Thursday, August 13, 2015

Boeing's Short Term Market Is Active

Short Term Plans and Long Term projections are two different worlds in any business. The short term period is executed with high confidence as it brings resources together with an immediacy of implementation. The long term period is predicated on the success of the short term execution and the stability of any long term projections going forward as planned. However, the confidence level in the long term is subject to more risk factors than the short term.

It sounds like Mumble Jumbo. It does have a sense that planning as a mover and shaker is pretty crazy stuff. Boeing's CFO and planner has this to say about the airline industry.

Aviation Today: [Avionics Today 08-13-2015]

“Despite a lot of movement going on in the global marketplace — and we’re watching it — we’re not seeing a slowdown in demand,” said Greg Smith, chief financial officer and executive vice president of business development and strategy at Boeing, speaking at the Jefferies Industrials Conference in New York yesterday. “There’s a lot of volatility in the market … but, despite that, there’s pretty robust demand in the market around products and services.”

The trickledown effect on airlines become a hit and miss order barrage from Smith's statement. Indicating a robust market remains if selected by an active airline, while executing its own plans regardless of current world market conditions. An active airline is one who has reached its pinnacle within its five year plan and places the order out of the same sure momentum from planning and execution.

There may be less players in this mode than last year, but the orders are significant for those who are ready to place an order. It may be the last rush before the market takes a pause before the next surge. A twelve month pause would be the expectation. The year 2016 may go sub 800 for Boeing in total. It is acclimated for over 1,000 orders each year for some time. An order dip is coming for all makers in 2016. In the year 2018, the market should become normalized again with plus 1,000 orders a year. I am just saying this for the reasons quoted above from Greg Smith. He has let it slip, the market change is coming.

Don't panic, this is inside of Boeing's 20 year forecast for market demand. In spite of Boeing's outlook for aircraft numbers of abundance. Nothing has changed, if a market dip is experienced. Its how a manufacturer uses a "market dip" as an opportunity. 

Boeing has long since become a proponent of increased production capacity no matter the backlog issue. However, even though it adjust the 747 production downward, it is feathering its capacity for the next big orders for that type. It also, is successfully switching 767 capacity to the military function. Boeing also has another 50 Fedex 767 on the backlog. Its waning production stance on these models will not affect Boeing's over-all productivity efficiency. Boeing has at least five years of robust 787 production and not yet started producing the Max. It also has just begun plant expansion in Everett for the 777X wing plant. An order dip gives Boeing pause for optimization for backlog reduction and plant expansion at the same time. The world will need those aircraft in the next 20 years, no doubt.

Boeing is already taking the opportunity to step up its efforts for maximizing the "order pause". The post order pause period is already on the presentation boards in meetings. Boeing would hope to shape the order backlog by giving Boeing more flexibility in the innovation scope. A reduced backlog will give Boeing's market immediacy to the market place.

As discussed before, a customer will look at delivery time before ordering aircraft. The optimal leverage point in a sale is a customer's timing opportunity. Airlines have its five year plans too. Ordering an A-350 or a 787 is based on when it can have finances in order, and when the opportune arrives for inserting new aircraft. The manufacturer that can meet the production slot with a customer’s optimal opportunity for new aircraft wins the sale. Boeing wants that high ground. The former 787 backlog was too big to meet a customer's buying constraints on time.

A market pause shapes a manufacturer's backlog portfolio with optimization in the market place. Actually Boeing needs an order pause for the purpose of aligning it Max effort for balancing Both Market Inputs (MI) and Production Outputs (PO).

The MI have long outpaced the PO, where Boeing cannot keep up production balancing with sales. This is a complex balance. Production is more efficient with greater output. Boeing won't expand production capacity unless Marketing bring home the orders. Production can't become more efficient unless it has the backlog in place to make production enhancement decisions. Market can't sell units if the backlog is too far out and so forth. The Dog chases its tail until exhaustion.

The solution is an MI pause balancing the backlog. No "right minded" Market guru can refuse any viable sale. If some airline today offered Boeing an order for 1,000 Max over the next three years, Boeing would say yes, sign here and here. 

The PO people would have to go just dump in the portable latrine in Renton Wa. Then on another day, the PO people are told to slow down production to 25 units a months on the 737 Max. Back they go to the portable latrine to pay homage to the work slowdown.

The only control for Boeing is found in the flexibility of market demand and fall, which forces all airplane makers to build flexible production facilities where work numbers can be accommodated and machinery can move in out under a facility reconfiguration work order.

The 767 line is the new MI model as it wrestles with its new found market for its type (s). The 777X is also employing a plant change-over in Everett, Wa. The 737 Renton Plant is going to build 52, 737 NG and Max at the same time in several years. Boeing has opted its 787 for a two plant model in both Everett and Charleston, SC. It hints at expanding the SC plant with more production options as the Market place flexes. Therefore the rule goes as follows:

MI * Backlog (f) - PO= optimal Efficiency (OE) for both the customer and manufacturer. Boeing's goal is to move its backlog at an optimal five year buffer. Any longer of a backlog, it losses sales opportunity. Any shorter than three years, Marketing has adjust prices lower to move product. Optimal Backlog time is about 42 months. 

The real variable is Plant flexibility affecting production efficiency.