Boeing, Airbus battle 'raging skepticism' over output
Airbus SAS and Boeing Co. spent much of this week's Paris Air Show urging suppliers to keep their assembly lines ready to respond quickly when the recession ends and orders pick up. Partsmakers aren't yet convinced.
"There is raging skepticism because there is no historical precedent for the ability to do what they're suggesting to do," Rockwell Collins Inc. Chief Executive Officer Clay Jones said in an interview in Paris. His Cedar Rapids, Iowa-based company builds avionics and parts for most Boeing and Airbus models.
The world's two biggest commercial-plane builders together expect to deliver about 960 aircraft this year, unchanged from earlier projections. And neither Boeing nor Airbus has made a big cut to its production plan for next year, insisting that suppliers can trust the strength of their backlogs and shouldn't make rogue decisions to scale back.
Carriers continue to drop and push back deliveries because of the recession, and orders for planes have plummeted. Chicago- based Boeing announced just one order for two narrowbody 737s at the Paris event, and Airbus, based in Toulouse, France, has sold 60 jets. The value of the transactions for the big two is expected to be far less than the $64 billion in orders at last year's show in Farnborough, England. That's led partsmakers to speculate that demand for their products is bound to decrease.
The world's airlines lost $10.4 billion last year, and the industry will lose another $9 billion this year as traffic plunges, according to the International Air Transport Association. In the last slump, deliveries at Boeing and Airbus dropped 31 percent from 2001 to 2003.
"The retention of the narrowbody rates appears to be inconsistent with historical perspective," Jones said of Airbus' and Boeing's intentions not to lop output in the largest segment of the market. "That's the nature of the conundrum we're in. So now we have to use our judgment."
Airbus "can't blame" its suppliers for mistrusting the company's forecasts, said Chief Operating Officer Fabrice Bregier. After all, he said, they've been burned by big, sudden cutbacks in the past eight months at regional-jet builders such as Embraer and Bombardier Inc., and business-jet makers Cessna and Gulfstream. Many also make parts for the automotive industry, where sales tumbled 18 percent last year and 37 percent this year through May.
Boeing has said it will hold steady on its expected monthly manufacturing rate of 31.5 of the world's best-selling plane, the 737. Airbus is only scaling back production of the A320 by two a month to 34.
"For Airbus so far, the situation is stabilized," Bregier said. "We're taking every opportunity to explain to them that when we say we'll deliver in 2009 as many aircraft as in 2008, we have that not only in the order book but airline by airline, we have the customers, we have the financing and we know we'll do it."
Boeing and Airbus were cautious in ramping up output amid a record three years of orders through 2007 that produced a combined backlog of more than 7,000 planes, or more than seven years worth of work. That means that now they don't have to scale back as much as they did in previous down-cycles, the companies said.
The suppliers say they don't get much advance warning when planemakers decide to slow down, and lead times for some parts, such as landing gear, can be up to 18 months. Some companies don't get paid until the planes are delivered. To protect themselves, the partsmakers say they are doing their own research to forecast demand.
"I've seen at this show a great deal of energy by both Boeing and Airbus to assure the supply-base community that their forecast, particularly for single-aisle product, is robust," said Jeff Turner, CEO of Spirit AeroSystems Holdings Inc., Boeing's biggest supplier. The Wichita, Kansas-based company builds the aluminum fuselage for the 737. "It's my job as head of Spirit to forecast what I think will happen in the market."
Turner didn't say what his latest predictions are.
Airbus tries to supply accurate forecasts to help suppliers keep production steady and to ensure the planemaker has parts when it needs them, John Leahy, chief operating officer of Airbus, said today in an interview.
"You can only make changes at a gradual rate," Leahy said. "The longest lead time item is somewhere around two years. It's not just that you call up today and they instantly have it. If you're trying to ramp up or ramp down, you want to have some lead time up to your deadline to smoothly do it."
Companies such as Spirit and Rockwell Collins have said they will hold to their contracts and deliver the parts Airbus and Boeing order. The question is whether they will be ready to ramp up again quickly when the planemakers want. Many of the big suppliers have already cut jobs or reduced hours.
Scott Carson, the head of Boeing Commercial Airplanes, said in an interview this week that he's telling suppliers they need to be ready for a 10 percent production swing in either direction, depending on the economy and the status of active order campaigns. Ryanair Holdings Plc and UAL Corp.'s United Airlines have said they want to take advantage of the recession to seek discounts on hundreds of new planes, which could compel a higher output rate, Carson said.
Some suppliers hope to hold steady through aftermarket business.
"You're still flying airplanes, you have to do repairs," and those will pick up in the second half after the busy summer season of air travel, said Honeywell Aerospace CEO Rob Gillette.
Still, the work won't be as much as it was before because airlines have canceled routes and grounded planes amid the slump.
"Obviously the aftermarket has been impacted by much lower revenue passenger miles than we were working with when we did our planning," said Alain Bellemare, president of Hamilton Sundstrand, United Technologies Corp.'s aerospace systems unit. "We took some very aggressive cost actions and right now we are waiting to see what could be the outcome."