Single-aisle jets accounted for 73% of the orders taken by Boeing last year and 61% by Airbus. So it is hardly surprising that aerospace suppliers of all sizes are anxious about whether the two aircraft builders will really be able to maintain their optimistic narrow-body production plans. For their part, Boeing and Airbus worry that sub-tier suppliers will begin to pull back in anticipation of reductions that may never materialize, setting the stage for component shortages and delayed deliveries in years to come.
At the heart of theuncertainty that permeates this year's Paris air show is the question of whether the immense order backlogs held by the two aerospace monoliths are durable enough to keep the Boeing 737- and Airbus A320-family production lines busy until the global airline industry rebounds from a massive slump. Adding to the nervousness is that no one can predict when growth will return, although Airbus CEO Tom Enders is optimistic that next year may see some increase in order activity from this year's meek levels.
While Boeing is reducing 777 wide-body production, it maintains that there is no need to scale down from the 31 737s it builds each month. Airbus, after scuttling plans to increase monthly A320-family production to 40, will modestly reduce rates from 36 to 34 aircraft in October. But many suppliers--some burned by the business jet industry's steep production pullbacks early this year--are worried that further fallout from the global economic downturn could force much deeper cuts. Airbus officials acknowledge they are looking at alternative rates, but argue that it is simply a matter of contingency planning.
"Boeing and Airbus are saying they can handle this downturn and the financial analysts and suppliers are saying 'no way,'" observes Dan Greenfield, director of investor relations at Allegheny Technologies, a supplier of titanium used in aircraft engines and other components. "We're just saying, 'Tell us what you want us to ship.'"
With the downturn in the airline industry having choked off demand, some investors are asking how long either manufacturer can avoid scaling back single-aisle production. This year, Boeing's net aircraft orders--new orders minus cancellations--stands at seven, while Airbus has 11. "I don't buy the argument that the backlog is so deep that there won't be a meaningful cut to production," says John P. Nelson, managing director of investment banking at Cowen & Co. "I think the downturn is going to get much more severe."
That skepticism is shared, to varying degrees, by many suppliers. "Half my brain says you can't get through this without cutting narrow-body [rates]," says Rockwell Collins CEO Clay Jones. He recalls receiving similar assurances about record backlogs from business jet manufacturers last fall.
"When I called them last October, none of the business jet OEMs [original equipment manufacturers] thought they were going to have to adjust their production rates," says Jones. By early 2009, those same companies were making deep cuts that waylaid Rockwell Collins.
There are suppliers that continue to have faith in Boeing's assertion that its hefty backlog--equivalent to 6-7 years of aircraft production--will enable it to maintain 737 build rates. Goodrich CEO Marshall Larsen says he is hopeful that U.S. and Asian airlines will be rebounding next year, helping to underpin a return in demand. "I am optimistic about both OEMs maintaining their single-aisle production rates," Larsen says. "I'm reasonably optimistic that 2010 will be a better year. The downturn can't last forever."
To help sustain deliveries, Airbus and Boeing are relying on export credit agencies to help airlines finance aircraft. Airbus has seen export credit agency support increase to approximately 40% of deliveries this year, with Boeing reporting about the same.
A week after Boeing Chairman and CEO James McNerney strongly reiterated the company's plan to maintain 737 production rates, Scott Carson, president of the company's Commercial Airplanes unit, in an interview with Aviation Week & Space Technology, appeared to open the door a sliver to changes. He told reporters here that Boeing has asked its 737 suppliers to be prepared for anything from a 10% increase in production to a 10% decrease.
While Airbus is not ruling out further cuts to A320-family production rates, Louis Gallois, CEO of parent EADS, says it is too early to make a decision because the company has little visibility on what lies ahead. The true impact of the global economic crisis won't be known until 2010, he believes. For now, Airbus is overbooked in single-aisle production for both 2010 and 2011 deliveries.
Another reason both companies are cautious about reducing single-aisle rates is that slowing down aircraft production lines is a costly and complicated process that takes several months. Long-lead inventory can pile up, and skilled employees that will be needed for the next ramp-up are lost. "It costs a lot of money to change line rates," says one knowledgeable industry observer. "It might be better to take on a few whitetails," he adds, referring to aircraft that are built before a buyer has been secured. However, Airbus officials have vowed to try to avoid such a route.
A big worry of both manufacturing giants is that some suppliers--particularly those at the lower tiers--could curb output on their own in anticipation of cuts. If rates are maintained, that would make it difficult for the air-framers to meet future delivery commitments. "One of our biggest threats is if suppliers start to make their own assumptions and come up with production rates that are not in sync with our planning," says Enders.
A key Airbus goal at Le Bourget was to persuade suppliers that it will not precipitously cut output, leaving them stuck holding inventory and further straining already weakened balance sheets. "It is our task to convince suppliers that we have a plan that is not built on sand," Enders emphasizes.
Carson says Boeing is "going to great lengths" to keep suppliers in the loop. But, he concedes, the company's visibility goes only so far down the supply chain. "We encourage our suppliers to communicate with their sub-tier suppliers," he says. "That's about as good as you can get."
A senior industry official says that both Boeing and Airbus have recently become more communicative with suppliers about their outlook, noting that in April they were less forthcoming with details about order backlogs.
