The Worst start to building The new age Commercial Plane was not Airbus’. It was Boeing’s. Its biggest project – The Dreamliner 787 – has turned a Nightmare. There are other problems too. What went Wrong with Boeing? & can CEO Jim McNerney play Captain America?
Sixty-one year-old Walter James McNerney Jr. is quite accustomed to rough patches. He has lived through violent storms – some worse than the monster gale that flipped half the vessels at the Fastnet yacht race, off the coastline of South Ireland in the summer of 1979. But most, who have had the chance to conduct an anatomic diagnosis of his career – starting from P&G to The Boeing Co. – will agree that he has already lived through the biggest test of his character. It was while he was heading GE’s aircraft-engine business. The date: November 26, 2000. Late that afternoon, Jack Welch boarded GE’s corporate jet to fly from Palm Beach to Cincinnati. When he landed, the sun had set and the rainfall was heavy enough to fill a glass in a minute. It was 7pm on a cold Sunday evening. He met McNerney at the conference room of the Lunken Airport corporate hangar. Then, McNerney was a popular name in Corporate America. He was considered amongst the three most-likely to succeed Welch as the world’s most valuable company’s CEO. Welch had news. “You’re not getting the job. If there’s anyone to be mad at, be mad at me. Put my picture on the wall and throw darts at it. I can’t even tell you why,” said he. Nine days later, McNerney was named the new CEO of 3M.
A decade since that shocker of a sudden exit, McNerney today, finds himself in the cockpit of the $54 billion Boeing. His job: to steer the $64.31 billion-a-year revenue-earning maker of commercial planes, fighter jets, bombers, missiles, satellites et al, to the height of its glory. Not easy though. With repeated delays to the final delivery date of the 787 Dreamliner and the 747-8 passenger aircrafts (Intercontinetal) & 747-8 freighter, Boeing has hit an air-pocket. While Airbus (which replaced Boeing as the #1 supplier of commercial aircraft since 2008) sits pretty with its A380 double-decker jumbo dancing in the skies, Boeing’s big ticket bets are yet to find their way out of the workshop. Seven years back, the Dreamliner & the 747 families were supposed to give the American a clear supremacy in the commercial airline space, far outrunning its European rival Airbus. It wasn’t to be.
Boeing has an order book which gives-off a stench of backlogs, and this situation, thanks to the 787s & 747-8s, is here to stay for many years. This is not some doomsday call though. The pain is in the loss of revenues and opportunities. The manufacturer, which earns 50.33% of its revenues from the sale of commercial aircrafts has a total backlog of $321 billion. Of this total, $169 billion (847 units) is accounted for by the 787s (each priced between $185.2 million & $218.1 million), of which not a single unit has been handed over to the 57 airlines which placed an order for it as early as six long years back. Today, the 20% more efficient, 220-seater 787 is still under construction, and with the first delivery scheduled for Q3, 2011, will be about 4 years behind schedule. Another chilblain slowing down the American is the 747-8 family (priced between $317.5 million & $319.3 million respectively). Their deliveries have been delayed 4 times already, which implies a total business time loss of 2 years (now scheduled for H2, 2011). The backlog for the 747s is valued at $35.7 billion (112 units). So what is the magnitude of opportunity lost so far for non-delivery of the aircrafts? Assuming that being on schedule would have enabled Boeing to deliver as many 787s & 747-8s in the lost years (four and two respectively) as it is forecasted to roll out in as many years following the first delivery, the total revenue loss amounts to $85.26 billion ($67.75 billion due to the 787s and $17.51 due to the 747s). And we are not even talking of the cancellations yet.
There is much dissatisfaction brewing in the boardrooms of the airlines which expected on-time delivery of the planes. Boeing cannot choose to sweep these sentiments under the carpet. In the past two years (the first delay in deliveries was announced in 2007), Boeing has recorded a net loss in orders of the 787s. In FY2009 & 2010, it saw 60 cancelled orders, while only 11 new orders were placed. Since Q1, 2010, more than 100 cancellations of the 737, 747, 777 families have been received (cancellation figures in FY2011 alone touching 47). At the current net order rate, Boeing will only record a fresh order book of 304 aircraft in FY2011 – a y-o-y fall of 42.6%. That is a dangerous sign as far as new orders are concerned. The situation will worsen if another delay in any fleet is made public – and this is McNerney’s worst fear. While speaking to B&E from Chicago, S&P analyst Richard Tortoriello says, “Risks to Boeing include a worsening financing or economic environment and further delays or manufacturing difficulties on major programs.” Also adds New York-based Goldman Sachs’ Chun-Yai Wang to B&E, “The main risk to Boeing’s state currently includes new aircraft developmental milestones.”
Revenue, bottomline, deliveries and other key financial indicators, are already reflecting a weaker-than-usual Boeing. While topline for Q4, 2010, fell y-o-y by 11% (to touch $8.18 billion), profits fell by 39% (to $0.63 billion), and deliveries were down by 5% (116 units). For FY2010, the American delivered only 462 aircrafts (lower y-o-y by 4%), while its arch-rival Airbus delivered 10.4% more than Boeing. Assuming no new cancellations (which will be definite bad news) and no fresh orders, Boeing will require more than 9 years to erase all present backlogs. How bad is this? Airbus’ backlog will take 5 years to clean up, which is also the standard period used to show a healthy order-delivery equation. Translation: given that the manufacturers have to pay a hefty sum to airlines for late-delivery – ranging from hundreds of thousands to up to a million for each day – Boeing (with a comparative lag of more than 4 years) will either have to ramp up its production facilities in impossible time or will – in the absence of lobbying – be forced to forego many new multi-billion dollar orders. IATA (Global Market Forecast) predicts the need for 26,000 new aircraft (worth $3.2 trillion) over the next 20 years, and Airbus could well end up with the lion’s share of the new orders.
A decade since that shocker of a sudden exit, McNerney today, finds himself in the cockpit of the $54 billion Boeing. His job: to steer the $64.31 billion-a-year revenue-earning maker of commercial planes, fighter jets, bombers, missiles, satellites et al, to the height of its glory. Not easy though. With repeated delays to the final delivery date of the 787 Dreamliner and the 747-8 passenger aircrafts (Intercontinetal) & 747-8 freighter, Boeing has hit an air-pocket. While Airbus (which replaced Boeing as the #1 supplier of commercial aircraft since 2008) sits pretty with its A380 double-decker jumbo dancing in the skies, Boeing’s big ticket bets are yet to find their way out of the workshop. Seven years back, the Dreamliner & the 747 families were supposed to give the American a clear supremacy in the commercial airline space, far outrunning its European rival Airbus. It wasn’t to be.
Boeing has an order book which gives-off a stench of backlogs, and this situation, thanks to the 787s & 747-8s, is here to stay for many years. This is not some doomsday call though. The pain is in the loss of revenues and opportunities. The manufacturer, which earns 50.33% of its revenues from the sale of commercial aircrafts has a total backlog of $321 billion. Of this total, $169 billion (847 units) is accounted for by the 787s (each priced between $185.2 million & $218.1 million), of which not a single unit has been handed over to the 57 airlines which placed an order for it as early as six long years back. Today, the 20% more efficient, 220-seater 787 is still under construction, and with the first delivery scheduled for Q3, 2011, will be about 4 years behind schedule. Another chilblain slowing down the American is the 747-8 family (priced between $317.5 million & $319.3 million respectively). Their deliveries have been delayed 4 times already, which implies a total business time loss of 2 years (now scheduled for H2, 2011). The backlog for the 747s is valued at $35.7 billion (112 units). So what is the magnitude of opportunity lost so far for non-delivery of the aircrafts? Assuming that being on schedule would have enabled Boeing to deliver as many 787s & 747-8s in the lost years (four and two respectively) as it is forecasted to roll out in as many years following the first delivery, the total revenue loss amounts to $85.26 billion ($67.75 billion due to the 787s and $17.51 due to the 747s). And we are not even talking of the cancellations yet.
There is much dissatisfaction brewing in the boardrooms of the airlines which expected on-time delivery of the planes. Boeing cannot choose to sweep these sentiments under the carpet. In the past two years (the first delay in deliveries was announced in 2007), Boeing has recorded a net loss in orders of the 787s. In FY2009 & 2010, it saw 60 cancelled orders, while only 11 new orders were placed. Since Q1, 2010, more than 100 cancellations of the 737, 747, 777 families have been received (cancellation figures in FY2011 alone touching 47). At the current net order rate, Boeing will only record a fresh order book of 304 aircraft in FY2011 – a y-o-y fall of 42.6%. That is a dangerous sign as far as new orders are concerned. The situation will worsen if another delay in any fleet is made public – and this is McNerney’s worst fear. While speaking to B&E from Chicago, S&P analyst Richard Tortoriello says, “Risks to Boeing include a worsening financing or economic environment and further delays or manufacturing difficulties on major programs.” Also adds New York-based Goldman Sachs’ Chun-Yai Wang to B&E, “The main risk to Boeing’s state currently includes new aircraft developmental milestones.”
Revenue, bottomline, deliveries and other key financial indicators, are already reflecting a weaker-than-usual Boeing. While topline for Q4, 2010, fell y-o-y by 11% (to touch $8.18 billion), profits fell by 39% (to $0.63 billion), and deliveries were down by 5% (116 units). For FY2010, the American delivered only 462 aircrafts (lower y-o-y by 4%), while its arch-rival Airbus delivered 10.4% more than Boeing. Assuming no new cancellations (which will be definite bad news) and no fresh orders, Boeing will require more than 9 years to erase all present backlogs. How bad is this? Airbus’ backlog will take 5 years to clean up, which is also the standard period used to show a healthy order-delivery equation. Translation: given that the manufacturers have to pay a hefty sum to airlines for late-delivery – ranging from hundreds of thousands to up to a million for each day – Boeing (with a comparative lag of more than 4 years) will either have to ramp up its production facilities in impossible time or will – in the absence of lobbying – be forced to forego many new multi-billion dollar orders. IATA (Global Market Forecast) predicts the need for 26,000 new aircraft (worth $3.2 trillion) over the next 20 years, and Airbus could well end up with the lion’s share of the new orders.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
