by Vinay Bhaskara & Chris Sloan

SEATTLE – Global aircraft manufacturers Airbus and Boeing are in the midst of their worst non-recession slowdown in more than two decades. While the world economy is far from perfect, it is relatively stable and growing.

Yet Airbus and Boeing face substantial challenges in winning new orders, driven largely by macroeconomic trends outside of their control. The biggest killer is the price of fuel, which has broken from its 2000-2014 trajectory to settle at $40-50 per barrel (West Texas Intermediate).

One of the biggest drivers of the orders boom enjoyed by both global aircraft titans over the past decade and a half was, in fact, the rising price of oil (and thus higher jet fuel costs).

But today that demand is drying up, particularly for widebodies like the Boeing 787 and Airbus A350. Demand for smaller aircraft like the Airbus A320neo and Boeing 737 MAX has been more robust, but even there the order slowdown has been sharp, even if existing customers aren’t yet canceling their purchases.

It is into this environment that Boeing is launching three new jets over the next four years, including the 787-10, the 737 MAX 9 (and MAX 7), and the Boeing 777X. Despite demand slowdowns, the former two aircraft are in excellent shape developmentally.

At a presentation last week, we heard presentations from Bob Manelski, the Director of 787 Business Operations; Wayne Tygert,
787-10 Chief Project Engineer; and Mike Delaney, VP & GM Airplane Development; that touched on the 787-10’s and 737 MAX’s development and progress.

Boeing has turned the corner on the 787

The 787 is often held up as an emblem of the developmental and execution challenges that Boeing faced starting in the mid-2000s. And the 787 did truly experience a hellacious development process, fraught with challenges ranging from overweight airplanes to exploding ELTs.

But that was the old Boeing. Around 2013-14, there was a real cultural shift in how Boeing thought about execution (both publically and privately), and that has been borne out in the 787-10, 737 MAX, and 777X.

Boeing has “gotten out of the triage mode formerly associated with the 787 program,” notes Manelski, “[such as] seat production problems, production challenges, rework, and the battery problems. We’re on a journey that will never stop. We have clarity that we didn’t have a year ago. We’ve focused on using lean principles and thinking of our mechanics as surgeons. We make sure they have the right tools on time.”

This has paid dividends for the existing 787 variants (the 787-8 and 787-9), which have now seen 554 deliveries. The most recent deliveries are 100% on time in spite of Boeing reducing headcount and combining building positions.

There are numerous drivers behind this success, most notably a focus on lean principles with the use of mechanics as “surgeons,” stricter production control in two-hour segments and friendly competition between the Everett and Charleston plants.

Through all of this the end point is that between the two lines, Boeing is ready to raise production of the 787 to 14 aircraft per month from 12/month if needed. That would be the fastest rate of widebody aircraft production in commercial aviation history. And the 787, in every sense except financially, has turned out to be an incredible success story.

Per Boeing’s figures, airlines have saved $15 billion in fuel expenses with the 787, dispatch reliability is 99.3%, and production flow rate is a third of what it was four years ago.

It has also enabled the opening of dozens of routes that would have been economically impossible with any widebody aircraft before the 787, and that may be its most powerful impact of all.

Delaney echoed this sentiment, “The 787 was so successful that had lower trip costs than a 777 but same seat size,” he said. “It allowed airlines to open up new markets. It has opened up 140 city pairs that weren’t served before. We chose point to point while our competitor chose hub to spoke.”

787-10 development is on track; order book is a bit low but constrained by availability

According to Tygert, development on the 787-10 is continuing apace as Boeing progresses to first delivery to Singapore Airlines in the first half of 2018.

There are two aircraft in the flight test program, which is 20% complete, and there have been no squawks on any of the first three flight tests.

Test aircraft ZC001 is outfitted with Rolls-Royce Trent 1000 engines and first flew in March 2017, and it will test stability and control, flutter, auto land, avionics, and propulsion.

Test aircraft ZC036 is outfitted with General Electric GEnx-1B engines and first flew in May 2017. Its testing is focused on stability and control, flutter, performance, and AMM. A third test aircraft, ZC002 (also outfitted with Trent 1000s) will join the program after its first flight this month, focusing on testing performance, systems, and AMM.

Image Courtesy of Boeing
Image Courtesy of Boeing

To date, the 787-10 has 168 orders from 9 customers, which isn’t an incredible backlog this close to EIS. However, the customer base isn’t particularly risky (outside of perhaps Etihad’s order for 30 787-10 jets), and several customers like United Airlines (14) British Airways (12), Air France-KLM (6), and ANA (3) are likely to order much more once delivery slots are available.

In fact that last sentence is particularly illustrative – with the 787 functionally sold out until 2021 at the earliest, not many airlines are in a hurry to buy additional Dreamliners.

One such airline is Emirates, who may not place an order for a mid-sized widebody this year contrary to longstanding market intelligence. That might knock up to 100 frames off of the 787-10’s EIS backlog.

Image Courtesy of Boeing
Image Courtesy of Boeing

But the demand is there, even in today’s weakened environment and we aren’t very worried about the business prospects of the largest Dreamliner.

At the end of the day, it’s still an incredible aircraft that covers 90% of global twin-aisle routes with what Boeing claims is 10% better fuel burn per seat than the A350-900 and 25% better fuel burn per seat than the A330 (classic).

Image Courtesy of Boeing
Image Courtesy of Boeing

737 MAX execution remains on point post-EIS

With the delivery of the first 737 MAX 8 to Lion Air subsidiary Malindo Air on May 16 (and the first flight on May 22), the 737 MAX officially became the smoothest aircraft program to roll out from either major manufacturer since (and I’m not making this up) the Boeing 777 back in 1995.

Since then, Airbus has tripped up on the A380, A350, and A320neo while Boeing fell flat on its face with the 787 and messed up on the 747-8. By contrast, the 737 MAX 8 entered service on time and without a hitch, and barring any engine issues, will have a more stable EIS than the A320neo (even if the latter is a hotter seller).

Image Courtesy of Boeing
Image Courtesy of Boeing

The 737 MAX 9 had its first flight on April 13 with first delivery coming early next year and will make its debut at the Paris Air Show this year. The 737 MAX 7 and MAX 200 (a high-density MAX 8) are still scheduled for 2019.
EIS and both have achieved firm configuration. Parts configuration has begun for both variants, and final assembly will begin in the fourth quarter of this year. All in all, despite the very real problem at the upper end of the family (in the so-called middle of the market or MOM), Boeing is in a very good place with the 737 MAX.

Image Courtesy of Boeing
Image Courtesy of Boeing