Some suppliers consider sitting out Boeing’s NMA program

By Dan Catchpole

August 15, 2018, © Leeham News: If Boeing launches its New Midsize Airplane (NMA or 797), it is expected to use the cleansheet program to force new contract terms on suppliers. And that has some suppliers wondering if it is worth participating in the program at all.

Speaking on background, executives from several suppliers told LNC in recent months that they might not bid on NMA work if it means greater price concessions up front, as well as surrendering lucrative aftermarket sales to Boeing.

Bidding will depend, in part, on whether suppliers can pass cost cuts down to their own suppliers,  and if Boeing takes on more risk and development costs to offset lost aftermarket revenue. One exec wondered what it could mean for the company’s engineering capabilities if they have to bid for essentially procurement orders with Boeing holding onto the IP.

Struggling to close business case

The aerospace giant is still struggling to close the business case for the NMA, which would serve midrange routes often flown with aging Boeinig 757s and 767s and Airbus’ oldest A330-200s. Boeing says there is demand for between 4,000 and 5,000 aircraft; however, some analysts and suppliers, including engine companies, think the market is closer to 2,500.

The NMA business case is far more complex than any previous Boeing jetliner program. The NMA would be the first Boeing jetliner designed to make money for Boeing throughout the plane’s lifetime. Indeed, revenue from aftermarket sales and services appears critical to Boeing being able to offer the airplane at a low enough price to compete with Airbus’ A321. Potential customers want the purchase price tag down to about $70 million—or less, figures that skeptics think are impossible for Boeing to achieve.

High margins on aftermarket sales and services have helped many suppliers weather Airbus’ and Boeing’s efforts to cut production costs.

Taking a pass

It would not be the first time Boeing’s aggressive supply chain strategy prompted a major supplier to sit on the sidelines rather than bid on a Boeing program. UTC Aerospace Systems (UTAS) decided to not bid on making landing gear assemblies for Boeing’s 777X, even though the company makes the components for the 777-300ER. Instead, Boeing in December 2013 picked a small Quebec-based firm, Heroux-Devtek, to provide the assemblies.

“The landing gear was a particularly difficult discussion,” UTAS CEO Greg Hayes said during an earnings call in October 2017. “Boeing asked for a large price reduction, which we could not accommodate, which would have ended up us losing money on a product with no aftermarket.”

Follow-on revenue is critical for UTAS, Hayes said.

“The problem at UTAS today, of course, is, we don’t make any money on any product that we sell to the Boeing Company. None. In fact, we lose money.”

The situation has improved since then for UTAS. In March, UTAS President David Gitlin told investment analysts that the supplier had reached new agreements with Boeing around the airframer’s Partnership for Success (PFS) 2.0.

Gitlin said the two companies had reached a “win-win” solution that opened the door to serious talks about the NMA program.

“On the NMA, I think now that we’ve been able to come to an agreement with Boeing that works for both of us, I’m excited to engage in those discussions and see where it goes,” Gitlin said.

Like many Tier 1 suppliers, UTAS has launched its own cost-cutting initiative, called PACE, with its suppliers.

Insulating impacts

Like Boeing, Airbus has pushed for price concessions from its supply chain. Boeing’s behavior is in no way unique. While cost control makes complete common sense, done poorly, it can have disastrous results, as GM learned in the 1990s.

Some suppliers are more insulated from Boeing’s efforts to reshape its relationships with suppliers. These tend to be supply chain segments that have greater control over IP, such as engines, and that have more direct relationships with airlines, such as cabin interiors.

Other suppliers might not have a choice about participating on the NMA.

“While contract terms on (the NMA program) will likely be a challenge for (Spirit Aerosystems), and other suppliers, we view this as a necessary program for some level of involvement for Spirit considering its capacity, and the potential for some cannibalization on the 737,” Cannacord Genuity analyst Ken Herbert noted in a July 30 research note.

The problem is compounded for some by the fact that if authorized, the NMA will be the only new commercial airplane development program among the major players for several years. That means some suppliers, reluctant or not, might just have to find a way to make participating on the program pencil out.

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33 Comments on “Some suppliers consider sitting out Boeing’s NMA program

  1. Just to remember that Embraer have full capabilities to make landing gears …

  2. Better to put the investment into a replacement for the 737 and midlife update for the 787.

      • That’s not particularly surprising given the impending limits on the 767 sales.

        Every Boeing widebody has been focused by design on cargo variants/dominance, with the exception of the 787, where I think the early model road maps wound up getting trashed. I don’t think anyone anticipates Boeing giving up their 98% cargo market to the A330 in 2028 deliberately. Cargo loads on an ovoid fuselage do seem ‘interesting’ though.

      • Wonder what the market space is for a well-priced A330-800F, if AB decides to make that move? And of course what ‘well priced’ means both for the possible buyers, and for ABs profit and loss potential.

      • agree pretty bizarre . . . sounds like wishful thinking on the part of executives who don’t understand the economics of cargo airlines

      • Thanks for the link, was not aware of the “axe” hanging over the 767F’s sales due to emission controls.

        Will the 2028 Emission Controls also apply to military aircraft such as transporters, tankers, etc.?

        • It is unheard of for any defense body to give a hoot about emissions controls. The top priority for the military is high performance at reasonable costs. Don’t take a Prius to the battlefield as troop transport, lol. Your enemy isn’t going to play by the same rules.

          • I can visualize the troops driving through the desert in a Prius and drinking herbal tea at night, LoL!

          • My mom alwyas had what I called Fake Tea around (well before Agent Orango)

            English Breakfast or the like.

            ps: I am totally UN-American in that regard, I dislike coffee.

  3. The comment on “the NMA will be the only new commercial airplane development program among the major players for several year” is spot on. Assuming players are not going to be on the Comac/UAC CR929 widebody program, the NMA is only new plane for the next 10 years. The next generation single aisle for both Boeing and Airbus will be probably not be delivered until the early 2030’s based on the development new mfg processes like Thermoplastic wings and fuselage along developing the supplier chain with additive manufacturing

    • The 929 is going to be interesting.

      That tension between China and Russian not wanting any Western content and being able to supply reliable content.

      Western companies have learned to be leery of both with IP.

    • It depends a bit on the A321LR(X)/ A322 and what parts you are making. If you are into wingboxes with fuel tanks, wings, APU’s, flaps/slads/speedbrakes, landing gears, wheels&brakes, pylons, nacelle, engines, thrust reversers, Main Landing gears and new Components you might be asked to quote the new bits depending on how much Airbus dares to increase the MTOW and offer new/revised Engines that uses the Technology proposed into the 797 engines.

      • As noted previously, I no longer respond to anything Claes has to say.

        We have our own people on this side of the pond like that I would not talk to either.

        • The 929 looks like a Mee-too Product some 15 year late. They still have the time to figure out a market segment where they will the best Product offered. Technicall that would be a lighter Aircraft than the A330/787.

    • The comment that the NMA will be the only new commercial airplane development program for several years might be spot on, but it’s worth examining why this is so.

      The implication is that Boeing has to do this to get a competitive airframe into its product catalogue, whereas Airbus can simply pad out the A320 line a little more at very low cost to achieve more or less the same result.

      I find that astonishing. Whoever drew up the basic A320 design all those decades ago did very well indeed. The A320 has been the goose that lays the golden egg for nearly three decades now, with barely a whisper of a response from Boeing.

      Getting back to the topic of the article, in general if one finds oneself having to beggar one’s suppliers to be able to compete in the market, then something has gone badly wrong. If there’s no money in it for them, then there’s likely no money in it for oneself either. If they’re walking away from your business altogether, it’s time to take a long hard look at one’s approach and do something different. Carrying on is lunacy.

      • Mathew:

        I hate to tell you but a 737-Max is competitive with an A320NEO.

        While the A320 is indeed well done, it was just well done state of the art at the time. State of the art included larger jet engine diameter. It was a timing thing that saved them from the 737 architecture of close to the ground (though that had a reason at the time as well with many fewer if any jet-ways – I remember climbing the ramp steps to DC-8, 707 and the Constellations back in the day (and a few others)

        The 737 was a DC-3 type originally, lower and easier.

        What it does say about the art is its not made any significant improvements since the early days of jets in fuselage.

        All the big improvements are in wings and engines.

        That is why when Boeing got into a corner, a new 737 has little appeal.

        Boeing could make it state of the art and Airbus just puts a new wing on the A320 series and its right back in the game.

        They would have to cut an exclusive with P&W to get an engine that gave them the big let up that Airbus could not get other than having GE or RR come out with their own GTF.

  4. I don’t know why these low ball numbers keep getting quoted by the media. Probably stemming from leasing company executives who always talk their hand.

    What would anyone expect a potential customer to say when asked what they want to pay?

    Guess what? I would like to drive a BMW 7 Series and pay $25K for it. Ain’t gonna happen.

    The price is what the market will bear. There will be a huge queue when Boeing launches the 797 and if Boeing is smart they will price it accordingly and get off the listening tour. The business case is a slam dunk. It is only difficult if you enter the price in your revenue projections that customers tell you they want to pay.

    • All true, but then what is the price you can ask for a BMW 7-series car? That depends a lot on what Mercedes is asking for an S-series and AUDI for an A8, and maybe there are also Jaguar and Lexus and some other player on the field, depending on the market and customer.

      In our case the competition is the A321XLR and the A330-800. Any price for a 797 must match them in some way.

      The problem that Boeing has here is that the production cost of a full carbon 797 will be very close to the 787, quite a bit higher than the A330-800, maybe twice that of the A321. And this is where things are getting difficult. So it’s a rather long shot, and not really a slam dunk.

      • I agree on the higher than an A321

        But Boeing is selling 787-9 at lower lists than A330-900.

        I don’t think the business case is slam dunk either.

        If it was we would be off to the races

        • Agreed. Many years of rumour have not translated into a concrete offering on the open market. There’s problems in the programme. If anything the time to go to market was, what, 20 years ago?

      • I am sure back in the day there were uninformed people who thought the 777-300ER needed to be priced like the A340-600 as well.

        The A330-800 is a non-starter. A321 has been a runaway success but the A321XLR will be about as successful as the A330-800.

        • Nothing wrong with 340-600….oh those extra 2 engines marked it down a bit.
          How many extra engines does a likely 321xlr have?
          The A330-8 is doing it’s job if it forces Boeing to keep raising the deferred production cost block on the 787. In the real world it must be a worry to have to build 1500 planes to cover your production costs at line number 1501 onwards

          • Duke: In the scheme of things Boeing shot itself in the foot management wise on the 787.

            Imagine where we would be if they had done it right?

            So a hosed up program that is in debt is still beating a paid for one all hollow? Hmmmm.

            If I was Airbus I would be asking “What is Wrong With This Picture?”

          • even the most died-in-the-wool airbus fan boy has to recognize the abject failure of the A340-600 . . . oh sure it gets off the ground but Airbus only sold about 100 units . . . compare that to the 777-300ER which sold nearly 800 units to date . . . airbus has never been good in the widebody space but the company should be commended for trying hard

          • @Tyler: Perhaps, but the long, sleek lines of the A346 make it one of the most beautiful jets since the DC-8-63.

  5. Count me highly skeptical of the “can’t close the business case” reports. I suspect Boeing is planting these reports in the same manner Hollywood stars used to have stories planted in the tabloid press. If they were just dropping the MoM then they wouldn’t still be working intensively with suppliers. The project is approved; they are just trying to keep Airbus guessing and off-balance until they can publish a nice delivery schedule.

    • Boeing played the same choices choices, so many choices…over the undercarriage for the 737-10. How long did they run this game for, was it as much as 9 months?

  6. If you chat to Boeing, they believe they are on to a winner with the NMA.

  7. Cost cutting is a fine business model for commodity products. If your product is performance driven, you make more money with productivity improvements, and process improvement.

    Losing a fortune by cost-cutting on the 787 might have been a learning experience, you’d think.

    • No, they keep thinking that they can get a free Launch.

      Whose to say they are wrong? The worst managed debacle cost wise in Aviation History (even beats the A380 losses) and they are still raking money in hand over fist and doing share buy backs.

      So yes if you are Boeing there is free lunch.

      If you work for a living, well that is what the peasants are for, support the Lords.

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