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.
I could be churlish and suggest that it is all smoke and mirrors, another way for Boeing to wow investors of the merits of a new programme only to be saddled with substantial cost overruns in the implementation.
I prefer a slightly more nuanced view, I am sure that Boeing will incur overruns and that their targets will not be wholly achieved. However the very fact that they are embracing fundamental change in process, manufacturing management and business model suggest they will get closer to overall efficiency and profit maximization.
This sort of paradigm shift in the way of doing things is often messy, incomplete and only partially effective. The one thing it does do is challenge management to understand and improve the basics of what they do.
Kudos to Boeing if they can make it work (and lots of opportunities for armchair strategists to comment when elements fail)
Curious why 25 and 20% are cited, 15% is considered a heck of a good return.
Yup, I thought 14-15% had been mentioned more than once as an overall target margin at BCA.
This is margin, not return. Remember, they have to repay 11-figure development costs out of this, plus contribute to all the fixed costs of running the overall business. 20% margin is probably the minimum needed for the program to make any sense at all (unless this whole “let’s turn into Epson and make all our profit off the printer cartridges” model works out well for them).
From my own experience, installing SAP is a huge undertaking however when it is finished and operational it is an excellent product including German reputation for quality
Well SAP in Anchorage AK is running about 80 million and still not working. I believe it was to come in at 8 million.
As for German Quality, we own a Passat Diesel (no not one of the emissions busting group, earlier) – apparently we were lucky, we only had 3 failures during the warranty period.
Long term, it had an oddball setup where a chain drive runs both the oil pump and a balancer module slung up under where the oil pickup would normally be.
Reports trickled in early on (30k) of cars breaking chains and grenading the whole assembly. Of course the question arose, why would anyone drive something like that with a chain? Ahh yes, a holding key also was wallowing out, had to replace thw hole unit at a cost of $1500 (parts, not labor)
The a member of the club found a replacement part in Germany that eventually became the ONLY replacement part in the US.
And what do we have, GEAR DRIVE adapter system. Much like RR and their infamous Trent 1000+ debacle (in this case giving up an entire system instead of better components) that the basic design was so flawed there was no hope for it.
Hmm, long term? A good one would make it maybe 160,000 miles. Bad ones failed prior to that.
At the timing belt change time, you cold elect to save some labor and have the Module done. $4500. Nice.
Being a mechanic, I kept all the parts and our was probably in the 160k group. I could see the wear starting and the key movement.
But, yes there is more. The chain looked like no chain I had ever seen (and yes I have seen a lot of them)
I had to look it up. There are many variations on chains, but one thing they have in common since about 1902, its there is a roller element on the pin to stop wear.
This chain had NONE!!!! So, they take a 1900 chain design, they put it in a 2000s car, run it at twice engine speed and expect what? Quality? I don’t think so, slap dash third world engineering at best (and that is really an insult to 3rd world engineers, they would at least use a basic if not advance roller system, my bicycle does – shades of GM and a nylon gear with a steel chain (with rollers though) for the cam shaft drive years back)
We won’t mention the entire German sub fleet out of service (6) and all of 96 Leopard 2 tanks ready to go, or an air fleet that is about 25% operational (on a good day.)
You’re forgetting the building/design/management of new Berlin airport project. And the new frigate that lists.
Though the Leopards and air fleet have nothing to do with build quality. That’s on going frugal mode on maintenance and spares on the military.
Add to your list of well known projects that finished late and over budget: Sidney opera hall took 5 times longer to build than planned and 300% over cost. If I remember correctly. There are many other projects like that.
Errors in estimates and predictions that relate to time (airplane program costs included) tend to add up in the unfavorable direction – unlike what is wildly accepted, it’s almost never 50-50 probability. e.g. a flights always tend to arrive at a destination airport late, rather than early. You are likely to be 2 hours late on a flight but you are almost never 2 hours early; just the way randomness works over time.
I’m really curious about two things:
1) Which engine maker will Boeing be able to rope in, all of the candidates plenty busy with other things.
2) Which production system for a CFRP fuselage and wing Boeing will come up with, as it certainly has to be revolutionary.
Only these two points will certainly move the service entry far to the right, but so be it.
Well I hear GE is up for sale!
US laws prevent Boeing owning engine manufacturers and vice versa.
US law prevents Boeing from owning engine manufacturers.
It seems B would be in effect “betting the farm” on this huge transformation, while simultaneously taking on sundry global MRO operators etc… as competitors on the services arena,
Given the past track record of B management at controlling such a complex process (787 comes to mind) there might be some interesting times ahead.
With the possibility that NEO and MAX may deliver 28,000 aircraft combined in 20 years, A350 and 787 6,000 aircraft, if the market dynamics shift, the middle of the market could be quite large. Perhaps there could be 10,000 aircraft market for a Boeing NMA and a new Airbus NMA with roughly 45K engines and 45m wings.
Thinking about the lack of new airports or runways, if the NMA can increase the volume of passengers from an existing runway, I think the step up to 225 seat mixed class or 250 seat single class aircraft is next.
You can hide or boldly go where no one has gone.
Agreed, we have seen the market keep shifting and it may be that the A380 model will apply to this market as all those aircraft have to take off and land.
Airbus has sold some A330 in China on that basis, more than enough pax to fill it and while its poor economics on fuel and weight for the distance, it works due to only one crew and other cost savings.
I would rather see Boeing try and fail rather than not try at all.
And we get to see a cool new aircraft and if Boeing can make the new business metrics work!
What do you mean -poor economics on fuel and weight ??
How else are you going to carry the 284 passengers in the highest density version 4 class A333 with China Southern.
2-4 hr flights is extremely common for widebody flights in Asia, as fuel is the largest component of takeoff weight, going a few hours means you dont carry much. I have noticed some people from Asia who look down on narrow bodies and expect W/B on flights to major cities. Once was the case in US too, with early DC10, L1011 and 767 flights between hub cities, now they are fairly rare and passengers wonder why there are so may delays as the sky is thick with N/B
Agree, with if you look at the big numbers / longer term, and you may be off significantly, there probably will be a significant segment for aircraft in between NB & WB, without going into further details.
A metric Scott did not list was how much Boeing left on the table on the TF-X.
About 6 Billion under the estimates. I have seen road contract refused to a bidder as the DOH knows that a road firm will default on a contract like that.
Roughly 37% under. KC46 was a wimpy 10% (under Airbus bid, I don’t know what the estimate was)
So Boeing is buying into this big, makes it interesting, you know they will have to produce (fixed price) we get something back on our taxes for a change!
And its not like they can’t afford it, 20 billion losses in 787 and still share buy backs.
Let her rip chip!
With articles like this Big Aero comes over all quaint, cute, olde-worldey.
Not sure if the military influence and the ability to get cost overruns funded means that Big Aero is still living in the 1950s.
For the record Big Auto is totally different to the point of being on another planet.
Still makes mistakes but delivers a lot more.
I was staggered to read that Boeing hasn’t had ERP implemented for years already. Or is this just a switch to SAP away from another vendor? Also, years back, SAP people I knew considered it to be a bit of a ‘one size fits all’ solution that tilted too much toward the business being forced to adapt its processes to fit SAP rather than SAP adapting to the business’ processes.
Would be interesting Scott to see articles/interviews re the CIOs around aerospace as I reckon they’re at least as important for the companies as new manufacturing processes etc. Ted Colbert first?
Re shifting profit so markedly away from out the gate to some point in services down the line seems to me Boeing are taking a significant gamble. Maybe they’d simply offer the best quality and/or best value solution and maybe get political support for winning these down the line revenues (there were insinuations/suggestions that something like this happened when BAE first won and then lost the deal to upgrade Korean F16s a few years back. But then BAE are not a US business) but who knows what the climate will be like even 5 years out, let alone 50 years, or what effect the potential of multiple customers having farmed out servicing to their own suppliers might have on competition for Boeing.
There will be a major article Monday about ERP and Boeing’s move to SAP. But other than the standard tease, it will be behind the paywall.
Boeing was a big Baan user back in the 1990s. It was typical for enterprise software in that time period to receive the source code along with the installable system. Possibly when Baan disappeared Boeing continued maintaining and extending that system with internal resources.
If that is the case then there is actually great danger in switching to SAP or any other off-the-shelf system. I have seen more than one company destroyed when senior executives determined to “replace our archaic systems” with “a COTS best of breed solution” – quite often the executives have no idea how their internal business processes really work and when 30 years of internal organic development are swept away by the Big 5 and their consultants the capabilities lost are never regained.
I had 2 occasions to follow SAP installation in Switzerland and in France both ended up in very good operational capabilities for 2 very different type of businesses (Electronic appliances and mechanical machineries)
Both were replacing very old home-developed ERP …
In Switzerland it was very painful … in France it was quite smooth … takes 2 years one for training every body and defining for SAP the structure of the business the second year was transfer of datas and final update.
Quite. Not only may there be a risk of operational damage (hopefully they’ve assessed all of this and believe there won’t be or they can mitigate it if relatively minor or local) but it could mean key people/teams taking their eye(s) off the ball for a significant time. I wonder how the different divisions/programs are responding and which are driving this.
That makes sense sPh. Both about them having Baan ERP back when and also how the situation may have evolved. Fingers crossed Boeing have sought a broad range of feedback and listened well.
OK, thanks Scott.
Lets assume they can build it for US$70m, how much will the engines and fitted cabin cost?
The 321 list price is around US$130 which mean they can sell at US$70m with engines and cabin?
List price for the current LEAP’s are ~US$15m x 2, cabin outfit? So it could be hard yards for the NMA, BA obviously wants to make money with their maintenance, could work in the US but not all parts of the world.
The list price for a new super efficient MoM engine that will sell approx 1/4 of the LEAP volume with 30% more thrust smells like at least twice the price so you reach approx $30M/ea, then comes discounts and PbH agreements with LLP stacks on top.
Boeing could auction the first few hundred Aircrafts to the highest bidders and thus maximize revenue. DAL and other prospective launch customers looking for a great deal might not be that happy
I don’t get it Claes;
This MoM aircraft must have engines that cost twice as much with 10,000 lb more thrust (a 30% increase on Leap/PurePower). What sfc would be required so that flying such an aircraft over 4500 miles is more efficient than in an A321 development?
I reckon around a 25% reduction in sfc would be required.
My calculations are no more detailed than that simply because there’s no point in going further. No technology is available in the next decade that will deliver a 25% sfc reduction to the MoM, and even if such a technology was available it would also be available to the narrowbody.
I know people are going to interject that the narrowbody won’t be able to carry passengers prone and pampered in the custom of today, so that’s why there’ll be a MoM widebody. But I see it the opposite way – narrowbodies will be so much more economical than MoMs that today’s norm will become extinct just as soon as those narrowbodies find the range. Business class travellers will shift down to the standards that they get on current intra-Europe or intra-US flights.
If I were Airbus I would start making a long-medium range variant of the A320 – and especially the A321 – family.
What a fantastic product range Boeing will have with the B737, NMA, B787 and B777X. Airbus meanwhile are taking a break and going to loss design experience with the now total French board philosophy of being a production company. Airbus’s strength used to be the cultural gathering of French, German, British and Spanish making them so successful, but now with just French in charge, the inflexibility, red tape, umpragmatic, no forward planning, process driven. Airbus from having a good product range a few years ago are now going backwards under the all French regime, long live Tom Williams………….
Sad but true, AB seems to have gone into hibernation after the A350 and is in “band-aid” mode.
BA will totally control the 200-300 seat wide body market with the 787’s and possible NMA for many years. This market for aircraft with ranges of 4000-8000Nm most likely more than 5000, and it could be 80+% Boeing’s.
Maybe the JV with BBD on the CS-aircraft is an indication of AB’s future strategy, could the C929 be next through a JV with CRAIC? This aircraft could take a big bite out of of the A330 replacement market in China and Asia. EIS is said to be 2025-28.
Don’t know what seating BA had in mind with the NMA but wonder if the new bill that Mr.T signed for the FAA to come up with minimum seat requirements for airliners could impact on design.
Would be great to have a minimum of 18 inch seat bottoms, 2 inch armrests (6 for 3 seats) and 20 inch aisles.
Need to write to Santa about that one? All things being equal the 330 layout is for me more than acceptable.
As mentioned somewhere else I were on a 2 leg flight recently on an Ethiopian 788 with claimed 33″ pitch, found it liveable, having empty middle seats on both flights next to me definitely helped.
The high density 3-4-3 on the 77W’s with flights often more than 10 hours is the type of thing the FAA needs to look into?
OK, so presumably will be Boeing and all the US airlines on one side of the lobby, Airbus on the other side. With health lobbyists (and the CFA?) the potential swinger. Will health lobbyists go for what is actually healthy or will they go for what puts money their way?
Makes me wonder: would switching from program P/L to enterprise P/L make the use of program accounting for NMA moot?