Pontifications: Gifts that keep on giving

Feb. 15, 2016, © Leeham Co. In the news business, it’s called the gift that keeps on giving.

Hamilton KING5_2

By Scott Hamilton

These are news stories on topics that just won’t go away. And we get to write about them over and over and over and over. And then we get to write about them some more.

For most of the decade of 2001-2009 and into 2011, we journalists got to write about the USAF aerial refueling tanker scandal and procurement process. First, Boeing struck a deal to lease 100 KC-767s to the USAF. This deal blew up like an IED in late 2003 when Sen. John McCain (R-AZ), who sat on the US Senate’s powerful Armed Services Committee, challenged the fiscal responsibility of the deal. His investigation uncovered improprieties. A former USAF procurement officer who was hired by Boeing after the contract award went to jail. So did the CFO. And Boeing CEO Phil Condit resigned, giving us as his successor former McDonnell Douglas CEO Harry Stonecipher. (This later became story in its own right.)

After Boeing’s lease deal was voided, Northrop Grumman teamed with EADS (as the parent of Airbus was then known) to compete with Boeing in a new round of tanker procurement. Northrop-EADS won. But then Boeing protests, the Government Accountability Office upheld the protest and round three began. Boeing won–in February 2011–eight years after the original contract was frozen (December 2003).

Even now, the tanker story occasionally rears its head again. Boeing is late with the KC-46A and has written off nearly $1bn in costs. It’s clear there’s more to this story to come.

Airbus is not immune

Through much of the mid-to-late 2000s, Airbus was not immune to endless gifting, either. The A380 program, controversial to begin with, became a series of headlines and with it, disarray in the executive’s office and intrigue of trans-border governance and politics.

My first trip to the Airbus headquarters and factories in Toulouse was in May 2006. Coming back, I was in the process of writing a series of stories and had not yet gotten to my interviews about the A380, when news broke of another delay in what would become a string of them based on the now-infamous wiring snafu between Airbus’ Hamburg and Toulouse engineering centers.

Thus began a long string of press stories about the A380 program that resulted in the resignations of several CEOs at EADS and Airbus. Finally settling on Louis Gallois and Tom Enders, a further string of stories were written on how they solved the problems of the past and how Enders began to remove the state meddlings of German and France emerged.

Airbus’ muddled response to the Boeing 787 provided fodder for a long time. Initially the A350 was a re-winged, re-engined A330, incorporating some more upgrades. But it was still a metal airplane and composites were the soup of the day. Market reaction was tepid. Airbus went through four more versions before settling on the XWB. Even then this proved to be off target with the A350-800 that just didn’t have the needed economics and an A350-1000 that still needed some tweaking.

The more recent A330neo has seen sales stall while officials focused on selling the A330ceo to bridge the production gap and fuel has fallen to under $30bbl. Even though one Boeing official called Airbus’ wide body strategy “a mess,” the fact is that excluding freighters, Airbus has outsold Boeing in wide bodies in most of the recent years.

Bombardier

Bombardier designed a superb plane in the C Series. Then management proceeded to royally f[oul] up the strategy to sell it.

The turmoil at BBD has been the subject of two recent in-depth stories: this one by the media outlet MacLean‘s, and one by Bloomberg News.

BBD is now a penny stock and the company is planning a reverse stock split to avoid delisting on the Toronto stock exchange. Government bail outs have become necessary and the industry views BBD as a bankrupt company. There hasn’t been a C Series order since September 2014. The headlines continue to be ominous and there are many more to come.

Back to Boeing

And then there’s Boeing again.

On the Jan. 27 earnings call, Boeing surprised analysts in a bad way with lower than expected guidance for 2016. Stock was off nearly 10% at one point even as the earnings call was proceeding.

Last week, Boeing was back in the news with Ray Conner, CEO of Boeing Commercial Airplanes, announcing to employees a new round of deep cost cutting was needed because of pricing pressure from Airbus, the loss of market share between the 737 MAX and the A320neo family and the need for a new airplane to solve this problem. (if Airbus’ wide body strategy is “a mess,” it’s now become clear Boeing’s narrow body strategy is “a mess.”)

Less than 24 hours later, news emerged that the Securities and Exchange Commission was investigating whether Boeing improperly forecast sales projections in setting its accounting blocks for the 747 and 787 programs to pump financial reports.

Stock on Thursday, the day the SEC probe became known, dropped to as low as $102, a two-year low. The last time Boeing stock was at $100 was June of 2013.

Boeing is facing a long period of unhappy headlines.

Bombardier. Boeing. It’s the gift that keeps on giving.

 

58 Comments on “Pontifications: Gifts that keep on giving

  1. I think calling Airbus’ widebody strategy a mess is sort of harsh. On the other hand, calling it a strategy at all is also brave. In my opinion the “strategy” at both manufacturers appears largely reactive to either market forces or competition. The last widebody being the result of real strategy was the A380. The B787 was sound in its market position, but too ambitious in its system design.

    • “The B787 was sound in its market position,”

      Sure, as was the A330 whose slot the 787 aimed to squat on. 🙂

      • Yep I was looking at the math. From 2007 onwards, the A330 outsold the B787 2.5:1

        • 877 to 629 is 2.5 to 1? Funny math.
          Regardless why not 2006 (which is what I think you were going for) or 2005?

          Stat abuse is a horrible thing.

    • An odd comment. A valid product strategy is not only one where you actively push new products onto the market; it can also be where you wait to see what the market (or your competitor) pulls from you. Or in fact, may other things; a strategy is valid as long as it helps you to meet your business objectives.

  2. It may sound weird, but I really view Ray Conners announcement as a positive. In my interpretation, there has been a fundamental shift within Boeing management, so that they now see things as they are, as opposed to what one would like things to be, and approach things with the mindset of a realist. I believe this management team can make great strategic decisions going forward.

    • I see it the same way: it almost seems like Boeing Management is back in touch with reality. I think the progress on the 737-MAX is also a sign that Boeing is slowly getting its mojo back.

    • It’s really a great legacy that McNerney left. Three major development programs under his watch. Two will never show a profit and it’s questionable that the third one will either. Combine that with the accounting concerns and it’s clear that the chickens are coming home to roost. Hope the new management team will get things back on track.

        • “Geo” answered this one with basically the same answer I would have given. The sonic cruiser was an interesting concept but was simply something that the airlines didn’t want. Its operational benefits depended on low fuel costs, so something like this could possibly emerge again.

          • I still think the “tamed down Racer Car” pedigree was a necessary ingredient to the success of Dreamliner campaigning.
            Without that detour the small “distance” to the existing competitor airframe would have been less obscured.

            ( showcased a bit by the foundering of the NSA: too far out to the right and not enough performance delta. )

  3. “There hasn’t been a C Series order since September 2014.”

    It’s a good aircraft. We know that.

    This is almost unprecedented. Has there been a major new type that has remained unsold in this way?

    A bad sales team slows your rate, it doesn’t stop it completely. Surely customer cautiousness cannot explain all of it, and neither can A+B threats and inducements.

    I’d like to know why.

  4. It’s clear that the 320/321 NEO (and the forced move to the MAX on Boeing’s side) is the marketing coup of the decade to say the least.
    Boeing has been totally trapped and it’s now clear that the only way to make it out is to design a brand new airplane, at last. But in that case it’s a marketing nightmare to be the first to the market : what is the best fuselage section ? Single-aisle or Twin-aisles ? Boeing will have to take a big risk and Airbus will have time to strike back and take benefits from the market feedback.
    Really, really hard times to come for Boeing. And lots of interesting Scott’s pontifications to come as well…

  5. Regarding Bombardier and the C Series, it seems they are now at a point where interested buyers will refrain from ordering aircrafts because they are not confident enough the company will still be around in a few years to deliver them, and further down the line to service them.

    With most potential buyers adopting a wait-and-see position, a vicious circle has set in.

    In this context, any upcoming federal support could be targeted at this problem. A simple loan or investment to/in the company or C Series program will not be enough.

    In addition to WTO-safe financial support, the federal government could look at a form of “performance bond”, similar to what is used in the construction industry.

  6. BBD and Boeing better burry their pride, put their NB strategies in the bin & sit around the table.

    Maybe halt the CS program for 2 yrs. Integrate a 787 ‘ish cockpit into the CS, stop the CS100 and launch CS500.

    Launch a big NSA, so 120-240 seats 4000NM is covered next decade.

    BBD and Boeing stumbling around in their own erroneous market perceptions only helped Airbus.

    • Something like this is BBDs best hope, because I can’t see Airbus or Boeing moving up a size and just leaving that part of the market for the Cseries. If they introduce an opptimsed a319 or b737 700 replacement, BBD will be annihilated.Might as well wait and the Canadian government will give you the wreckage with a dowry from the British government thrown in.

  7. I am not sure the word “strategy” is really at home in this business. The costs of developing anything are such that makers look for a market before building the aircraft, not the other way around. Successful big changes are generally evolved not invented, ie Comet to KC-135/B707, B777-200 to B777-300ER. Large steps have often had a long time and a lot of work to break through, ie B747-100, which only ever got 160 orders. So saying strategy is a mess seems a wrong strategy to start with!!

    I understood that Boeing used to be way behind Airbus in automation. Now that the dollar is up again Boeing can’t avoid improving productivity per man hour. In the end it they get pushed into investing more in production techniques labour costs will become a smaller part of their running costs, wages can rise and some of the never ending fighting over conditions might get solved.

    • Bringing the 747-100 as an example to an aircraft with few orders is a mistake. Orders didn’t stop b/c the airplane wasn’t good enough but b/c Boeing introduced a version with longer range.

      • And Airbus hasn’t, I partly agree with you but back in the 70’s the 747 line didn’t look to too healthy. My father even predicted it’s death as the A300 was sooooo much cheaper to run.

  8. ps I should have added that Boeing’s investment strategy is mess, they should have been saving up for the inevitable day the 737 runs out of steam.

    • People like you and I simply don’t understand economics. I suppose you’re one of those [edited as violation of Reader Comment Rules] that wants the government to stop borrowing money and maybe even pay some of it back when times are good.

        • You guys don’t understand. The peasants are supposed to be prudent, save on non existent money and no bankruptcy (see credit card debt)

          On the other hand, big companies can be irresponsible as they want to because they write the tax laws and there is always the bail out.

          Or as I was told by one lazy non worker, you should do as I say, not as I do. Half of it was good advice.

      • well, now that you mention it……. Sadly I’m not a US citizen, our (Australia’s) deficits look even worse to me and our tax laws have holes you could drive a GFC through.

  9. The C Series is not growing at least in part because fuel efficiency does not justify much higher sticker prices.

    The 737MAX and A320NEO, with fuel at $1 per gallon, only justifies a sticker price “bump” of $3.8 million. The MAX’s list “bump” over the NG is $14 million.

    It is simple economics: if fuel is cheap, paying much more for fuel efficiency is a loser. As airlines realize low fuel is here to stay, either Boeing and Airbus will have to sell MAXs and NEOs at much less of a “bump” (and write off the billions invested), or airlines will pay much less for NGs and CEOs.

  10. A couple of missed items

    An Air Force acquisition general failed to mention his wife worked for Northrop Grumman. Sound familiar? Shades of Boeing tanker debacle. Who won the bomber contest?

    Said General is now assigned to helping wounded veterans. Hmmm, maybe they don’t want him! Honorable serving men vs upper management yeast.

    Said General of course had nothing to do with the bomber acquisition. hmmm and more hmmm.

    And in an ironic bit of news, the RAAF with their KC30 (A330MRT) just did fueling test on a C17

    In the meantime, the KC46 (KC767) is in the midst of having refueled a number of aircraft with a C17 on line but not available (probably because the Aussies were using it)

    So for all the delays, Boeing is almost up to speed (or is) with the A330MRT. Talk about a program delay, just getting around to its primary mission of fueling C17s for the RAAF (they have 8 C17s and ability to fuel them is a cornerstone of the program.

    • There is a problem with getting things half right TWA!
      The AF acquisition guy wasnt a general he was a civilian, and his wife merely had a NG retirement savings account.

      Not sure why RAAF KC30 is using USAF C-17 as they have their own, but for the KC-46 they are working their way up from light to heavy for both probe and drogue. I guess ‘heavy with probe’ will be near the end of the list.

      • Wrong on significant part:

        Some and some. He is “former” Air Force, colonel and was working in the procurement dept.

        As his wife has a retirement account with NG, then she is a former employee as to the best of my knowledge NG is not like Morgan Stanly that handles other retirement accounts.

        good question is when did she retire and how long has her involvement with NG not been disclosed when he was in a position of acquisition?

        KC46 is working as they can get the aircraft, C17 was supposed to be on early list but slipped due to availability.

        Probe a lot more critical hardware wise than the drogue system (though issues with the Italian tanker were no fun)

    • There is a difference between a certification of a tanker for a certain aircraft or some wet contacts for initial testing.

      The KC- 30A already refueled Wedgetails via boom over Iraq.

      The C-17 is in heavy use because the KC-X project is years late. KC-X was thought to release the C-17 from moving troops and parcel services.

      • Yea I hoped someone would catch that!

        Still it does show the long slow trail of the A330MRT getting up to speed.

        RAAF took delivery of a very deficient system and has slowly got it up to speed.

        USAF expect the tanker to perform fully when it gets delivered.

        Ironic to see it doing early in the certification what the A330MRT is just finally getting to.

          • Keesje:

            There was a report by the Australian general in charge of the program about how they got it going.

            While there was a great deal of lipstick on the pig, upshot was that they took delivery of a system that could only carry passenger and in the course of 5 years got it mostly working.

            In comparison, the KC46 is doing well despite the screw ups. I think credit should be given where its due.

  11. The rancor is rampant in here today. What some of us fail to see is that companies as large as these go through cycles all of the time. The 747 had free reign for as long as it did then the A380 made its debut. When the 1st iteration of the A350 came to fruition, it was a A330 with lipstick and an evening dress. Now look at it. It’s a winner.

    Putting Boeing and Bombardier in the same group is really unfair. Boeing is 67 times larger than Bombardier. However way they figure it out, they will. Airbus seems to be firing on all cylinders and that’s great. But by no means are BA and BBD bad companies who need to bury their pride because things are not going according to plan. Nothing is perfect.

    • “”When the 1st iteration of the A350 came to fruition, it was a A330 with lipstick and an evening dress. Now look at it. It’s a winner.””

      Worse still…it’s a 777 Killer that’s going to effectively end the 777-300ER (the biggest cash cow widebody of all time). Before Boeing proposed launching the 787 (which was aimed at the a330 market space), there is nothing to indicate that Airbus had any plans to make a run at the 777 market space (but that’s just what the A350-1000 and A350-900 do). I find that situation so…ironic.

      • There have been 5 solutions for a fuselage around two LD3 containers, 747, A300, 777, 787, and A350. The A350 may be the most optimal solution. The switch to a similar comfort 10 abreast might give 11% more seating, at the cost of 11% more weight and skin drag, but frontal area goes up by 18%. What to do with the crown space? It is expensive volume to move through the air if it is not paying.

          • Sent too soon, I believe at one time it was used for duct runs from the Air Bleed system.

            787 would not need that, not sure how much is used by A350/A380/747 (all different setups with A380 the most odd with two tier seating)

            Still the bigger the bird the more excess room

        • IMU ( and guessing a bit ) the LD-1 was fitted to the 747
          clipping away the “ear” partly created the ld-3 to fit the MD11/Lockheed Tristar?
          Airbus designed the smallest diameter fuse fitting ld-3 and a pax deck. ( via elevating the pax deck slighty and reducing unused volume in the upper lobe) for the A300 and all following Airbus 222″ diameter fuselages.
          Boeing created the 767 and forced a new LD type : LD-2. Haven’t looked at how the later >222″ fuselages handle wasting space ( and where )

      • To suggest that something is being killed, you need to see if it is really just that. The 777 line is in the midst of a transition to the – 9 and – 8 models. The 777 sold just Below corporate targets for 2015 and 2014 was a good year as well. Meanwhile the 350 hasn’t taken an order in the last 2 years. I assure you that Toulouse isn’t worried because it will sell sooner or later. Keep in mind that the 777 is a much older line than the A350, but you already know that. Thank you for the input.

      • It has an order book of -35 the last two years, whom exactly is it “killing” again?

        • @ Geo

          And an order book stretching beyond 2020….. And of course a good emirates win shortly. to follow Virgin, Philippines etc etc. I think we can safely say that the programme is a success with the 1100 still to come. The fuselage diameter also give AB a base for future developments as an A330 replacement in 2022. The X could be fantastic but it is some way away and has to accept some legacy bits that may compromise its overall performance via a vis weight

  12. I am trying to imagine the poor AF officials trying to explain president “Trump” that they are only getting for him the second largest passenger airplane in the world, not the largest one. “What? You know I am a proven winner, I don’t order second best things…..” I can already hear that one:P

  13. Not that its a show stopper but the A321 had an incident (tail strike maybe per flight global)

    they are having their problems with the NEO.

    Also 13 unatributed orders for A330NEO

  14. You are welcome, add in AV Week quote P&W as looking at a 40k lb thrust engine for the MOM.

    Extend current or new core is open (but not open rotor, pun)

    That should at least indicate a weight target.

  15. And in other news as reported, both Leeham and I have Air Asia X on the red list (mine is a watch list)

    they cancelled the last A330s on order and shifted those to A330NEO.

    How far they can kick the can down the road before the can disappears will be interesting.

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