The month of February has not necessarily been one of positive news emanating from commercial aircraft producer Boeing.
The Wall Street Journal reported this week (Paid subscription required) that Boeing’s Commercial Aircraft business is planning job cuts as part of a cost-cutting drive in response to rising competition from Airbus.
This news comes shortly after Boeing’s prior stunning announcement that it will actually deliver less commercial aircraft this year that was delivered in 2015. Whereas Boeing delivered a total of 762 commercial aircraft in 2015 while declaring a year of outstanding operational performance, the current forecast is to deliver a range of from 740-745 commercial aircraft in 2016.
Commercial aircraft CEO Ray Connor reportedly announced in an internal webcast that the aircraft manufacturing was losing market share, and that the company will utilize attrition and voluntary layoffs to primarily trim its executive ranks. A Boeing spokesperson confirmed to the WSJ that the company would start reducing employment levels with executives and managers first. The overall impact of the layoff is described as dependent on reduction in cost structures.
According to the WSJ report, Mr. Connor communicated to employees that Airbus had been undercutting on pricing of certain aircraft models while customer feedback had identified executive management as a source of cuts to reduce costs. Boeing’s unionized work force has reportedly already agreed to voluntary layoffs. An executive for Airbus indicated to the WSJ that he disagreed with the notion that the European aircraft manufacturer was offering models at lower prices.
One could suppose that the above statements could be interpreted in different ways.
For the Boeing supply chain network, it is a continued sign of continued emphasis for added efficiencies, throughput and cost reduction.
As we penned this commentary, there was further breaking news that the U.S. Securities and Exchange Commission (SEC) has launched a probe of Boeing’s accounting methods related to both the 787 Dreamliner and 747 programs. A widely cited report from Bloomberg News, citing people with knowledge of the matter indicates that SEC enforcement officials haven’t reached any conclusions and could decide against bringing a case. According to the Bloomberg report, the investigation comes after a “whistleblower” contacted the agency regarding accounting methods. Boeing utilizes a cost tracking method called program accounting that enables the spread of development costs for new airplanes over the program’s expected production life. In the case of the 787, that is a long window while the 787 program itself has recorded upwards of $30 billion in deferred production costs that have yet to be logged against the income statement. While Boeing’s program accounting method is compliant with Generally Accepted Accounting Principles (GAAP), Airbus utilizes a different international accounting standard that requires program costs to be booked earlier in product production lifecycle.
The news of the SEC investigation and a warning that Boeing might face upwards of $9.7 billion in charges for both the 787 and 747 programs if additional sales cannot be generated, sent Boeing stock down nearly 7 percent on Thursday erasing about $7.8 billion in market value.
The broader takeaway from our Supply Chain Matters lens is that business-as-usual is no longer a norm for any industry, especially one that continues to experience multi-year backlogs of booked customer orders. In Boeing’s case, an estimated $432 billion in orders booked overall. The uniqueness of commercial aircraft is in its engineer-to-order environment with multi-year program engineering, production and accounting windows.
Time-to-market, business agility, continuous innovation and supply chain responsiveness our indeed the new norm.