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VIEW: Will market dynamics force Boeing towards a new clean-sheet aircraft

VIEW: Will market dynamics force Boeing towards a new clean-sheet aircraft

VIEW: Will market dynamics force Boeing towards a new clean-sheet aircraft
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By Satyendra Pandey  Oct 29, 2020 4:04:49 PM IST (Updated)

Boeing reported a $400 million dollar loss for the third quarter alone and for the first time in two decades they revised their market forecast.

Boeing, one of the world’s premier aircraft manufacturers, finds itself in the center of a perfect storm. While it still commands around 40 percent market share in single-aisle aircraft and around 55 percent in dual-aisle aircraft, aircraft demand is at an all-time low and existing asset values have seen reduction which in some cases is north of 20 percent. As the pandemic ensues with a disproportionate impact on aviation this poses an immense challenge. And for Boeing with Commercial Aircraft as around 50 percent of total revenues, it is weighing down in multiple ways. The company reported a $400 million dollar loss for the third quarter alone and for the first time in two decades they revised their market forecast. All this while, its competitor Airbus has been catching up and is leading in the single-aisle narrowbody aircraft segment. The question on everyone’s mind: will Boeing be forced into considering a new clean-sheet design for a new aircraft?

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The current product portfolio requires re-alignment
The current Boeing product portfolio of 5 aircraft types.  With this product portfolio, Boeing is able to service range and capacity requirements for airlines across a broad spectrum. This includes the 737 which serves the narrowbody segment; the 777 and 787 which serve the wide-body segment and the 767 and 747 which are increasingly being produced for only niche-segments.
For Boeing, the challenge is compounded due to the previous grounding of its most successful product—the 737—an aircraft that has been in existence for half a century and where the latest variant is the 737Max. Boeing has already assumed a charge that is likely to be more than $5 billion for the 737Max.
In the wide-body segment where Boeing has been a clear leader, there are geographic and geopolitical challenges. Specifically, Boeing wide-body aircraft orders concentrated in the Middle East and Asia—and both regions are undergoing drastic change. The geopolitical tensions with China are also likely to aggravate the situation in the medium term.
Additionally, with the ensuing pandemic, liquidity on aircraft has been severely impacted. If that was not bad enough there is also pressure on hub-model and on the mega-carriers where Boeing’s widebody aircraft were a cornerstone. These aircraft (for both Boeing and Airbus) have witnessed accelerated retirement schedules and will likely take a while before they return because of the pressures on demand and changing consumer behavior. It is not an ideal situation from any angle.
The current backlog for Boeing consists of more than 4,300 commercial airplanes. Yet, given the current challenges, the aircraft product portfolio requires rebalancing towards new market realities. While several efforts have been made on this front, including adjustments of production rates and consolidation of 787 production in South Carolina, the reality is that macro-economic headwinds are forcing airlines to re-evaluate capital commitments and airlines will not be able to absorb all of these deliveries. And alternatives including new and old aircraft are available in abundance.
Cash-flow impacts have to be catered for
With the 737Max grounding coupled with the COVID-19 pandemic, cash-flow for Boeing continues to be significantly diminished. The cost of the 737Max groundings coupled with the ongoing pandemic now exceeds $2 billion and counting. And the lower production rate may very well result in another $3 billion of costs not covered by revenue streams. Boeing’s net debt is likely to be 1.5X of 2019 levels.
While the company sits on $27.1 billion dollars of cash, stemming cash-outflow is a clear priority and is out front and centre. It is no wonder that Boeing is considering any and all actions including giving up their office buildings in Renton Washington, supply chain optimisation and significant layoffs.
While the company has made significant headway in managing liquidity including the suspension of dividend payments and elimination of share repurchases, for cash-flow to stabilise the deliveries have to begin and build-up. And as of now while there is a certainty that deliveries will start, the buildup remains a question of much debate.  That is unless there is a disruptive shift in the status quo.
The cash-flow is also a critical driver of new aircraft programs which can range between $10–15 billion. And that has to be committed while the advances received cover a minuscule portion of the program. It is no wonder that earlier in the year Boeing confirmed that they were no longer looking at a new aircraft—rather the efforts were redoubled to rebalance and revive the current portfolio. Yet market realities may just force a rethink.
For Boeing, a return and revival all point towards a clean-sheet design
For Boeing to restore itself to its former glory, it needs to yet again return to a bet-the-company strategy. It has already done this in the past starting with multiple aircraft whether it be the 747 or the 777 or the 787. The program cost for each of these ranges from 7 billion to upwards of 30 billion but these aircraft not only delivered stellar returns for Boeing but in doing so changed the face of aviation and enabled Boeing to continue as an aerospace leader.
When it comes to aircraft characteristics, aircraft speed has remained fairly stable over the last 50 years. As has aircraft size measured by average seat count. This in spite of existing technologies that can enable aircraft to fly faster and airframes that can be slimmer. Most of the advancement in the past decade has come from better engine technology and strangely enough engine makers are also facing their own challenges. And for any aircraft program to succeed it requires a sizeable base of orders and market dynamics till now have simply not warranted a different type of aircraft.
Ironically, the pandemic coupled with Boeing’s ongoing challenges has brought forward the case for a completely new aircraft type. Because, between the folks that can afford private jets and those that have to fly commercial due to no other option the market size is estimated to be as high as $300 billion; and between the folks that will pay a premium to fly direct and by-pass hubs the market size is estimated to be even higher—by some measures as high as $700 billion. This is where the opportunity lies. Unsurprisingly, it is one where niche players and government-funded players have started to re-focus efforts. And once lost these market segments will prove extremely tough to recapture.
A strategic imperative for Boeing now requires exploring these market segments which it can capture. This includes incorporating several changes all at once including safety, speed, size, sophistication and sustainability. Further, it also requires a rethink of how liquidity on aircraft (existing and future) can be maintained. The market clearly has a demand for a midsize aircraft. Developing such an aircraft and positioning the 737Max as a bridge solution to the new aircraft is a strategic option that Boeing—sooner or later—is likely to explore.
Multiple news reports have cited that the current challenges at Boeing are such that it needs to stabilise the company before returning to new clean-sheet aircraft designs. And also that the market risk, technology risk and financing risk simply do not align at this time. Multiple denials have been cited but despite the denials, the strategic imperative remains. And the very factors that are cited for Boeing refusing to consider a new aircraft design are strangely enough the ones that are likely to force Boeing towards a new clean-sheet aircraft design.
For the aerospace leader, it is a time of tumult, turmoil and trepidation. And one refuses to believe that they will simply give up their market position. As William Boeing famously quoted, “Let no improvement in flying and flying equipment pass us by…”
—Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast-growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling, and turnarounds. 
Read his columns here.
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