July 2008 Archives

First half

As you’ve probably heard or read today, Boeing announced its second-quarter 2008 financial results today. Clearly we had some challenges last quarter, and that’s reflected in our results.

On the defense side we had the previously announced charge for the AEW&C program.

For Commercial Airplanes we had operating earnings that were lower than this period a year ago. We had a different customer and model mix in our deliveries, some customer introduction costs, and airplanes that were sold a few years ago in a more aggressive pricing environment. Also, our other airplane programs had to absorb some costs that would have been absorbed by the 787 program had we been delivering Dreamliners this year.

While the business environment for our customers – and for us – remains challenging, we had some good performance. In the second quarter we delivered 126 commercial airplanes to our customers – an increase of 11% over 2Q 2007 – and we’re on track for between 475 and 480 deliveries by the end of 2008.

In 2009 we expect to deliver between 500 and 505 airplanes, with a higher total expected for 2010, as 787 deliveries ramp up.

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Among a number of milestones this past quarter, we debuted the new 777 Freighter, the world’s most capable twin-engine cargo airplane.

Our Commercial Airplanes backlog is at a record $275 billion, an amazing number. Our challenge is performing in a rather uncertain market.

One thing in particular we’re looking at is the financial market for commercial airplanes. Boeing Capital Corp. (BCC) keeps watch on the global capital markets to make sure our customers have access to efficiently priced capital from third-party sources.

We work hard with financiers to help them understand the investment value of Boeing’s products. We’ve been successful in that area, which is why we haven’t had to directly provide financing in several years.

But based on what we’re seeing, we may need to again help customers with financing - most likely those in the U.S. If we do, as our top executives said today, we’ll do it in a prudent manner with the aim of returning financing into the third-party market when that improves.

Overall we still see strong demand for airplanes. We have a highly diversified backlog, both geographically (90% outside of U.S.) and relative to customer business model.

Without question this industry is grappling with significant challenges. We stand ready to assist our customers, with our efficient airplanes, great service offerings, and financing if that becomes necessary. We’re with them every step of the way.

Lucky man

FARNBOROUGH – Well, despite the lyrics to the song I alluded to earlier in the week, I guess the show does eventually have to end, and we’re at the end of a very eventful week here at this biennial event.

At least one colleague has written to me this week with the sentiment: May you continue to be a Lucky Man. It rings true, as the very first rock concert I ever attended was Emerson Lake and Palmer – fall 1977, Ithaca, New York. As you can imagine my hair was longer and shaggier then, and in general, I just had more of it.

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Clouds over the static display area at Farnborough. It’s cool and drizzly today at the show, but it’s no damper on a great week.

Anyway, air shows are amazing. What a celebration of our industry. No better place to connect with customers, suppliers, and the media.

And nowhere else could you find yourself, as we did this week, in an exhibit building doing a briefing for the Japanese media in which English was being translated to French – then French to Japanese, and then Japanese back to English! At times it was so mind-boggling, that even our interpreter got confused and was translating English back to English. You just had to be there.

From here I go to St. Louis, to talk to Boeing executives about the future in today’s competitive and dynamic environment. After spending the week at Farnborough, boy do I have a lot to talk about.

What a lucky man I am.

Lean and green

FARNBOROUGH – Some people are saying that the show has seemed leaner this year – as in, smaller crowds, less excitement. Well, I don’t know what show they’re at, because there’s lots going on, and I’ve been running nonstop since the start of the air show early Monday morning.

I’ve done television interviews with ITV, Bloomberg, France 2, and Al-Jazeera. I’ve met with dozens of analysts, investors, customers, and partners from across the industry. And by the end of the week I will have met with print reporters from China, Japan, Malaysia, Finland, Canada, the UK, U.S. and a variety of wire services, aviation trades, and Web publications.

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My media schedule began this week with a morning chat on Bloomberg Television with Rishaad Salamat.

Invariably in the interviews, reporters want to know where this industry is going at a time of surging oil prices. They also want to know where we’re going in terms of the environment and how we’re going to achieve industry goals of carbon-neutral growth.

We’re working hard on that. We’re investing significant resources to advance technologies to enable the next great leap forward. Speaking of which, here at Farnborough our exhibit is something that the techie in all of us would love.

The exhibit looks at the ways technology has been brought to bear on improving airplane efficiency, improving the air transportation system, and what we’re doing in terms of second and third generation biofuels. Biofuels are the only fuel type where the source (a plant) absorbs CO2 from the atmosphere - helping to offset the emissions produced when they are consumed, and moving us closer to carbon neutrality.

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Boeing’s Farnborough exhibit is focused on the technological innovations that can potentially help aviation be more sustainable - from biofuels and other renewable energy sources, to designing new noise-reducing technologies and optimizing air traffic system efficiency. It also highlights some of the products and technologies that have made aviation quieter and more fuel-efficient over the decades.

Our exhibit also shares interesting things going on in propulsion. Engines are a very important part of achieving new efficiencies. We’re looking at noise reduction to design quieter aircraft. The roar of a jetliner is increasingly a thing of the past because Boeing has been designing aircraft with noise-reducing innovations for decades, making each new airplane quieter than its predecessor.

In terms of air traffic system efficiency, did you know that reducing every flight by one minute would prevent 4.8 million tons of CO2 emissions a year? System congestion and delays waste fuel and increase emissions. Creating a next-generation air traffic system is key. In fact Boeing and Airbus recently signed an agreement to work together to ensure global interoperability in air traffic management as part of this effort to help reduce the impact of aviation on the environment.

And as we mentioned last week in our Current Market Outlook, by 2027, 82% of the world’s fleet will consist of new, more fuel-efficient airplanes.

So, we as an industry are making progress on the environmental front, improving fuel efficiency, reducing emissions, and having airplanes become quieter and better neighbors. But it’s clear we have work to do to find a pathway to sustainable long-term growth – and that future will be unlocked by technology.

And with that .. it’s back to the excitement, to the challenges, and to the surprises every air show always brings - even a leaner and greener one!

A busy day on two shores

FARNBOROUGH - Just a quick note from the air show to point you to a highlight or two from our first day here.

And back in Seattle, a milestone flight for the 777 Freighter.

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The 777 Freighter lands at Paine Field in Everett at the conclusion of its first flight Monday. Captains Suzanna Darcy-Henneman and Van Chaney commanded the flight.

Welcome back my friends

FARNBOROUGH - Here we are again. Can’t believe it’s already been more than a year since my first major air show as marketing V.P., last year in Paris. I found that experience to be exhilarating, exciting, and exhausting beyond all belief!

But seriously, being here has gotten me to thinking – what has changed in the year since the entire aviation world met on this huge stage?

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Air India’s newest 777-300ER touched down Saturday at Farnborough. It will be on display during the air show highlighting its new livery, interior and passenger amenities. The airplane is named “Jammu and Kashmir” in keeping with Air India’s tradition of naming its 777s after states of India.

Well .. a lot has happened since the last air show, hasn’t it?

  • There have been 2,678 commercial airplane orders (Boeing and Airbus)
  • Oil has gone from $67/bbl to $134/bbl
  • Jet fuel has gone from $2.12/gal to $3.92/gal
  • The U.S. dollar has gone from 0.75 euros/dollar to 0.64 euros/dollar, and from 123 yen/dollar to 107 yen/dollar
  • The market has continued to liberalize with “open skies” between the EU and the U.S.
  • And worldwide aviation traffic continues to grow

So what’s coming up? Well, here’s what I can confidently predict for this year’s show at least: a lot of talk about who’s winning the Boeing/Airbus air show “orders race.” And that talk won’t be any more relevant than it ever is. Our competitor tends to hold order announcements (sometimes from previous years) until air show time, hoping to create a “buzz.” But Boeing sees air show week as just one in fifty-two.

What else is a given at the air show? Each day, quick breakfasts on the run at the Boeing chalet, working long days until exhausted, then the ride on the bus to the hotel, back to sleep, only to start all over again the next morning.

As I plunge ahead at Farnborough, and a busy travel schedule for the rest of the year, it occurs to me that my predecessor, Randy Baseler has not been on an airplane since he retired. Now, that is a change from last year!

And so.. on to the show that never ends ..

Traffic and whether

LONDON – Call it an understatement, or call it an overstatement, but we do seem to be in unprecedented times right now. The airlines are under pressure as we’re facing a weakening worldwide economy, surging oil prices, and slowing traffic growth.

It’s an extremely dynamic period for the commercial aviation industry. And it’s also, shall we say, an interesting and challenging time to be releasing our latest 20-year forecast.

I’ve just presented to journalists here in London the 2008 Current Market Outlook (CMO). And the bottom line is that the worldwide market for commercial airplanes is shifting to new, more efficient jetliners, as airlines replace older and less efficient airplanes.

In fact we’re seeing a much greater share of demand for replacement airplanes in the forecast: 43% in this year’s outlook compared to 36% in last year’s CMO. In a tough, competitive environment, airlines are looking for ways to cut costs. With high fuel prices, it certainly makes more and more sense for airlines to replace their old aircraft with new, fuel efficient airplanes, and we have reflected that trend in our analysis.

Another key point is that we’re seeing a better balance in airplane demand geographically, which leads to a more stable long-term market.

Overall, during the next 20 years we see a market for a total of 29,400 new commercial airplanes (passenger and freighter), with a total value of $3.2 trillion. You can look at my presentation here. (5.7MB pdf).

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Single-aisle airplanes will make up the bulk of airplane deliveries at 19,160 units valued at almost $1.4T, up from last year, particularly due to strong domestic growth in emerging Asian nations. Our forecast for regional jets has fallen to about 2,500 units. Airlines will continue to augment their fleets with mid-size twin-aisle airplanes, and the remaining segment, 747-size and larger (including freighters), accounts for just a small percentage of units delivered. Single-aisle and twin-aisle categories represent about 89% of the total dollar value of the market.

As I told reporters here in London, this year’s outlook is rooted in near-term market realities, but also recognizes that this is a long-term forecast. We’ve faced many other market challenges over the years. They all have their own dynamics and their own impact on global air travel - 9/11, SARS, the Asian financial crisis, two Gulf Wars, and other shocks to the system we’ve experienced in recent history.

In each case lots of people wondered whether we’d ever recover as an industry. But what we’ve learned from more than 40 years of doing these forecasts (yes, since 1964) is that our industry has a way of moving forward. After such situations stabilize, and worldwide GDP growth continues, air traffic gets back on its long term trend.

So, the title above is no typo. One of the big questions this year is sure to be “whether” our forecasting this year will hold to that history.

When you look at these annual forecasts, we’ve found that in terms of forecasting traffic, both Boeing and Airbus tend to do a pretty good job. Traffic has grown over the past 10 or 20 years at somewhere between 4.8% and 5% a year.

The real tough thing is to figure out how airlines will accommodate that growth. I would say that when you look at Boeing’s forecasts, maybe we didn’t hit a bull’s-eye, but we did score very high.

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How’d we do? As you can see, our 2000 market outlook accurately projected the demand distribution by airplane type. The quantity of aircraft ordered is also in line with our projection. But we did slightly under-forecast the number of single-aisles needed and also under-forecasted the popularity of twin-aisles, while over-estimating the large airplane (747, A380) demand.

Now, as you may know, we do the market forecast for three reasons: to help shape our strategy, to support our long-range business plan, and to provide the fundamental data that we use in our fleet planning exercises and work with customers.

So the more accurate our forecast, the more confidence we have that we’re building the right products, that we have a robust plan, and that we’re providing the best possible advice to our customers.

It really comes down to that.

Which leads to: How has our competitor done in terms of forecasting? You’d best ask them yourself. But putting aside the great differences in our views of the market, it’s clear you could characterize their forecast as missing the target. For instance, the Airbus forecast for A380 sales in 2000 was for more than 1,300 airplanes. In the last 8 years they’ve sold about 200.

Keep this all in mind as the focus shifts next week to the Farnborough Air Show.

We’ve come to Farnborough (and Paris) in good times and bad times. When times are good, we often get asked, “Aren’t you guys going to sell more airplanes than this?” And when times are tough, we hear, “How could you guys possibly believe that you’re going to sell this many airplanes?”

But as I mentioned, it all tends to even out.

 

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