Oct. 4, 2018, © Leeham News: A consensus appears to have developed among aerospace analysts that the business model for the prospective Boeing New Midmarket Aircraft is about much more than the profit-and-loss case for a stand-alone airplane program.
It’s something that Boeing CEO Dennis Muilenburg has alluded to many times on earnings calls and elsewhere.
But now, as Boeing moves toward a decision to launch the NMA program next year, the business model has fundamentally become defined.
Note that I say, “toward a decision,” not “if the program will be launched.” I’m convinced Boeing will greenlight the NMA.
During the past year, Wall Street analysts have increasingly concluded that Boeing’s next airplane business model isn’t just about program profit-and-loss.
Indeed, Boeing struggles to hit the cost-vs-price targets that customers say they want when it comes to purchasing the NMA. They have a target price of $65m-$75m in mind. Designing and building a new airliner. This means Boeing needs to build the airplane for $49m-$56m if it wants a 25% profit margin, or $52m-$60m at a 20% margin.
This is a tall order for an all-composite airplane, which is needed to support an ovoid fuselage and get the economics of a single-aisle aircraft, LNC’s analysis reveals.
Muilenburg has signaled many times that production of the NMA will be an important part of the business case.
LNC last year wrote many articles about the production transformation Boeing is undertaking. Automation, 3D printing, additive manufacturing, Fuselage Automated Upright Build (FAUB), new production techniques for wing manufacturing for the 737 MAX and 777X are all elements that Boeing publicly has revealed.
Streamlining production, increasing efficiency and cutting costs are one of the keys for the business case of the NMA.
Important to the NMA business case, but applicable to all production across the Boeing enterprise, is streamlining and making more efficient ordering, tracking and delivering parts for Boeing Commercial Airplanes, Boeing Defense, Space & Security and Boeing Global Services.
Called Enterprise Resource Planning, or ERP, a process to do all this has been in place since the 1997 production meltdown with the 737 and 747 lines. A transition to a new system, called SAP (for Systems Applications Projects), is intended to achieve these particular objectives.
The transition will be challenging due to the size and complexities, which are huge. It won’t be easy or smooth—some glitches already emerged.
Services is also a part of the NMA business case.
A little more than a year ago, BGS was said to be but a small part of the NMA business case. Now, it’s become a critical part.
In fact, The Boeing Co. appears to be heading in a direction of becoming as much or more focused on services as it is on products.
When Boeing won the contract for the USAF KC-46 aerial refueling tanker, its winning price was 10% below that of Airbus for its KC-30 tanker. Airbus officials were stunned and perplexed at Boeing’s low price.
Indeed, Boeing already wrote off nearly $3bn in initial development for the early program.
Former CEO Jim McNerney and current CEO Muilenburg each claimed Boeing will make money over the life of the program.
I wrote about how in a Sept. 10 column.
Last week, Boeing won a $9.2bn contract to produce some military 450 jet trainers called the T-X. If all options are exercised, the per-plane price will be about $19m.
Few believe Boeing can build the airplanes for this low price. How, then, can Boeing make money?
A combination of the new production techniques and Boeing Global Services is how.
LNC’s Bjorn Fehrm gave a high-level view of the T-X production angle and its relation to NMA in this post.
Bernstein Research, Credit Suisse and Morgan Stanley aerospace analysts are among those that have put these three elements together, understanding that the NMA business model no longer is a program P&L but what I term to be an “Enterprise P&L.”
If this seems far-fetched, consider that twice Boeing has decided to take a loss to win a contract, betting on the come that the after-market services will produce profits long-term.
The Enterprise P&L helps understand why Boeing might be able to make a business case for the NMA despite most others believe the market demand is much smaller than the 4,000-5,000 airplanes Boeing sees for the Middle of the Market over 20 years.
Although key suppliers and the engine-makers may find it very difficult to find a business case if they market demand they see (about 2,500 airplanes), Boeing’s Enterprise P&L could paint a different picture—for Boeing.