Opinion piece published on AIR’ sister media company website Airinsight.com
It is “silly” season again, a Formula 1 terminology, used to described which driver is going to drive for which team the following season. The Boeing Company appears to have a similar, albeit much more distant effect on states vying to capture final assembly or at least a significant share of Boeing’s next midsized airplane, which could also impact significantly the site selection for the narrow-body aircraft slated to enter service in the early 30s.
The state of Washington, Boeing’s traditional home for over 100 years has witnessed significant transformation over the past 30 years. Moving from a traditional agricultural and industrial force to a more diversified and highly competitive high tech hub thanks to companies such as Microsoft and Amazon. Boeing remains the top employer in the state in 2018, but employment levels are likely to continue to decline as the company diversifies its footprint, both nationally and globally.
NMA, the yet to be announced new midsized airplane, will compete in the 220-270 passenger market with an estimated range between 4,500 and 5,000 NM. It will fill a critical gap in Boeing’s product range that is only currently served by the 767 and the out of production 757. The 787 and 737MAX10 can compete in that segment to a degree, but we view those platforms are sub-optimal for that particular mission.
The three hurdles to NMA: Defense Programmes, Costs and US politics
Washington doubtlessly has all the attributes to be able to capture NMA. It has a highly competent workforce, facilities, and an excellent education system. Additionally, the critical mass of suppliers based in the cluster is a definite advantage as are Boeing’s vertical integration and logistics footprint in the state. Operations in WA, include composite wing manufacturing, automation and fabrication in nearby Portland and for aerostructures in Frederickson. It also has Everett and a significant available footprint for any aircraft program starting production in 2025 given the sunset of the 747 and 767 cargo and tanker production also nearing its end. As the 787 program is likely to be transferred entirely to Charleston, SC, WA State’s best friend for the future is indeed South Carolina. As efficiencies grow at Boeing SC, the location can take on more work towards rate 14 and thus provide Everett with a welcome footprint that could be used for the NMA. That is if it is indeed Boeing’s intent. The equation is unfortunately a wee bit more complex than the “field of dreams” approach “if you have space, facilities and people, they will come”
Hurdle 1: Defense Programmes
Boeing can be perceived a short term, financial driven organization (we have written about the financial transformation of the group on the AIR site), but it is also a superlatively brilliant strategic organization. It has to be. Programmes, in particularly defense ones, are going to be running for 30-40 years and thus decisions made today will impact company revenues to 2050 and beyond
Boeing is facing a challenging market environment at this juncture that may stir some or most of the assembly work away from WA State. Two defense programmes will impact the NMA decision substantially: T-X and MQ-25. If the company does not capture either programme, this will leave the Boeing facility in St Louis in a very tight spot. The F/A-18 and F-15 production runs have received a boost from the US administration but are highly unlikely to carry on beyond 2025. Export opportunities for both aircraft remain weak and are likely to suffer from US policy and the latest trade issues. Boeing’s preservation of its defense industrial footprint and its St Louis workforce are elements that need to be carefully taken into account as things are unlikely to remain static there.
Hurdle 2: Costs
Boeing has very aggressive cost targets for the NMA. Target list price is rumored to be in the $125-$145M range depending on fuselage material selection. Furthermore, the competition from Airbus, whether an A321NEO derivative, the 330-800NEO or a new airplane, will be particularly strong. For Boeing, renegotiating suppliers’ agreement and working with services to expand monetization opportunities may not be sufficient. Production cost will have to be examined carefully. Thanks to automation, manufacturing economic improvements can be realized with quality and rate ramp-up improvements.
For Seattle, costs are a variable that can be both favorable and unfavorable. The cluster’s overall costs are rising substantially and can negatively affect the outlook. However, the talent pool is one of the best in the world and can wholly justify its productivity. However, manufacturing costs remain high and will continue to rise, which may in turn lead Boeing to consider more financially attractive locations that can be developed further to eventually face rising lower cost competition from the 2040s onwards. Additionally, the “Embraer” variable is unlikely to be settled before the summer and may also become part of the NMA equation and other industrial strategies.
Hurdle 3: US politics
While we try to steer away from politics, a poison pill to say the least, the decision to build NMA in WA is not going to be viewed favorably by the current administration. NMA could become entangled in the politics of re-election if the current President makes it an issue, as he has aptly demonstrated with other issues associated with aerospace in recent months. WA State is also unstable as to the direction of its local politics and the subsequent impact this may have on its business climate. Any further targeting of businesses risks being perceived negatively by Boeing and aerospace suppliers. The landscape has indeed changed in a decade, and relocation is no longer the massive hurdle that it was once for lower tier suppliers as a few former California based suppliers have recently demonstrated.
WA State remains the go-to location for Boeing. However, in a transforming market, facing transformative production technologies and an increasingly competitive environment, the equation is no longer linear. Many variables, such as workforce and education, no longer carry the same weight as they did only a decade ago. At the end of the day, it will be fiscal and cost variables that will trump (no pun intended) all other considerations. This is a strategic decision that must be accompanied by a strategy from WA State that goes beyond the now, and seeks a transformative path forward to accommodate the new financial realities of the commercial aerospace markets. Expect also Boeing to negotiate with other states to gain maximum fiscal benefits and also expect those states to line up again en masse. WA played its cards aggressively in 2013 for 777X, but this will be more of a challenge for the WA legislature and unions for the NMA.
Washington will hopefully win NMA, but the uncertainty will likely remain for a few years as Boeing also decides on its future narrow-body strategy, which will likely come rapidly after NMA and may eventually be a deciding element in the NMA production location decision.
Michel Merluzeau is the Director of Strategy and Market Analysis for AIR (AirInsightResearch), the advisory subsidiary of AirInsight Group. He is based in Seattle, WA