Prices set for years, Boeing cost-cutting goes straight to bottom line

April 12, 2016: Prices for Boeing and Airbus planes are set through the remaining decade, meaning any cost-cutting being pursued by Boeing will flow straight to theBoeing Logo bottom line, a new note issued yesterday from Bernstein Research concludes.

“Pricing on more than 80% of deliveries is already set through the decade,” the note says. “Despite the competitive pressures, however, the reality is that most of the competitive situations are about deliveries in the next decade. This creates a situation in which most of every dollar of cost savings will flow to margin during this decade because most of the planed deliveries are already priced. The same is true for Airbus.

“This has not been the case in prior cycles because backlogs then tended to be only about three years of production, rather than the eight years that we see today. In those cycles, Airbus and Boeing would cut costs, but then compete away the value. That price competition will now be happening primarily on deals for delivery after 2020,” Bernstein says.

Bernstein’s new note is an update following several developments in Boeing news: lower 2016 guidance, a particularly low-price (but one-off) deal for 737-700s with United Airlines and a planned workforce reduction of 8,000 this year at Boeing Commercial Airplanes.

Bernstein views some over-reaction to these and the note attempts to put some context to the developments.

“787 manufacturing continues to focus on cost reduction,” Bernstein writes. “For example, new drilling equipment has been installed in final assembly in Everett, which takes drilling time down by 50%. Two-thirds of the 787s in production are now -9s, which have easier wing-body and section joins than do the -8s (in addition to -9s being higher priced), as well as simplified interior designs.

“777 production will ramp down to 7/month (from 8.3/month) in 2017. We expect lower pricing on new 777 orders, which are supposed to be offset by lower costs that come from implementing 777X changes early. Such changes appear to be underway, with 777-300ERs already being delivered with fuselages from the new automated 777X line,” the research firm says. “We continue to model 777 deliveries falling to 5/month in 2018.”

Bernstein also tamps down prospects of a new Middle of the Market airplane any time soon, an important consideration when it comes to use of free cash flow and research and development expenditures.

“Expect no new ‘middle of the market’ airplane to materially reduce cash flows or increase risk during the next five years,” Bernstein says. “Boeing is actively looking at different options that could serve as a 757 replacement, but these are studies intended to inform a long-term product strategy (post-2025 EIS). This work involves looking at a family of aircraft between today’s 737 and 787, rather than an approach to address competitive issues with the A321neo.

“If Boeing concludes that there is a significant issue with the 737MAX-9 versus the A321neo, a shorter-term approach would be needed. This could be a further stretch of the MAX-9, although that is not particularly attractive, as it would require a new landing gear. So far, such a move does not appear to be an imperative, since the narrowbody market is split 50/50 through 2020 and the A321neo is not the dominant variant choice so far.”

 

69 Comments on “Prices set for years, Boeing cost-cutting goes straight to bottom line

  1. Bernstein: “So far, such a move does not appear to be an imperative, since the narrowbody market is split 50/50 through 2020 and the A321neo is not the dominant variant choice so far.”

    So, that’s settled. https://youtu.be/5NNOrp_83RU

  2. No, really?

    I bet Boeing’s claim that the accounting block will pan out without a forward loss is based on the assumptiuon that Partnering for Success can achieve a 15-20% reduction in prices across the board.
    Anyway, they can invent yet another cost saving initiative that would only deliver in the future but could be priced into the accounting block with immediate effect, improving KPI in the current quarter.
    Meanwhile pre-delivery payment advances factored into 787 cash flow keep saving their bacon. Cash-flow breakeven is not the same as unit cost (gross margin) break even.

    • As Spirit said, we have partnered for success as much as we are going to partner.

      I guess that’s the benefit to having your own cowering workers, you can threaten them directly (yes I know that was McNenary)

      If your supplier refuse to budge you can always get someone who never built a new landing gear system on board (what is that going to cost Boeing to get them up to speed?)

      And of course current major structures that you are committed to, refuse to dicker and what can you do?

      Sure no business down the line (but then who do you get that can do something like that and up to ops). We saw how well that worked with the 787.

      How much has Charlotte added to the program costs?

      All that production could have been accommodated in Everett.

  3. Such changes appear to be underway, with 777-300ERs already being delivered with fuselages from the new automated 777X line,”

    Surely this suggests that the 777x will be minimal change vis a vis 777-300er in terms of fuselage. What happened to AlLi? This does not bode well for future proofing the 777x in my view.

    “787 manufacturing continues to focus on cost reduction,” Bernstein writes. “For example, new drilling equipment has been installed in final assembly in Everett, which takes drilling time down by 50%. Two-thirds of the 787s in production are now -9s, which have easier wing-body and section joins than do the -8s (in addition to -9s being higher priced), as well as simplified interior designs.

    They still have a way to go to recoup $30bn in the deferred costs. This is the most intriguing manufacturing issue in aerospace as it is still in the balance and will be for at least 5-10 years which way it will go. Like the A380 however it is a massive waste of financial resource as the return will never amount to anything of significance if ever achieved.

    I bet both Airbus and Boeing look with an increasing fondness for their older products A320/330, B737/777 and the considerable cash generated by those programmes. It makes you wonder about the whole risk/ reward payoff in the industry

    • Well, it’s expensive to certify a new airliner and set up a new production system – for sure. But the 787, A380 and A350 will be around for many decades. Besides, what is the alternative to developing new products? – Not learning to work with CFRP or other advanced materials? Lessons learned can be a financial drain on one program, but are often financial gains on subsequent programs. I think your sentiment is far too gloomy.

      • Were the lessons learned? Spot clean up on 787, but the overall direction?

        I saw no management heads roll, people retired, move into other positions etc.

        And they sat on the 737 issue for so long they are stuck with a MAX10 if they want to compete.

        While I agree production is 50/50 and the sales are not an indicator by themselves, the A321 sales are a major issue.

        As I recall, Airbus is moving up through 30% of production for those and you can assume options are for conversion from A320NEO to the A321.

        How long before its 50%?

        And they don’t have to rot gut cut the price, they can get a nice return.

        And you have someone like AK Airlines that is likely (if approved) to be an Airbus co fleet with those very attractive A321NEO on order and possibly conversions from the A320NEO.

        So another blue chip customer that may split into an also Airbus.

      • @JohnB

        You are so correct, what do you do? It is the nature of the industry. In terms of giving an acceptable return to investors however it is an issue that appears to be unresolvable. In relation to risk you would expect investors to demand a higher return on their investment. The only thing that makes it worth their while is the current cash cows generate considerable returns on their investments. A couple of duds (financially), B747-8, A380 and B787 and the company is seriously weakened. In the past a single dud could destroy a company, now A and B are sufficiently large to absorb one or two hits but they call into question the return for years after the event.

        The B747-8 was just a means of pouring money down the toilet, the A380 will never recoup its considerable investment and chugs along as a cash neutral anachronism until hopefully the market comes to it. The fun one is the B787, now beyond its troubles but up against the A330neo offering too small an improvement on most stage lengths to command a premium sufficient to make a dent in the deferred cost.

        What I was trying to get at is that the benefits go to the airlines and do not reflect themselves in the accounts of the OEMs. I will attempt to lift my gloommongery sorry

        • If you noticed, 787 orders are not going very well.
          They are very difficult to maintain, and the customer that have them, though happy with the economy, are not breaking down the doors to buy more…… plenty to be gloomy about.

          • Very difficult to maintain… What are the issues? What substantiation please

    • “They still have a way to go to recoup $30bn in the deferred costs. This is the most intriguing manufacturing issue in aerospace as it is still in the balance and will be for at least 5-10 years which way it will go.”

      As long as they make a profit of some kind on each plane delivered and keep delivering the planes they can defer calling a forward loss position for ever. In fact the only thing that matters is that more cash comes into the company than goes out, otherwise you are bankrupt. However, you should show lip service to accounting conventions to avoid the remote possibility of going to jail. So Boeing will come up with some justification for the accounting block.

    • In terms of a commercial failure there is no comparing the 787 and the A380. Sure, the 787 program execution was a disaster, and it has a huge accounting block, currently 1,300, but there is no doubt they will sell that many. They may sell twice that amount. The program is a commercial success.

      The A380 was both program execution disaster, AND a commercial flop. Airbus will NEVER recoup the development cost.

      • There is no way the numbers for 787 make it a commercial success. Yes it sells a hell of lot more ( around 120 per year) than A380, but it loses more every year as well.
        “Boeing initially set the 787 accounting block at 1,100 units when it began deliveries in 2011. It increased the accounting block to 1,300 in late 2013. Essentially, this means that after 787 production becomes cash positive later this year, Boeing expects to recoup the $33 billion in deferred costs over the rest of the 1,300 unit 787 accounting block. That will be roughly 850 planes.” Motleyfool

        However they do say ;It’s virtually inevitable that Boeing will raise the 787 accounting block again sooner or later. If it’s not during 2016, it will almost certainly be during 2017.”

        Thats is, commercial success is a long way off yet. Im betting we will still be saying that the accounting block will be increased (again)well into the 2020s.
        As we have a seen a big drop in future order rates for widebodys with lower fuel prices, looks like Boeing has been caught out by market changes just like Airbus was over the 380

        • “Boeing expects to recoup the $33 billion in deferred costs over the rest of the 1,300 unit 787 accounting block. ”

          _average $38m_
          That doesn’t show the scope properly yet.

          starting from break even the required curve is strongly backloaded in an environment of diminishing returns.

          With no changes to the accounting block recoups per plane must go to twice or thrice that. i.e. $40..60m per plane.

          Though if Boeing manages that they will have achieved their projected profits over the accounting block.
          ( what do they show as planned profit per plane?)

      • Exactly, The 787 program is young and it certainly was more of an “investment” in future aircraft programs. My prediction is the program will yield nearly 3000. I may be going out on a limb saying this but little will be learned from theA380 program other than the World still is not ready for high density routes as was predicted.

      • @ Rick

        I certainly take your point if the A380 is taken in isolation. I would however venture that the sums invested by Boeing and Airbus in their wide bodies over the past 15 years are staggering and the total invested by Airbus on A380/ A350 where there are clear synergies in a lot of systems development of $30-35bn (pick a figure you are comfortable with) are less than the sums that Boeing have invested in the B747-8/ B787. I believe that on that basis Airbus is slightly ahead in the benefits derived. Time will tell whether the market grows into the A380.

        You could suggest that it is similar to the original B747 investment. it took many questionable years before generating proper returns.

        If Airbus can keep the programme ticking over they have a plausible chance that market dynamics will change in the A380’s favour. A chance based on the fact that anyone who has flown on them will welcome given that it is the undisputed passenger favourite in comfort terms.

        • Also a lot of stuff learned is “how not to do it”. Lots of 787 details will not be seen again on future designs either because they are a cul de sac ( barrel sections ) or are no longer relevant in the next generation ( watercooling electronics).

          And what has been learned will be thrown out the door with the next fire cycle applied to the workforce.

  4. The A321 may not be the dominant choice in the market, but with little competition from the 737MAX-9 you would think (without the benefit of your market insight) it is a very profitable aircraft for Airbus.

    • The A321 is the only player (realistically) in its segment.

      In that regard it is like the 747 and the 777 once were, cash machines.

      Being the only player is not the totality o9f it, 787 is certainly the dominant if not also realistically (at least in the 787-8 and ) the only players, but its got a back breaking weight around its neck.

      When you are in a tough spot (Ford some years back now) you sometimes just have to suck it up, admit the issue, present the plan in in Fords case, they mortgaged the entire company assets. Clay Ford had the integrity to admit he could not do it, brought in Mulalry and then backed his plan to the hilt.

      They were the only car entity that came through without a bankruptcy.

      That is real leadership, putting it on the line, doing your job, willing to throw YOURSELF in FRONT of the bus.

  5. It will be interesting to see how the forthcoming Delta narrowbody order goes – I can’t see Delta wanting to pay more than United/Continental for 737s and Boeing must surely be as keen to keep the C-series out of Delta as they were for United.

    • There is no «loyalty» for Boeing at Delta like United. The price made ​​for the United 737 is linked to other shopping and services. Either way it is a medium-term strategy indefensible. We can already imagine the boss of Ryanair knocked on the door of Boeing to revise down the price of its recent order . And that’s not counting all the others who want to reorient the price payable on the United. And then let’s say : Delta can make the bold gamble to pay for new machines like the CSeries, to purchase all the available slots until 2020-22 , and thus be the one to deliver high – product and asking for ticket prices higher, etc. If this is the case, one can imagine the effect of such a slap on the Boeing leadership. And the above findings .

      • Knowing Delta they demand the first 10 for free and the conditional they can jump off the train without penalties. It’s up to BBD.

      • I wonder whether Delta would not negotiate a “most favoured Buyer” clause, to sit back and rejoyce observing the aftermath of post-Delta wheelings and dealings, assured of its Priviledge ?

  6. The aircraft market is a dynamic market. The forecast financial flows depends not only on a backlog. This is to imagine all kinds of events that induce airlines nailing ground their planes , defer their orders or outright cancellation. Viruses, wars, energy prices , fears of travelers and technological innovations of competitors. Although probability is not very high , the fact remains that it is relative such studies .

  7. With excessive pressure applied to the supply chain is there any danger of those changing focus to Airbus as a customer?

    • You mean the 787 wings in Japan and barrel section in Italy ? The supplier has sunk costs and no realistic way to move to another OEM. While Boeing is stuck with them as suppliers. Any way as those suppliers dont have the big overhead like Boeing on building planes designed 25-45 years ago, Im sure it will be a polite NO for some price reductions.

      • Spirit has adjusted and is making parts for the A350 (forget what parts but not insignificant )

        Anyone would be wise to split things up as best they can.

        • And Boeing is going to move its 737 fuselage assembly to where ?
          Smaller structural parts can be made anywhere but the larger items like whole wings etc arent really negotiable.

          The only way to get price reductions on the big parts is to increase the production rate . Which we see happening

          • “And Boeing is going to move its 737 fuselage assembly to where ?
            Smaller structural parts can be made anywhere but the larger items like whole wings etc arent really negotiable.”

            Look at the Airbus model of distributed production.

            Exists for historic reasons but is perfect to “re site” production of even rather large parts.
            With the added advantage to produce in smaller islands of competency that do not saturate their region.
            i.e. you don’t burn your workforce with commuting. Good for motivation.

      • IMU the risk sharing partners have sunk their own ( or taken from subsidy ) money.
        Boeings idea seems to have to push all risk to suppliers and all profit to Boeing. Perfectly executed. TANSTAAFL.

        What does make more sense: producing things for Boeing with low change of profit or starting new with Airbus?
        ( They don’t do program accounting. money lost on Boeings project is just that: lost.)

  8. “Pricing on more than 80% of deliveries is already set through the decade,…creates a situation in which most of every dollar of cost savings will flow to margin…”

    There is a big assumption here – that the pricing on these orders is sufficient to create a margin !! Are we supposed to believe that A & B never thought about reducing costs, and priced all these orders to be profitable with existing costs ?

    I suspect that they have both already factored in their ability to reduce costs with experience and volume, and this supplier pressure is designed to make sure those assumptions are met. Far from increasing margin as costs are reduced I suspect that it may be a matter of converting a potential loss to a profit. You might call that an increased margin as it goes from negative to positive, but I don’t suppose that is the first impression someone would get from reading the report.

    It is possible that they also factored in more inflation than we are currently experiencing so that might be helpful for profits. A bigger factor will be changes in exchange rates, and the degree to which both manufacturers have insured against such changes or how much they built in those changes in their pricing strategy.

        • The very ones…

          “Emirates emerged as the buyer of two new Airbus A380s, stepping in to add to its large fleet after the recent bankruptcy of a Japanese carrier.

          Airbus, which had been left holding onto the two planes after clashing with failed Japanese carrier Skymark Airlines over unpaid debts, announced the sale of two planes to an undisclosed customer earlier this week.

          The order is worth USD$865 million at list prices, but industry sources estimate Emirates picked up a bargain worth lower than half-price as Airbus sought to close the Skymark saga.”

          So much for the 865 million.//

          http://news.airwise.com/story/emirates-orders-two-more-airbus-a380s

          • Probably in name only.

            Delivery is a bit out.
            Either those frames are stored
            or go somewhere else and then new built frames go to Japan some years later.

    • You do know they are based in Seattle.

      Could the rest of the world please have less US politics news- we are sick of it.
      And that goes for US sports as well

      • Hey in the US we wish we would have less US politics news as for sports, well we don’t force the BBC< NHK< DK etc… to cover it.

      • Problem is that US politics tend to uncleanly spill over into the international realm.
        ( see the Panama Papers that seem to have been released into the wild with a strong political agenda _and_ to boost demand for the emerging US tax havens.)

    • This does seem to have become a Boeing obsessed site. Airbus news , good or bad, seems to be barely mentioned at all unless being compared to Boeing.

        • OK “obsessed” was too strong a word but using the same search tool it returns 33 Boeing articles vs 16 Airbus this year. That is somewhat slanted.

          • @Geo: Boeing is making more news these days. The whole debate over MOM. Rate reductions. Uncertainty over 777 Classic sales. Uncertainty over the 747-8 future. Lower financial guidance. Lower projected deliveries. KC-46A issues per the GAO. Over at Airbus, other than supplier-induced delays on the A350 and A320neo, things are going along a lot smoother. The only overhang is the A380. Back in 2006-2008 when Airbus went through five CEOs, the A380 wiring problems and indecision on the A350, Airbus got a lot of attention. News cycles come and go.

      • Probably because most of their subscribers are US based. And as well US is a more open society for politics(groan) and business.
        Theres a whole galaxy of media covering the US aerospace and defence business.
        Plus does the Toulouse home newspaper have a special section on Airbus news.
        The UK and French specialist media have what you would call ‘long standing arrangements’ with their local manufacturers.

  9. A stretched B737-9 MAX?
    Higher landing gear, hence more or less new wing.
    Finally, the B757NEO of some sorts.

    • looked at it many years ago for EIS in 2014. Boeing did the MAX a few years later.

      http://i191.photobucket.com/albums/z160/keesje_pics/Radical4Bill737Upgrade737-900XG.jpg

      It think it is becoming more and more clear Boeing will go for a larger NB. Not because it’s perfect, but because the alternatives are riskier.

      Maybe with multiple wing/engine options to avoid uncompetitive compromises in the huge 170-200 seat 1000NM segment.

      http://i191.photobucket.com/albums/z160/keesje_pics/Boeing%20MoM%20NSA%20797%20MNA%20A322%20Airbus%20keesje_zpsyczimwib.jpg

      http://i191.photobucket.com/albums/z160/keesje_pics/Boeing%20MoM%20NMA%20NSA%20A321%20keesje%20Airbus%20Design%20Engine%20Wing%20737_3_zpstcsl9lbv.jpg

      • Yes, whatever, keesje … provided those Gentlemen in Chicago have their belts tight around the stomac and are able/willing to push a project … which is doubtful, Leahy prophetised that from Boeing in this matter there will be a lot of presentations, but very little ACTION. They have turned afraid of taking a decision, because several times as of late, they got wrapped over their finger for failures, and a wet cat fears water. For innovation to prosper, when you make an error you must be encouraged, not sanctioned, or the reprimanded innovator sits down in a rocking chair, spinning thumbs, drinking coffee and smoking a cigar = doing nothing ?

        • I love all the metaphors! Not misplaced either.

          Maybe to add, when its management failures its like a cat in a litter box.

          While I have no way to assess the efficiency of the spun process vs the frame type as far as better or worse cost wise, there was nothing technically wrong with the 787. Both were a result of managing setup not the tech.

          some production wrinkles (figuratively and literally).

          Take away the management foul ups and you have an outstanding success, probably will turn into the all time output of a wide body in now or future history.

          financially its a bit like chaining a cannon ball to Phelps neck and telling him to win the 100 meters.

    • Many western suppliers are involved. They knew / know exactly were the project is. No surprises.

    • @TransWorld: Robbing Peter to pay Paul is an expression that dates to 1661….and maybe to the 1400s….

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