Boeing launches PFS 2.0

Update, 0815 PDT July 7: Boeing Corporate Headquarters responded to our questions. The transcript has been added to the article below.

Boeing LogoJuly 7, 2016, © Leeham Co.: Boeing’s controversial Partnering for Success (PFS) drew ire from its suppliers and scorn from observers for its heavy-handed, threatening cost-cutting demands: shave your costs to Boeing 15%-25% or be put on our own no-fly list of companies that we won’t do business with.

Boeing wasn’t shy about who it targeted, or punished. Even supply-chain giant United Technologies was placed on Boeing’s no-fly list when it balked at the onerous demand.

Now Boeing is moving forward with PFS 2.0, a second round of demands.

  • PFS 1.0 focused on price.
  • PFS 2.0 focuses on terms and conditions.
  • Boeing wants to stretch accounts payables; some suppliers balking.
  • Suppliers get credit for investing in technology.
  • Threats cease in PFS 2.0.

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C Series charge spotlights 787 deferred costs

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May 4, 2016: (c) Leeham Co.: The $500m charge reported last week by Bombardier for 127 recent orders for its C Series resulted in shining the spotlight on Boeing’s deferred production costs for the 787.

As LNC wrote this week, interpretation of the BBD charge was misunderstood. Some press reports yesterday demonstrate it continues to be. We won’t restate what we’ve already written about the true nature of the charge and how it differs from program accounting used by Boeing–this has been well covered by now. The Seattle Times suggested that the per-plane profit required to pay off the $29bn in deferred production and $3bn in tooling costs for the Boeing 787 was greater thanBoeing Logo generally recognized. The average figure is about 20% higher than the number widely cited by Wall Street.

The most commonly accepted figure to recapture the record-setting deferred production costs and tooling has been $30m per airplane, a figure most Wall Street analysts believe is too high to achieve. But this number appears understated, according to an analysis by The Seattle Times in the wake of Boeing’s first quarter earnings call.

Boeing’s 10Q contains language that appears to confuse the issue somewhat.

“At March 31, 2016, $23,661 [million] of 787 deferred production costs, unamortized tooling and other non- recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $8,757 [million] is expected to be recovered from units included in the program accounting quantity that represent expected future orders.”

This appears to suggest the first tranche of these airplanes results in a need for a $36m per-plane profit and the second tranche requires a per-plane profit of $54m. Charles Bickers, a spokesman for Boeing’s corporate headquarters in Chicago, told LNC that segmenting out the ordered but undelivered aircraft from orders yet to be received but assumed is not the way to look at the issue.

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737-7X, 737-10 studies illustrate Boeing weakness in single-aisle market

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Boeing LogoApril 27, 2016 © Leeham Co.: News that Boeing plans to develop a “737-7.5” MAX, following on the prospect of a “737-10” stretch of the 737-9 illustrates just how weak its single aisle product strategy has become.

The Wall Street Journal revealed last week that Boeing is planning the airplane, which is larger than the current 737-7 but smaller than the 737-8. Jon Ostrower, the reporter, dubbed the plane the 737-7.5. Internally, it’s called the 737-7X.


  • The 737-7 MAX has proved a sales dud. There are just 60 orders from two established airlines, Southwest and WestJet, and one start-up carrier that ordered just five.
  • Bombardier appears on the cusp of landing an order from Delta Air Lines for up to 125 CS300s, the direct competitor to the 7 MAX, but this is only one element in Boeing’s consideration to grow into the “7.5.”
  • Rather than being a growth of the 7 MAX, the 7.5 will be a shrink of the 737-8. This is a less costly and more efficient method for Boeing, but shrinks are never the best solution for the operator.
  • LNC reported in February that Boeing had decided to recommit to the 7 MAX after nearly losing an order to Bombardier for the C Series. Instead, UAL ordered the 737-700 at an unusually low price and other considerations. Ray Conner, CEO of Boeing Commercial Airplanes, called the deal a blocking move to BBD. The 7.5 appears to be the course Boeing has chosen.
  • Pursuit of a 737-10, a stretch of the 737-9 that may include a new wing, larger engines and other changes, is an acknowledgement the 737-9 is losing the battle for this size aircraft to the Airbus A321neo. But Boeing’s challenges to develop a 737-10 are vexing. More than a year ago, LNC outlined these.

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Bombardier’s Delta deal looking good, but don’t celebrate yet

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Air Baltic CS300

Air Baltic will be the first operator of the Bombardier CS300. Source: Bombardier.

April 18, 2016, © Leeham Co.: Bombardier, if it didn’t dominate the news cycle in commercial aviation last week, must have come close. Consider:

  • The Wall Street Journal, and then Bloomberg, reported that BBD was near to winning a big order for 75+50 from Delta Air Lines for its C Series.
  • Reuters reported that BBD rejected demands from the Canadian federal government in Ottawa as conditions for investing US$1bn in the company. (Officials tried to walk this back some, saying talks continue.)
  • The head of corporate strategy for BBD came forward to forcefully argue for the investment as good for taxpayers, breaking what largely has been a cone of silence over the perceived merits of a deal
  • The US$1bn the Quebec provincial government agreed to invest last year remains unfunded.
  • BBD stock, which last year dropped to less than C$1, threatening the listings on the Canadian exchanges, jumped to C$1.75 at one point in anticipation of a Delta order.

While on balance, it seems likely Delta will order the C Series, Bombardier has been down this road before. Only a few months ago, the market and others were excited over the prospect that BBD was close to landing an order from United Airlines, only to see Boeing swoop in and grab the deal.


  • This is the second try at a major contract with Delta Air Lines.
  • The primary competition is against Embraer, not Airbus or Boeing.
  • We revisit our Skyline Risk Assessment, dormant for the extended period in which BBD had no sales of the C Series.

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Leeham’s Bjorn Fehrm selected for Swedish medal for engineering work

By Bjorn Fehrm

Bjorn Fehrm

 April 14, 2016: Bjorn Fehrm, the aeronautical and economical analyst for Leeham Co. and Leeham News and Comment, has been selected to receive the 2016 Thulin Silver Medal from the Aeronautics and Space Technology Society and the Royal Academy of Engineering Sciences of Sweden, the groups announced this week.

Fehrm focuses on technical evaluation for Leeham Co and LNC, providing a level of technical and aircraft economic reporting rarely seen among aviation writers.

Fehrm has a background both as a fighter pilot and engineer, “where the knowledge came to foster a brilliant idea how to make radar chaff work for effective self-protection, and in 1980 filed a patent application for his invention,” the groups said in a press release announcing the award. “The principle is that the chaff must be spread very quickly in the transverse direction to give effect on modern radar stations which have high range resolution and Doppler signal processing. The chaff dispenser is mounted close to the aircraft’s wing tip vortices and is designed to not block any weapon positions or require mounting in the aircraft structure. This is achieved by integrating the dispenser in existing missile launchers of the aircraft. The dispensing of the chaff can be made with high precision and high endurance. The chaff is placed in discrete packets using an electro-mechanical dispensing method and is then distributed with the help of the aircraft’s wingtip vortices.”

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Airbus needs more vertical integration, says official

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John Leahy

John Leahy, chief operating officer-customers. Airbus photo.

March 3, 2016, © Leeham Co.: Airbus may well have avoided the supplier-driven delivery delays on its A350s had the company brought some key work in-house and become more vertically integrated, says its chief operating officer-customers.

Airbus has been bedeviled by delays in business class seat and galley deliveries from supplier Zodiac, resulting in delayed deliveries of the A350-900 to several airlines.

John Leahy, in an interview with LNC at the International Society for Aircraft Transport Trading (ISTAT) conference Feb. 29-March 1 in Phoenix (AZ), said Airbus shouldn’t be at the mercy of suppliers of interiors. His wide-ranging interview also touched on several other topics.


  • Airbus should have become more vertically integrated 10 years ago.
  • Basic supply chain solid.
  • Speaks about PW GTF, CFM LEAP
  • Airbus considering higher production rate on A320 than the announced 60/mo.

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Dissecting Boeing cost-cutting

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Feb. 11, 2016, © Leeham Co. The news yesterday that Boeing is undertaking a new roundBoeing Logo of cost-cutting has been buzzing around management and labor circles for months.

LNC last year began hearing management at Boeing Commercial Airplanes would likely face personnel cuts of 10% to 15%. Cuts were expected within the marketing/sales departments, in part due to struggling sales of the 7-Series airplanes, sources told LNC.

The leading labor unions, SPEEA (engineers) and IAM 751 (touch labor), each told LNC last year they expected workforce layoffs were in the future.

More ominously, a consultant who occasionally worked with Boeing, told LNC that the elevation of Dennis Muilenburg from president and chief operating office to president and CEO (and, eventually, chairman) would make former CEO Jim McNerney’s cost- cutting efforts pale by comparison.


  • Major layoffs predicted at Boeing’s Share Services Group.
  • Work continues to be shifted out of Washington State.
  • Large number of retirements at IAM and SPEEA expected by year end.
  • Airbus pricing pressure, 787 deferred production costs, commitments to shareholders and 777X squeeze cash flow.
  • “Mac the knife.”


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LNC’s annual production forecast for Airbus, Boeing

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AirbusNewJan. 11, 2016, © Leeham Co. Airbus and Boeing are headed for parity in monthly production rates by the end of this decade, a new forecast by Leeham Co. shows.

In our annual production rate forecast for the Big Two OEMs, we combine announced production rate plans, Market Intelligence indicators—largely from the supply chains that serve the Big Two—and our own analysis of where we believe rates should be based on backlog, market Boeing Logoconditions and ramp-up of the 777X and A350 production.

Our forecasts may well run contrary to what the Big Two will say publicly, and even privately, but our assessment is what it is.


  • Single aisle rates heading levels by the turn of the decade.
  • VLA rates have to come down based on lack of demand.
  • 777 Classic rate, even at reduced level, is unsustainable.

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Pontifications: Looking ahead to 2016

Jan. 4, 2016, © Leeham Co. Let’s take a walk through our outlook for 2016.

Boeing is 100

The Boeing Co. is 100 years old this year. July 15, to be precise. This is the last day of the industrial portion of the Farnborough Air Show.

There will no doubt be all kinds of celebrations at the Air Show. To the extent possible, I would imagine Boeing will try to have a whole lot of orders to announce there. There will be all kinds of run-up to the 100th anniversary. Few throw a party as well as Boeing. (Just don’t sing “Happy Birthday;” I never have liked this song.)

It’s a great achievement and we should all celebrate with Boeing for the next seven months.

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Top 10 Stories in 2015

  • HOLIDAY SCHEDULE: Unless there is major, breaking news, Leeham News and Comment is taking the Christmas-New Year’s holidays off. We resume our normal publishing scheduled Jan. 4, 2016.
  • So what do we have? Mitsubishi holding an MRJ briefing on Christmas Eve, Tokyo time. There’s no webcast or dial-in number but we’ll look for the stories coming out of this briefing and post something just for the record.

Here are the Top 10 stories on Leeham News and Comment for 2015:

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