Supply Chain Matters has previously noted signs that commercial aircraft supply chains supporting both Airbus and Boeing may indeed be faltering in their ability to scale-up current and future production volume output commitment milestones. The first clear sign came in February when Boeing transmitted a supply chain shock wave by warning that total 2016 production output and deliveries would be lower than that of 2015.
Last week, both commercial aircraft global producers announced their Q1 financial performance which included ongoing challenges related to supply chain challenges and expected performance for 2016 total delivery commitments.
Airbus CEO declared that 2016 has turned out to be the challenging year that was anticipated. Aircraft deliveries, cash and earnings were noted as heavily loaded towards the end of the year. While total revenues matched year-ago levels, net income and free cash flow were considerably below Q1 year ago levels. Further noted in the context of supply chain:
“The A350XWB ramp-up is progressing with the focus on bottlenecks in the supply chain, reducing outstanding work and controlling recurring costs. This is increasingly challenging. The target for a monthly production rate of 10 A350s by the end of 2018 remains unchanged. Five A320neos were delivered in the first quarter to two customers. Pratt and Whitney is committed to supplying new engines for aircraft delivery from the summer of 2016. The engines are expected to be delivered at the right level of maturity to enable the NEO (new engine option) ramp-up in the second-half of 2016. Overall, the A320 ramp-up preparation continues despite temporary supply chain challenges that are expected to be recovered at year-end.”
From or lens, such candid detail from a CEO related to the global producer’s most critical new product introductions is a clear sign of concerns related to various supply chain challenges.
In May of 2015, we noted that Airbus conducted an operational review of its crucial A320 supply chain amid a backlog of 5100 booked customer orders, many of which were for the new engine option version. In February of 2015, the company indicated that it had plans to increase the monthly production rate to 50 aircraft per month by early 2017, while evaluating an even larger cadence amid existing production of 42 A320 aircraft per month at the time.
In December of 2015, Airbus had to delay the initial A320neo delivery fulfilment milestone. Airline customer Lufthansa stepped-up at the last minute to serve as first delivery customer after former designated launch customer Qatar Airways refused to take first initial delivery because of last-minute operating limitations of Pratt’s new geared turbofan, PW1100G Pure Power aircraft engine. Lufthansa did take delivery of the first A320neo aircraft in January, but without any ceremony, fanfare or appearance of the “neo” decal on the aircraft. The explanation for the delay provided by Lufthansa was added technical acceptance and documentation needs required from engine manufacturer Pratt & Whitney as well as Airbus. Subsequent industry reports pointed to an engine cooling recycle issue for the engine when operated in dry high heat desert climate operational conditions.
Reporting on last week’s Q1 financial performance from United Technologies, the parent of Pratt, The Wall Street Journal provided somewhat more detail related to the new geared turbofan engine. Reported was that Pratt was changing its production process to eliminate a cooling issue with the engine when operating in high heat climates between flight cycles. That correlated with the reports in January regarding performance and certification needs related to the new engine. The production change is expected to be completed by June.
Regarding the A350XWB, there were previous reports of supply challenges related to the aircraft’s seats and interior cabin features among other supply issues.
In Q1, Airbus delivered 125 aircraft to 49 customers. Deliveries included:
103 A320 aircraft including five A320neo models
13 A330 aircraft
4 A350 XWB aircraft
5 A380 aircraft
As of the end of March 2016, commercial aircraft order backlog was reported as 6716 aircraft orders, of which, nearly 81 percent consisted of the single aisle A320 family of aircraft. That equates to over 13 years of production at current quarterly output levels.
Boeing’s Q1 Performance
Boeing reported higher revenues but lower profits for its Q1 financial reporting. Total revenue increased 2 percent from the year-earlier period while core operating earnings decreased 21 percent, missing analyst’s profit expectations for the first time since 2011. Boeing incurred an additional $243 million pre-tax charge related to a new U.S. Air Force tanker development program that has been plagued by product design and subsequent production delays.
The Commercial Airplanes business segment reported that revenues decreased to $14.4 billion, a six percent decrease from the year-earlier period primarily from lower delivery performance.
Boeing executives have increasingly pointed to operational cost challenges brought about by a more competitive industry new aircraft pricing environment. In addition to reduced deliveries, Boeing had recently announced specific job cuts and cost reduction efforts involving cuts of more than 4500 positions by June. Boeing had indicated that the commercial aircraft business segment expected to initiate about 2400 of these cuts via attrition and approximately 1600 through voluntary layoffs. The cuts included “hundreds” of managers and executives which would indicate a trimming of organizational hierarchy. Boeing continues to maintain pressure on current suppliers for cost cuts and productivity increases. Yet, During Q1, Boeing purchased an additional $3.5 billion of the company’s outstanding shares leaving $10.5 billion remaining under the current repurchase authorization to be completed over the next two years. Boeing has additionally taken steps to leverage more revenue from service parts revenues involving proprietary part designs taking away some revenue opportunities from major suppliers.
In Q1, the latest quarter, Boeing delivered 176 commercial aircraft that consisted of:
121 737 aircraft
23 777 aircraft
30 787 aircraft
1 747 aircraft
1 767 aircraft
Order backlog remains described as robust at $480 billion with over 5,700 commercial airplane orders. At current Q1 product volume that backlog equates to a little over 8 years of customer order backlog.
Thus, for the two dominant manufacturers of commercial aircraft, supply chain challenges have once again come back as concerns amid an environment of robust order backlogs. Each has different manifestations and supplier challenges, and each reflects on internal operational scale-up as well. More and more, challenging product design among the most critical supply components, including aircraft engines will continue to be the linchpin towards achieving required production scale-up milestones.
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