Thursday, March 31, 2016

Jet Prices Take Center Stage in Boeing Job Cuts: Cost will take a larger role alongside the performance of the companies dueling jetliners



The Wall Street Journal 
By JON OSTROWER
March 31, 2016 7:26 p.m. ET


Boeing Co. has opened a new chapter in its battle with Airbus Group SE, with price taking a larger role alongside the performance of their sparring jetliners.

The U.S. company wants to boost productivity and efficiencies at its jet plants, with plans to cut 4,500 positions from its 161,000-strong workforce by June, as part of its strategy to offer airlines and lessors the lowest price, according to one of its most senior executives.

The staff reductions would include 4,000 employees—or roughly 5%—from a commercial unit that has a $431 billion backlog of about 5,800 aircraft as of the end of 2015.

The unprecedented order boom only has intensified the competition with Airbus, prompting a shift by Boeing, which has long sought a price premium over Airbus for its high-performance jetliners.

The jetliner unit’s chief executive,  Ray Conner, said its focus on costs was coming “at a time when price carries more weight than ever in sales campaigns,” according to an internal message to employees last week.

Thursday, a Boeing spokesman pointed to February comments by Chief Executive Dennis Muilenburg, who asked investors to view its cost cutting as “playing offense in a competitive marketplace.”

Boeing in recent years has invested heavily in automated manufacturing equipment, in addition to incremental moves to trim development costs, while aggressively renegotiating supplier contracts to lower expenses under a program it calls Partnering for Success.

In recent weeks, however, Boeing executives have signaled that won’t be enough. 

Mr. Conner in February laid out the urgency of cutting more internal costs. He said jetliner competition has become increasingly fierce with Airbus and Bombardier Inc.

Boeing also faces an improved slate of Airbus jets that Boeing believes have narrowed its performance advantage, particularly for its highest volume product—the single-aisle 737 and rival A320 jetliners.

“This should concern us all,” Mr. Conner wrote. “Because if our costs are high, it gives us less pricing flexibility, and customers will be forced by their own competitive pressures to take their business elsewhere.”

The aerospace giant’s renewed push on costs starts with trimming the ranks of managers and executives, offering voluntary layoffs, leaving open positions unfilled and scaling back business travel. Involuntary layoffs would be a last resort, if its cost targets aren’t achieved, Boeing said.

Large cuts to Boeing’s workforce historically have come during times of industry downturn. The company laid off 30,000 in the year that followed the September 11, 2001, terror attacks and cut about 7,000 jobs during the global financial crisis.

In 2016, however, global commercial aviation is booming. Airbus and Boeing both delivered record numbers of jets last year, and assembly lines are preparing for fresh increases on both single-aisle and twin-aisle products.

Boeing ended 2015 delivering more jets than Airbus, but the European jet maker captured 57% of the orders. Airbus also holds roughly 1,400 more orders than Boeing on its newest single-aisle jets.

While the company sounds the alarm about its market share to its employees, it is telling investors there is nothing to worry about. Boeing sent a note to the investment community earlier this week rebutting a Goldman Sachs research report that signaled concerns about falling prices and declining company market share for its workhorse 737.

“As clearly indicated by deliveries, the current 737/A320 market is 50-50.” Demand and deliveries for “737 is the least of our worries,” according to the note reviewed by The Wall Street Journal.

Former Boeing strategists examined how Airbus slowly expanded its market share during the past four decades, in part using its less complex and cheaper jets to woo the most cost-sensitive buyers, which view single-aisle aircraft as complex commodities.

For example, Boeing has long-promoted higher-leasing rental rates for its single-aisle 737 jets, compared with its European rival’s A320, a boon for lessors and the financial community.

However, more stable production rates at Airbus during industry down turns meant lower leasing rental rates for its jets. With more available aircraft, the low prices were attractive to lessors and upstart low-cost carriers building their fleets, which were unlikely to switch models after establishing an infrastructure.

Airbus, too, for years faced pressure to cut internal costs when the dollar weakened against the euro, putting the European plane maker a competitive disadvantage.

The currency momentum has swung in Airbus’s favor, giving it more leverage in price negotiations, though executives for the company have denied they are using the currency tool to offer discounts. 

Beyond currency, analysts also point to a less complex approach to its products by Airbus, compared with Boeing’s expensive and delayed effort to develop its 787 Dreamliner.

—Robert Wall contributed to this article.

Original article can be found here:  http://www.wsj.com

No comments: