with skepticism on Wall Street, this column, and, according to our information, within Boeing Commercial Airplanes.”

      There are limits to the amount of non-sense even your own people will accept. .

  2. Looking at the graph in the middle of five year spans, from 2005-2010 was about 100/yr
    2010-2015 about 170/yr, so a 70% increase but understandable with the 787 coming online. 2015-2020 is projected about 240/yr, so a 40% increase, or 8% year growth, which is still pretty respectable.

  3. So when they say that a 777X is the equivalent of 2-3 777 classics by “feathering in production”, aren’t they signalling to those of us who can see past the PR spin, that the rate is going down to 6/mo?

    The revenues from each 777X produced isn’t going to be 2-3 times that of the classic. Cashflow from the 777 is reduced in the next few years.

  4. I think its ShinMaywa Industries, who are the OEM for the japan only turbo prop amphibian ( and a large range of special duty trucks) and who do the wing to body fairing for the 777.
    If the interiors supplier is expecting a slowdown, it may mean the 777F might be increased to take up some of the slack.

    • I find your obsession with the UltraFreighter curious.

      there is a reason all non-military freighters are passenger derivatives. that reason is that freight alone is not profitable enough to drive design of standalone aircraft designs, or even have significant impact on the initial design of passenger aircraft.

      you are going to say “but, but, 747!!” which indeed is a passenger design dramatically compromised for freight, but you have to remember that the roots of the 747 fuselage were in a competition for a military freighter (which led to the C-5) and it was more economic for Boeing to reuse all the engineering effort than to start fresh when combined with the ability to sell a very capable freighter early in production.

      the great majority of all civil freighters are either mature design late production when airframe costs are way down or P2F conversions of almost used up passenger aircraft.

      what makes you think the basic economic reality of the low profitability of freight is ever going to justify a clean sheet non-military dedicated freighter?

      • If by designing an aircraft to do exactly what it is supposed to do (and not something else), you gain 22 % in fuel efficiency, 17 % in economies of scale and 11 % in turn-around efficiency and if in addition you decide to accept AGA containers to improve your average load factor from 69-72 % to a record 86-91 % boosting revenues, then the past experience of my forelopers is worth zero because this project is resilient on its own merits.

  5. What will the ramp up and production level of the 777x be? Looking at the 787 and A350 which take about 3 to 4 years to get up to full production, but since the 777x is an existing line maybe it takes two years. I’ll say 30 777x delivered in 2020, and 60 777x delivered in 2021 and beyond. If they go to 100, they may burn through the backlog too quick.

    • That is the key question and my suspicion is that they return to historic 777 production rates as this catch up period was an anomaly for that size.

  6. Now Scott you are writing the “interesting” information, which now says your theory is being backed by supplier forecast modifications. The same story is there but it’s not just your “feelings”. We all knew rates are coming down for the program because it’s just the natural order of sales cycles. We also know any supplier will do as much as they can to keep the lines as full as possible, and to have people who are sitting on the sidelines proclaim their efforts are fruitless, simply is not what any company wants or needs. What if your story created concerns outside of internal plans? You would not have cared but damage control is a huge waste of time for companies. Data like this says things are being managed in an effective way, despite the rate reduction. Your prior story made it appear Boeing management were a bunch of fools and all they’re doing is blowing smoke. Data says that’s not the case and there is a plan. Despite not being willing to admit it, I’ll take credit for this article. Reducing the emotion in business cycles is always a good thing. Thanks for the information.

    • “We all knew rates are coming down for the program because it’s just the natural order of sales cycles.”

      L7, should we, or should we not believe 777 production rates for the next 5 years as confirmed by Boeing management?

      Your post is confusing because you accuse Scott of suggesting Boeing management is blowing smoke, on the other hand you’re suggesting everyone knows rates are coming down, despite of what Boeing management says. You can’t have your cake and eat it.

      • “You can’t have your cake and eat it.”

        isn’t that the point of having your cake? So you can eat it, too? 🙂

    • The BS is strong with this one!
      Easy on the koolaid chump!

    • L7:

      “Boeing management were a bunch of fools and all they’re doing is blowing smoke.”

      L7
      Well when a company buys back its own stock to keep the price artificially high so the CEO can continue to collect his bonus and they force forward pre payments to make things look good it does bring to mind smoke and mirrors management.

  7. What’s the shelf life of a wing? The 767 was good for 30 years, the 777 was good for 25 years, the new 777x wing should be good for 25 to 30 years and one re-engine.

  8. I don’t understand those who give a pass to Boeing’s projections on this, which were patently unlikely at best, then go on to somehow conjure up any degree of employment stability numbers wise.

    A wing with largely automated assembly, and a fuselage (ditto, see FAUB-Fuselage assembly upright build), along with continues outsourcing of components, major and minor.

    Not to mention the jobs making components internally.

    Any sort of substantial rate cut on 777 means jobs losses in the thousands, and 777X is a solid net job loss over 777.

  9. Hopefully if it occurs its over time, any job losses by retirement. Maybe wishful thinking.

    Its going to take a while to get things sorted out, wing plant is big effort and in house so offset there.

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