In this continuing series of Supply Chain Matters blog commentaries, we are surveying the recent financial and operational performance of some bellwether companies’ indicative of industry product demand and supply networks trending.  Our goal is to share indicators of how certain industries, companies and customers are faring during this unprecedented 2021 global supply chain surge.

Our first blog in this series we highlighted the financial and operational performance of Samsung Electronics and Apple, both being very indicative of high-tech and consumer electronics product demand and supply network trending and supply chain challenges.

Part Two in this series focused on A.P. Moeller Maersk, operators of the leading ranked global container shipping line which experienced its strongest financial performance quarter in the shipping firm’s 117-year history.

In this Part Three commentary we turn our attention to the commercial aircraft industry, the linchpin of global trade and supply networks, and an industry that has been reeled by the impacts of the COVID-19 pandemic on passenger air travel and consequent new aircraft demand. Our focus is on the duopoly of Airbus and Boeing, and how they are faring financially and operationally after the first quarter of 2021.

Boeing 787 Production Line

Airbus

At the end of April, Airbus reported the aerospace designer’s Q1-2021 financial performance which were generally positively received.

Commenting on the latest performance, CEO Guillaume Faury indicated:

The good Q1 results mainly reflect our commercial aircraft delivery performance, cost and cash containment, progress with the restructuring plan, as well as the contributions from our helicopter and defense and space activities. The first quarter shows that the crisis is not yet over for our industry, and that the market remains uncertain. We are investing in innovation and in the transformation of our Company to deliver on our long-term ambitions across the portfolio.”

The global aircraft manufacturer reported relatively stable year-over-year revenues of € 10.5 billion for the quarter (Q1-2020 € 10.6 billion). Revenues generated by the commercial aircraft business decreased by 4 percent, reportedly due to lower service volumes.

What especially caught the eye of financial markets was a swing to profitability with Adjusted EBIT reported to be € 694 million overall, while Adjusted EBIT related to the commercial aircraft business segment increased to € 553 million. Consolidated Net income was reported as € 362 million.  The net cash position at the end of March was € 5.6 billion. The total employee count reportedly reduced by 3 percent since the end of December 2020, and now stands as upwards of 127,000 employees vs. 131,000 employees.

On the operational side, Airbus delivered 125 commercial aircraft during the quarter, three more than the same period in 2020 when the pandemic was just getting started. Gross commercial aircraft orders received were noted as 39 compared to 356 received in the year-ago quarter. After order cancellations, net aircraft orders were a negative 61. Order backlog as of March 31, 2021 was noted as 6,998 aircraft. Priorities outlined by senior executives included finalization of the implementation of restructuring, preparing for when the market recovers and added transformation of the commercial aircraft industrial value chain, which more than likely includes the overall Airbus supplier network.

Regarding the supplier network, Bloomberg, citing informed sources, reported this week that suppliers have been told to be ready to ramp production volumes of the popular A320 single-aisle aircraft to upwards of 53 aircraft per month by the end of 2022. The report indicated that no final decision has been made and that the number represents the top range under consideration. Airbus is currently producing 40 of the A320’s monthly with plans to ramp to 43 in Q3 and 45 monthly by the end of this year. As a reference, in 2018 when the market was booming, Airbus’s target monthly production rate for the single-aisle category was 60 aircraft per month among 5 final assembly facilities.

Executives reiterated their guidance outlook issued in February that includes the same number of commercial aircraft deliveries as achieved in 2020, Adjusted EBIT of € 2 billion and breakeven cash flow before M&A and customer financing. Of continuing concern are the ongoing COVID-19 infection rates among developing nations, especially India, which is really being hit hard. The country’s airlines were a lucrative market for Airbus.

 

Boeing

Boeing continues to deal with what Bloomberg describes as: “one of the toughest stretches in its century-long history.” The aerospace manufacturer reported its sixth consecutive quarterly loss, while continuing to manage additional quality challenges related to both the Boeing 737 MAX and Boeing 787 Dreamliner aircraft.

For the first quarter, the company reported a loss of $561 million compared to a loss of $641 million in the year earlier quarter. Total revenues for the quarter were $15.2 billion (Q1-2020 $16.9 billion). Included in that number was $4.2 billion of revenues associated with Commercial Airplanes. (Q1-2020 $6.2 billion) The manufacturer recorded operating cash flow of negative ($3.4) billion. Compensation of $1.2 billion to 737 MAX customers further crimped results for the quarter, along with a $318 million special charge related to a supplier squabble related to the Air Force One build program. That supplier has reportedly filed for bankruptcy.

Cash and investments in marketable securities reportedly decreased to $21.9 billion, compared to $25.6 billion at the beginning of the quarter, primarily driven by operating cash outflows. The company refinanced $9.8 billion of debt in the quarter.

On a positive note, the manufacturer booked 76 orders net of cancellations which included a deal with Southwest Airlines for 100 of the 737 MAX aircraft. Order backlog at the end of March was reported as “over 4,000 airplanes valued at $283 billion.”

Commenting on performance, Boeing President and Chief Executive Officer Dave Calhoun indicated:

I am proud of the progress our global team made across our business in the first quarter as we continued to transform our enterprise, strengthen our safety processes, and sustain critical investments for our future. While the global pandemic continues to challenge the overall market environment, we view 2021 as a key inflection point for our industry as vaccine distribution accelerates and we work together across government and industry to help enable a robust recovery. Our balanced commercial, defense, space and services portfolio continue to provide critical stability for our business – and we remain focused on safety, quality and integrity as we deliver on our customer commitments.”

Before the announcement of quarterly financial performance, Boeing extended a vote of confidence in Chief Executive David Calhoun by renewing his contract for up to five years. However, the manufacturer is reportedly seeking a new CFO, as Greg Smith, considered a possible successor to the CEO role indicated he would retire in July. According to reporting by The Wall Street Journal, Mr. Smith, a 30-year Boeing employee, was deeply involved in Boeing’s efforts to return the 737 MAX back to service.

The manufacturer has reportedly burned through upwards of $30 billion since the 737 MAX was grounded in March 2019. In early April, deliveries of the 737 MAX had to be halted because a suspected issue with the aircraft’s backup electrical power system caused by a change in the aircraft’s assembly process. Sixteen airlines were instructed to ground upwards of 60 of their 737 MAX aircraft to address the issue.

Suspected fine cracks in the aircraft fuselage of Boeing’s 787 Dreamliners led to a five- month halt to aircraft deliveries to allow certain suspected aircraft to be inspected and manufacturing assembly processes to be modified. Reportedly, that drove the company’s inventory balances $1 billion higher while about 100 aircraft were parked at various storage areas. Deliveries of the Dreamliner aircraft resumed in March.

Executives reiterated desires to deliver upwards of the 100 parked 787 and half of its parked 737 MAX aircraft by year-end, but both Bloomberg and The Wall Street Journal opined that this goal is looking increasingly difficult.

 

Supply Chain Matters Perspectives

Judging from the current performance of these two commercial aircraft industry bellwether and highly influential players, caution is still rather prevalent regarding a post-pandemic normal for the industry and its supplier networks.

As readers will likely surmise by this point in their reading, there are succinct differences among the condition and readiness of both players with Airbus better positioned both financially and operationally at this point to be able to be prepared for an industry come back when it occurs.

Boeing has shown some meaningful signs to improve its renewed commitment toward fixing manufacturing quality problems and providing added transparency and openness with global regulators. Yet, there is obviously more leadership and added commitment required. We were candidly disappointed with the early renewal of CEO Calhoun’s contract. He remains an insider tasked to make significant change to a corporate culture that lost its engineering roots. From our perspective, change becomes more meaningful when led from leaders not vested in current stakeholder interest and existing culture.

More importantly however, is the financial and operational health of the thousands of suppliers large and small that make-up this industry’s supply networks. Some have succumbed and many remain challenged. That includes a significant amount of skilled and valued workers that are the lifeblood of the industry. Signs now point toward supply network consolidation and the jury is out as to what benefits this would provide other than financial market interests. The scorecard for this area is a compilation of many other commentaries that can be featured in the weeks to come.

We close with the following. To date, over 3 million deaths have been associated with the COVID-19 pandemic, which is a sobering tragedy.

Beyond that tragedy, an industry and its associated supply networks that were the envy of all other industries in terms of multi-year backlog of orders and work remains a casualty, along with the economic fortunes of many individuals that are directly or indirectly associated to commercial air travel. While optimism is improving, the notions of any post-COVID normal are still out of sight.

 

Bob Ferrari

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