American aero major Boeing (BA, Financial) is overjoyed as its much popular model – Boeing 777 – recently completed two decades of being in service. The first 777 was delivered to United Airlines in 2005. However, behind all the smile and celebrations, there were concerns about managing 777’s production line optimally so that it doesn’t result in a production gap. As a solution to this issue, Boeing executives recently announced that they are going to cut 777 production rate in 2018 as assembly of the newer version 777X begins. Currently the jet is being produced at 8.3 jets a month and tit will be brought down to 7 jets a month. Here’s a look at why this move is necessary, what its problems are, and why a rate cut makes more sense.
What’s the problem with a production gap?
Production gap is something that aero majors despise because it carries a lot of extra baggage with itself. The entire supply chain gets affected if there’s a gap in the production line. First of all, jet makers won’t be able to sustain its staff if there’s no production, resulting in layoffs. If the company follows a level strategy instead of chase strategy, then it will incur unwanted losses just to keep the staff active but without any work. Secondly, the component suppliers are adversely affected. They will have to scale down their operations and run into similar losses. Certain suppliers and staff members are experts in contributing to the manufacturing of specific models – this is true for 777 also. These parties will have no work until 777X production starts. Again shifting the work force to another aircraft program is a tedious task as it raises costs, and depends on the requirements as well. So, to deal with all these problems, Boeing needs to cut production rate and keep the production line active.
This move solves the issue?
The answer to the question is a Yes. This solves the issue surely, but this too is not devoid of problems. Analysts and industry experts believe this to be lesser of the evil. Production rate cut and production gap both affect the same parties, but the adverse effect of production rate cut is much controlled. As the production rate shrinks, component suppliers will also have to regulate their scale of operations, incurring limited losses. For the jet maker, this move will affect its revenue, profitability and cash flows. For Boeing, 777 has been a very high cash generating model and producing lesser number of 777 means slower deliveries, ultimately resulting in lower profits.
Despite these issues, production rate cut is any day desirable compared to a production gap. Boeing isn’t the only company facing this situation. Its European rival Airbus (EADSY, Financial) was facing the same issue related to A330 and A330neo. Eventually Airbus had to reduce its production rate before work on the newer version of the epic jet. Apart from production cut, Boeing seems to have something more planned. According to a Seattle Times report, “To provide some buffer for the added complexity of building the new 777X, Boeing will leave an undetermined number of empty positions in the manufacturing flow when it starts assembling the new plane.”
All this becomes essential because it takes more time to build a new model compared to an existing one. Industry experts are not alarmed by the announcement since time and again this has happened when a jet maker has introduced a new aircraft. This is all in a day’s work for the jet makers and probably the better choice. The production rate cut is a stopgap solution and should aid the jet maker in the long run.