This Supply Chain Matters blog commentary supplements our prior commentary reflecting on both Airbus and Boeing’s announced operational performance in Q4-2018. Both aerospace designers and manufacturers have now reported full year financial performance, the former at the end of last week.
It is becoming ever clearer for both commercial aircraft aerospace manufacturers that individual supply network performance will remain crucial in 2019 and beyond for long-term goal attainment for investors, suppliers and customers.
Airbus reported what was described as “strong” financial performance along with delivering on all key performance indicators including commercial aircraft deliveries.
Key financial performance highlights of FY 2018 included:
- Total Revenues of €63.7 Billion, in increase of 8 percent over 2017 revenue performance.
- Reported EBIT of €5 billion, a year-over-year increase of 89 percent.
- Net Income of €3 billion, a year over year increase of 29 percent.
As noted in our prior Supply Chain Matters commentary regarding Q4-2018 operational performance, Airbus CEO Tom Enders acknowledged a multitude of challenges yet strong operational performance. Total commercial aircraft deliveries for the year were 800 aircraft, an increase of 11.4 percent from the 718 aircraft delivered in 2017. The context for aircraft delivery performance was that at the mid-year point, Airbus had only delivered just over 300 aircraft. At the time, CEO Tom Enders acknowledged second-half “back-loaded” deliveries of the single aisle A320neo aircraft, primarily due to new engine delivery shortages. Those challenges persisted with herculean efforts throughout December to make the 800 aircraft delivery target. In early January we highlighted a Bloomberg published report indicating that the goal fell short by a few aircraft, but it would now appear that hurculeon efforts during the last days of the quarter made the magic number.
In the crucial A320 single-aisle aircraft family, a total of 626 aircraft were delivered, of which, 386 (62 percent) were of the neo version which required either the new Pratt And Whitney GTF or CFM International LEAP engines, both of which have been challenged with production ramp-up and other issues. CFM management has acknowledged slower-than-expected processes to have critical parts double-sourced with suppliers, particularly castings and forgings. Airbus management acknowledged further upgrades to the Pratt engines are due this year, while in-service performance continues to be monitored.
Senior management indicated that plans are in-place for the 2019 calendar year that will ramp-up the monthly production rate for the A320 family to 60 aircraft per month by the middle of this year. The number is planned to ramp to 63 per month in the year 2021. Accelerated deliveries for the single aisle A320 family remain crucial for delivering on total revenue and earnings performance in the coming years.
A further operational area for Airbus in the coming months is the successful ramp-up of the A220 production facility in Mobile Alabama. Recall that the A220 is the renamed Bombardier C-Series regional aircraft that Airbus acquired after rival Boeing challenged for added tariffs. Since that time, more U.S. airlines beyond Delta Airways, including JetBlue Airways, have placed orders for this aircraft. Total order backlog for the A220 aircraft stood at 480 aircraft at year-end.
For forecasted guidance, Airbus indicated an aircraft delivery goal of between 880-890 commercial aircraft for 2019. Hence, the spotlight on overall supply networks visibility and performance will remain rather diligent.
Total full-year new orders intake was reported as 747 net orders, a reduction of 32.9 percent from the 1109 net orders booked in 2017. Industry reports point to aggressive price competition between Airbus and rival Boeing, in both wide-body and single-aisle segments. Airbus’s total order backlog at the end of 2018 was 7577 aircraft, more than that of Boeing.
Airbus management further announced the suspension of super jumbo A380 aircraft program due to a lack of any new airline orders. Production is planned to cease in the 2021 period.
Boeing also reported what the manufacturer termed as “record” financial performance for 2018.
Key financial performance highlights of FY 2018 included:
- Total Revenues of $101.1 billion, a year-over-year increase of 8 percent, an all-time record high.
- Earnings from Operations of $12 billion, a year-over-year increase of 16 percent.
- Net Earnings of $10.5 billion, a year-over-year increase of 24 percent.
Boeing again had the opportunity to claim best operational performance in commercial aircraft deliveries with a total of 806 aircraft delivered, a 6 percent increase over that of 2017.
The aircraft manufacturer was not immune to Q4 ‘hockey-stick’ delivery performance delivering a total of 238 aircraft in the final quarter. Delivery issues of the new more fuel-efficient engines of the single aisle 737 MAX aircraft did impact delivery cadence at-times during the year but Boeing seemed to have managed the delays in a more agile fashion. In mid-September, Supply Chain Matters updated our readers on a number of reported efforts undertaken by Boeing to callback previously retired mechanics, inspectors and engineers to supplement existing teams to resolve production bottleneck delays and logjams. Other ongoing issues with aircraft airframe supplier Spirit Aerosystems and CFM International were reportedly addressed as-well. A total of 111 of the 737 MAX version aircraft were delivered in Q4.
In late December 2018, Spirit AeroSystems announced the signing of a Memorandum of Agreement (MOA) with Boeing to solidify pricing terms supplying a number of production programs including the 737, 777 and 787 aircraft families. The agreement reportedly included investments in tooling and capital for expected 737 production rate increases and joint cost reduction programs for the 777X and 787 programs.
Company executives indicated confidence to investors and analysts that engine supplier constraints will be overcome in the coming year, but CEO Dennis Muilenburg acknowledged added work still required within Boeing’s internal production areas. Teams have been dispatched to engine manufacturer CFM International and that company’s key suppliers to address existing bottlenecks toward ramping-up engine deliveries in the coming weeks and months.
The manufacturer plans to ramp-up both the narrow-aisle 737 and the 787 Dreamliner production cadence this year, the latter being long anticipated. In its overall annual guidance, executives called for total aircraft deliveries this year to be in the range of 895-905 aircraft, an increase of upwards of 12 percent. That amount of deliveries is expected to leverage total revenues of between $64.5 to $65.5 billion in commercial aircraft. Such goals will place additional pressures on suppliers not only in ramp-up, but on further cost reductions called for in “Partnership for Success” program.
A further ongoing concern relates to reported engineering and regulatory complication in the aftermath of the tragic Lion Air crash of a 737 MAX aircraft in 2018. While a formal investigation remains underway by air safety agencies, preliminary findings suggest sensor-calibration software issues related to the aircrafts auto piloting systems that interact with flight control operations causing the aircraft to suddenly dive or stall. Pilot error is also suspected but that appears to be related to both the auto piloting system and in training provided to pilots. Boeing reportedly is developing revised software fix but there appears to be differences of opinion among regulators and safety experts as to whether such fixes need to include more extensive changes including design changes, additional pilot training and safety aides. As to whether any of these planned actions will impact 737 MAX production is unclear, but perhaps not likely.
Another plus for Boeing was reflected in growth in its Global Services business which grew 17 percent year-over-year. Boeing had previous declared a longer-term goal for growing services revenues including areas that key suppliers previously benefitted from.
Boeing also plans to decide sometime in 2019 as to whether to move forward with the termed Boeing 797 mid-range aircraft service program, with planned in-service deliveries beginning in the 2025 time period. Industry experts anticipate a possible announcement at the Farnborough Air Show in June. The new program will likely leverage product capabilities already developed for newer single-aisle aircraft programs that include composite, lighter weight materials, and more fuel-efficient engines.
Finally, one particular aspect concerning Boeing’s financial performance has been its aggressive stock buyback efforts. In 2018, the company invested $9 billion in buying back shares in addition to paying nearly an additional $4 billion in stock dividends. By some accounting, Boeing has re-purchased 212 million of its shares over the past four years. In December 2018, management declared an additional 20 percent increase in share dividends along with a new $20 billion multiyear stock repurchase authorization. Supply Chain Matters, as often raised the question as to what would occur if such amounts of additional investment were directed at overall supply and demand network capabilities.
Our Industry Synopsis Moving Into 2019
Supply Chain Matters is of the viewpoint that it is becoming ever clearer for the duopoly of Airbus and Boeing that individual supply network goal performance remains crucial in 2019 and beyond. Visibility to individual supply networks performance remains at the highest levels to include most of the key industry suppliers senior management teams. This remains and industry under stress.
While senior management for both of these manufacturers seem to acknowledge same, to-date, efforts leading to significantly stepping-up overall aircraft deliveries seemed to be more gated by supplier ramp-up capabilities, especially aircraft engine and airframe suppliers. Dare we state again that the notion of anticipated shorter-term OEM financial returns directed toward each OEM’s shareholders than to the financial performance goals of suppliers remains a built-in conflict.
While all of this is occurring, geo-political events are changing rather rapidly which likely has an impact on global air travel in the coming years.
Deadlines related to Brexit and to resolution of the ongoing U.S. and China tariff wars loom large for 2019, and the global economy overall is showing new signs of strain. China’s economy in particular is decelerating, the Eurozone manufacturing economy as-well, and trade protectionism is rising among nations. The question as to how skilled pilot and service support teams resource needs will also scale to operate in excess of over 13,000 new aircraft over the next ten years remains a challenge.
Both commercial aircraft manufacturers will continue to work off the luxury of multi-year backlogs and abilities to reward individual investors, but when it comes to supply chain management, the devil remains in visibility and execution of all the details and in an understanding that once again, the overall ecosystem of supply and service networks, enabled by the best technology and informed decision-making is what matters the most.
© Copyright 2019, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.