Boeing has begun a major cost-cutting drive, citing stiff price competition from Airbus. Yet the financial stresses come not just from its European archrival, and some of them are self-inflicted, analysts say.
When Boeing Commercial Airplanes chief Ray Conner in February warned employees that jobs would be cut this year — anywhere from 4,000 to 8,000, as it turns out — he cited intense pricing pressure from Airbus.
Yet the financial stresses come not just from the European archrival, and some of them are self-inflicted, analysts say.
Boeing has “a lot of challenges on a lot of fronts,” said Bank of America aerospace-industry analyst Ron Epstein.
Boeing could see lower profit margins over the next few years as income declines from its longtime moneymakers, the 737 and 777 jet programs, with little prospect that the 787 Dreamliner can fill the gap.
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While the 737 and 777 programs transition to new models between now and the end of the decade, they’ll generate significantly less cash.
Production of the 777 in Everett is set to drop next year from 100 jets per year to about 80, which “is a big deal, because it’s so profitable,” Epstein said.
And as Boeing in Renton moves from the current model 737 to the new 737 MAX, the process is likely to hit some glitches and slow production, he said.
Though the 787 Dreamliner program is ramping up, it won’t come close to making up the cash shortfall. Boeing lost about $6 million on every Dreamliner it delivered in the last three months of 2015.
Epstein said Boeing would need to make an average profit of about $30 million per airplane on the next 900 Dreamliner deliveries just to pay off the production costs it has deferred into the future.
“Is that doable? There’s a prevailing view it’s not,” Epstein said. At some stage, he said, Boeing is likely to take a write-off on the 787, hitting its profits.
Aviation analyst Richard Aboulafia of the Teal Group points out that the 787’s lack of profitability, due to past production glitches, is “absolutely nothing to do with Airbus.”
“That’s a little gift the previous CEO (Jim McNerney) left behind,” he said. Aboulafia agreed with Epstein that new CEO Dennis Muilenburg may have to bite the bullet and declare a loss on the 787.
The imminent change in Boeing’s delivery mix from more profitable to less profitable airplanes will put the company “under serious pressure,” Aboulafia said.
Added up, the shifts mean “the next several years are going to be quite lean and tough for Boeing,” said Issaquah-based aviation analyst Scott Hamilton of Leeham.net.
At a time when Muilenburg has told Wall Street he intends to increase profit margins, Aboulafia said, profits could well fall unless drastic action is taken.
Hence the new urgency to slash costs.
Company spokesman Doug Alder said Boeing must take these steps to “position us to win future sales campaigns and allow us to keep investing in new products.”
He reiterated Conner’s assertion that layoffs would be “a last resort,” and said the impact on the jet programs in the Puget Sound region will vary.
Lower production rates ahead on the 747 and 777 mean those programs will be hit by the job cuts, Alder said. However, “the 737, 767 and 787 programs are going up in rate and will continue to be staffed accordingly.”
Other issues notwithstanding, the pricing pressure on Boeing is real.
In the February employee address announcing the cost-cutting drive, Conner gave an unusually candid account of specific sales campaigns when Boeing was forced to lower its prices.
He recounted how the chairman of EVA Airways of Taiwan told him last year that Airbus was offering EVA its A350-900 at a price “significantly lower” than Boeing’s 787-10.
“The chairman told me, ‘Look, this is too big a price gap,’ ” Conner said, according to an official transcript of his address to employees, “and they started to go down that path of actually going to buy the A350-900.”
To head off the prospect of losing a loyal all-Boeing customer, Conner lowered the price to win the order.
And it’s not just Airbus putting on the pressure.
Conner also told employees that Boeing had lowered its price dramatically to win an order in January from United for 40 current-generation 737s against “aggressive” competition from the new Bombardier CSeries jet.
Conner said Boeing did so specifically to block Bombardier’s new plane.
He recalled how Boeing had lost similar sales battles in the 1990s to the Airbus A320, allowing that jet to gain traction against the 737.
If Bombardier, which has had trouble securing customers for the CSeries, had won the United order, “that would’ve been a validation of this CSeries in the marketplace, I think. So very important for us to win that.”
Industry insiders believe United got its 737-700s, which have a list price of $80 million, for between $22 million and $24 million each.
“Ultimately we won, but I’m going to tell you, we got pushed to the wall,” Conner told his employees.
In the March issue of Boeing’s in-house magazine Frontiers, Conner acknowledged that Airbus has improved the performance of its airplanes relative to Boeing’s.
“Airlines once paid a premium for the value of Boeing airplanes,” Conner wrote. “That dynamic has changed … Purchase decisions increasingly hinge on price. Sales campaigns are tougher. Airbus has narrowed the value gap.”
David Strauss, aerospace analyst with UBS Investment Research, said one external factor that’s shifted is the strength of the dollar against the euro, which boosts Airbus’ profits and leaves it room for more aggressive pricing.
Boeing’s new reality is that the A320neo is firmly established as the preferred single-aisle jet family, with sales outpacing those of the 737 MAX by more than 1,400 airplanes. And on the widebody side, Airbus now for the first time offers real competition for the 777 with its new A350.
“Boeing had all the tail winds at its back over the last 10 or so years. Now it would appear Airbus does,” said Strauss. “It’s going to be tougher for Boeing to sell airplanes with the same level of profitability they’ve had.”
“That, combined with Dennis (Muilenburg)’s targeting higher margins at Commercial Airplanes, that’s what’s driving this,” he added.
Teal Group’s Aboulafia said he’s baffled by the divergence in tone between Conner’s internal speech to employees and the confidence in its market position that Boeing proclaims in public.
To the outside world, executives have insisted that demand is robust, that they have no concern about the single-aisle market because the 737 MAX is a surefire winner, and that the 787 will be profitable.
But company spokesman Alder insisted the cost-cutting is not because Boeing is in trouble but to ensure it remains competitive for the future.
“Our backlog, production rates and product lineup put us in a strong position, but we can’t stand still,” said Alder.