There has been talk about this for some time. Today Boeing announced it is going to accelerate 737 production from 31.5 planes per month to 35 per month. It may not sound like much, but that is over 11% faster and consider Boeing delivered 376 737s in 2010. Increase that by 11% and Boeing could deliver 417 737s per year. Consider also that such an increase in deliveries drives a lot of extra cash to the bottom line. Boeing needs that cash because of program delays for the 747-8 and 787. There’s the updated 777 coming too, which will need R&D cash.
How is Boeing going to achieve this increase in production? Here’s how the company puts it in their press release: “Boeing has taken a three-fold approach to prepare for the rate increases on the 737 program. The company is making production processes more efficient by working with employee process improvement teams, increasing the production capacity with capital investments such as a new wings system installation line in the Renton factory and making the site footprint more efficient by moving some production areas, expanding others and decommissioning outdated equipment. The automated spar assembly tool used to build the first spar is the ninth such machine at the Renton factory, drilling about 1,700 holes and inserting fasteners to make the spar. The tool increases the 737’s wing-building capacity and is an example of one of many facilities changes happening at the Renton site to increase capacity and prepare for rate increases.”
The increase to 35 per month is only an initial step though, Boeing plans to increase that even further. The 737 production rate will increase to 38 airplanes per month in the second quarter of 2013 and to 42 per month in the first half of 2014.
Bear in mind that Airbus is taking the same path. The sales war is moving into a next phase – production. The winner might be not the one taking the most orders, but the one delivering the most.
As we have seen just this week, airlines do not like waiting for orders – there is a limit to their patience and operational flexibility. If an OEM does not deliver within a reasonable amount of time, either the customer moves on because of competitive pressures – or even worse – the economy changes and the order/delivery cycle goes wobbly. Being late with a delivery means a customer can walk away with a deposit refund. That hurts. Examples are the A380 freighter and the 747-8F and, of course, the 787. Compensation is an ugly word for everyone in the business because it means nobody is getting what they really want.
To get some perspective on this issue we contacted some industry thought leaders. The production race is getting attention.
Richard Aboulafia (Teal Group) said “Faster production has always been a competitive issue. Reducing inventory hold times and more efficient use of factories and other facilities has always helped companies compete. But if everyone is doing the same thing, you’re kind of running just to stay in the same place.” Which underscores the fact that Airbus and Boeing are going to wring out every gram of efficiency from their bread and butter lines. This means that new entrants eying the sub 180 seat market have to be very careful. When these two giants battle, bystanders can easily get hurt.
Bob Mann (R.W. Mann & Company, Inc.) makes an interesting point, faster production “Should give more customers access to the 12 month “short call” on narrowbody airplanes previously only enjoyed by “Preferred Customers” (AA, CO, DL). Provides more availability to satisfy the baseline and MAX order split, too.” This speaks to both OEMs being determined to maintain their market share. Airbus and Boeing are determined to hold off Bombardier’s CSeries and other encroaching competitors. Faster deliveries are clearly one way to keep new entrants at bay.
Adam Pilarski (Avitas) shared this view – “I believe that improving rate changes is a very positive development. On the other hand, as you know, I believe we are in a bubble environment and we do not need increased rates since eventually the bubble will burst and we will see significant cancellations.” The point Adam makes is crucial – the aerospace industry suffers from boom and busts; orders and deliveries are frequently out of sync. Orders are placed in during good times but deliveries come during a slump. The number of orders both Airbus and Boeing have for their single-aisle airplanes is enough to keep both busy until 2018. And, yes, this could be a bubble.
Ken Herbert (Wedbush) shared these thoughts: “A few points I would make:
- Yes, very important for competitive reasons to ensure product availability to meet increased demand, or risk losing even more share to Airbus
- For competitive reasons, it is also important to continue to minimize the impact of new entrants, and to continue to pressure the CSeries and the C919
- I would argue, though that the market long term does not support more than 45 to 50 narrow bodies a month from Boeing, and with new entrants and aggressive sales pricing on narrow body aircraft will never recover. The industry knows that it is becoming a volume story (with the high potential for industry overcapacity in 10 years), and over time the 737 will not be as much of a contributor to profits for Boeing, thus more pressure to execute on wide bodies, where it will make its money.”
Gueric Dechavanne (Commercial Aviation Services) had this comment: “My opinion on the production rate increases is that both OEMs are doing this because these are their cash cows and they have new up and coming products that need to be supported. The large backlogs from both OEMs certainly help in the justification of the rate increases but I am not sure how long these increases will be sustainable, especially when we go through another downturn (Whenever that may be). My concern with the rate hikes is that they willl impact the existing fleet from a value perspective. In previous cycles, as demand grew, operators would go to the used fleet to support this growth as new aircraft were not as available. With these increases, this will most likely not be the case which will most certainly impact the ability of used aircraft to rebound in value as the market recovers.
I have not looked at the potential fleet of used aircraft that will become available in the next 3-5 years as they come off lease but I would assume that it will be significant. If this is the case and both OEMs are in full production swing during the next downturn, this will have a significant impact on used aircraft values and lease rates. Of course, keep in mind that what happens on the next 3-5 years is up in the air right now as there is still too much global volatility to determine what the future will bring.”
It seems there is a common theme from the experts – growing production may be needed to keep the new entrants at bay and hold on to market share but comes with significant economic cycle risk. This is what makes this industry so fascinating.