I’m John Persinos, editor-in-chief of Aircraft Value News. Welcome to my latest video presentation for Saturday, August 3. The article below is a condensed transcript; for additional details and charts watch my video.
Boeing named a new CEO on July 31 after reporting a core operating loss of $1.4 billion in the second quarter, more than triple the loss from a year ago amid a widening safety scandal that has hurt company sales and margins, as well as the stock price.
Boeing announced Robert “Kelly” Ortberg, former CEO of supplier Rockwell Collins, will be its new CEO, effective August 8, replacing retiring Boeing CEO Dave Calhoun, who has been under fire for Boeing’s missteps.
Ortberg studied mechanical engineering at the University of Iowa. The 64-year-old began his career as an engineer at Texas Instruments in 1983 and moved to Rockwell Collins in 1987 as a program manager for more than 30 years.
In 2013, Ortberg became the CEO of Collins Aerospace, a United Technologies Company created in 2018 by combining UTC Aerospace Systems and Rockwell Collins. Ortberg retired from Collins Aerospace parent company RTX in 2021.
The question is, can Ortberg turnaround the troubled aerospace manufacturer? Despite his experience managing a vast, sprawling aviation supply chain, it’ll be daunting for Ortberg.
Case in point: More than 60% of aerospace and defense suppliers surveyed in the latest iteration of a longstanding supply chain survey by a prominent financial analyst indicated that Boeing’s 737 MAX production challenges are the most significant issue for the sector this year.
The latest “Voice of the Supplier” survey, conducted by RBC Capital Markets and released last month to coincide with this year’s Farnborough International Airshow, states: “Boeing 737 MAX production rates have become a major concern for suppliers, overshadowing other issues highlighted in the previous survey. With production rates affecting volumes, suppliers seem more optimistic about other supply chain issues and industry dynamics.”
The extent to which Boeing stands out in the survey for the first half of 2024 is striking. Nearly 70% of respondents foresee further “downside” to the 737 program. Around 50% identified the engine supply chain as a key concern, while labor shortages were mentioned by a third of respondents, with even fewer citing raw materials and manufacturing delays. Labor shortages, supplier financing, materials, and manufacturing have shown the most improvement compared to the last survey in the second half of 2023.
When it comes to production planning, suppliers are scaling back their expectations. The survey from the second half of last year showed that suppliers anticipated producing 35 737 shipsets per month by June, but the first half of this year’s survey reveals a reduction to just 26 per month.
“Suppliers continue to view Boeing’s production goal of 50 737 MAX aircraft per month by 2026 as the most at-risk,” the survey states.
Once the pride of American aerospace engineering, Boeing’s recent history of regulatory failures, safety oversights, and ethical lapses have not only undermined trust in the company but have also caused substantial disruptions across the aviation industry’s global supply chain…which in turn is disrupting global commerce.
When Boeing’s supply chain sneezes, the global supply chain catches cold. Boeing’s descent began with the 737 MAX crisis, which erupted after two fatal crashes involving Lion Air Flight 610 in October 2018 and Ethiopian Airlines Flight 302 in March 2019. These tragedies, resulting in the loss of 346 lives, were traced back to a malfunction in the Maneuvering Characteristics Augmentation System (MCAS). When something goes wrong with this delicate system, people can die.
The subsequent grounding of the 737 MAX fleet worldwide exposed glaring deficiencies in Boeing’s safety protocols and regulatory compliance. Investigations revealed that Boeing had prioritized profit over safety, rushing the 737 MAX to market to compete with Airbus’ A320neo. Boeing was found to have concealed critical information about the MCAS from regulators and pilots.
The grounding of the 737 MAX sent shockwaves through the global supply chain. Boeing’s extensive network of suppliers, including major players such as Spirit AeroSystems and countless smaller firms, faced significant disruptions. Production halts and delivery delays cascaded down the supply chain, leading to financial strain, layoffs, and operational challenges. The ripple effect extended to airlines that had placed large orders for the 737 MAX, resulting in canceled flights, altered schedules, and substantial financial losses.
The global aerospace supply chain, intricately linked and interdependent, still struggles to absorb the shock, underscoring the fragility of the system when a key player like Boeing falters. The grounding of the 737 MAX has exerted a substantial impact on aircraft lease rates and base values across the board, driven by several interrelated factors.
With the 737 MAX grounded, airlines have fewer new aircraft available for lease or purchase, increasing demand for other aircraft models. This scarcity is driving up values for available aircraft, especially comparable narrowbody models such as the A320neo. Lease rates have followed suit. Scarcity of aircraft is one of the key factors in global aerospace right now.
Airlines that were counting on the 737 MAX are looking for alternative aircraft to maintain their schedules. This sudden shift in demand has put upward pressure on lease rates for other models, as the supply of immediate replacements was limited. Major suppliers such as General Electric and Spirit have faced significant financial strain due to halted production and delayed deliveries.
These suppliers have passed on some of their increased costs to manufacturers and, eventually, to airlines and leasing companies. Elevated aviation inflation has ensued.
Boeing’s troubles did not end with the 737 MAX. The supply chain for the 787 Dreamliner has been thrown into turmoil as well. Issues with the 787 Dreamliner, including production flaws and quality control lapses, have led to additional scrutiny and regulatory action.
The clear beneficiary of Boeing’s missteps has been its archrival Airbus. Airlines have diversified their fleets, reducing dependence on Boeing in favor of European-based Airbus and other manufacturers.
Can Boeing’s new CEO stem the bleeding? We’ll see how much one man can change the ingrained culture of a giant transnational aerospace manufacturer.
