Having enjoyed an excellent Paris Air Show that included 571 net new aircraft orders and commitments received, including 147 of the newly launched 737 MAX 10 variant, Boeing is not only in very confident and progressive mood but has sound plans to further grow.
First things first. Driven by strong growth in Asia Pacific and Middle East regions, global passenger growth is currently more than 8% vs the historical 5%-6% range, chairman, president and CEO of Boeing Dennis Muilenburg told me last week when we were able to discuss a variety of issues on a private video conference call. Muilenburg is quick to remind that 100 million people in Asia alone “enter the realms of traveling public each year”. Interesting observations such as this remind too that people from other Continents such as Africa that will also join the realms of traveling public in the years and decades ahead. This industry is far from reaching its peak yet.
Dennis Muilenburg is not only a very interesting man but a man with a real and very interesting mission – to grow the footprint of Boeing and to further improve performance across all parts of the group. An excellent communicator, a very hard worker and yet someone who appears to be genuinely at ease with himself, Muilenburg clearly enjoys the challenge that he himself has set to create one Boeing and grow the company further. Joining Boeing in 1985, Muilenburg previously served as CEO of Boeing Defense, Space and Security (BDS) and previously, president of BDS Global Services and Support Business. He was appointed CEO and president in June 2015 and chairman in March 2016.
Muilenburg remarked recently that ‘thanks to rising demand in the Middle East and Asia-Pacific regions, Boeing’s business is becoming less cyclical and dependent on U.S. and European airline demand cycles’. That is not to suggest complacency on the part of Boeing and its senior management of course and they are well aware that geo-political events can and do quickly impact on the commercial aerospace industry, just as they also do in defense.
Muilenburg is also very well aware too that new competitors from China, Russia and elsewhere including Canada are seeking to play in a market that has long been dominated by Boeing and Airbus. Boeing, he says, “will rise to the challenge’ set by these new competitors by staying ahead of the competition involves maintaining material and technology advantage and continuing to make yourself even more efficient.
Presiding over a workforce of around 150,000 people worldwide and in more than 65 different countries, Boeing remains the world’s largest aerospace company and the top US exporter. Having left the Paris Air Show at Le Bourget last week in sound heart with commercial airline customers having announced incremental orders and commitments during the week for a total of 571 Boeing airplanes, worth $74.8 billion at list prices and revealed that it was raising its 20-year outlook to more than 41,000 new airplanes worth $2.6 trillion being required over that period, while the overall number of order announcements order may have softened compared to recent shows, the outlook for the commercial aircraft industry remains very strong.
Boeing is of course far more than being just a manufacturer of commercial airplanes and to that end the Chicago based company has been putting considerable efforts into making its Defense, Space & Security (BDS) business unit more globally competitive through the combination of investment and through elimination of one layer of executive oversight. Throughout all of its activities Boeing recognises the need to be more agile and responsive to customers’ needs and to continue improving on its already good levels of productivity. It also recognises the need to continue investing in new technology and materials in order to stay ahead of its competitors.
Boeing strategy is built around improving how to better compete internationally and growing the business exponentially. Boeing is now in its now second century of operation and the company has operations spread all over the world. Importantly, it continues to invest heavily in all of them.
Important in this is that the UK is recognised as playing a very important role in Boeing’s future. Currently, Boeing is investing $20 million in a new production facility in Sheffield to manufacture high-tech components for Boeing’s Next-Generation 737, 737 MAX and 777 aircraft. The actuation systems produced in Sheffield will be used on the trailing edge of wings of these aircraft. The company has also announced plans to build a new maintenance Hangar at London Gatwick Airport in order to better support Boeing’s European GoldCare customers.
Reorganisation of Boeing Defense, Space and Security, a division that accounts for almost one-third of the company’s total revenues, announced earlier this year will see division of the existing five business units into seven. Boeing military aircraft will be rearranged into three smaller segments – autonomous systems, strike surveillance and mobility, and vertical lift.
Importantly, Boeing senior management is now placing considerable effort and importance on growing MRO/support services activities worldwide across all parts of the businesses. To that end, a services business unit that combines commercial aircraft and defense services is currently being established. I see considerable opportunities for countries such as the UK in which Boeing has already invested or is currently investing large sums of money. Worth noting that supporting 16,500 jobs in the UK supply chain as it does, the UK is actually Boeing’s largest source of supply in Europe. In total the company spent £2.1 billion with UK suppliers last year. I will be writing separately on Boeing UK later in the summer.
Moving back to investment in MRO and support services, my understanding is that Boeing would like to see the new global support services operation to be generating in the region of $50 billion annually within five to ten years. Boeing believe the global aerospace MRO market is currently a $2.5 trillion market and being one in which they currently have a relatively small 7% to 9% market share in relation to the installed base, looks to me to be very feasible.
Achieving $50 million of sales annually by say 2027 would equate to approximately one half of Boeing’s current annual sales. As already mentioned, the creation of Boeing Global Services will see several of the company’s commercial and defense services portfolios merged. The operation will be based in Dallas, Texas, will be run by Stan Deal as president and CEO.
During the Paris Airshow Boeing Global Services announced multi-year services agreements valued at $6 billion. I find this aspect of Boeing’s current strategy fascinating and will watch progress with great interest. The company clearly global support services as being the largest growth market opportunity for the future and I for one wish them well.
So where else is Dennis Muilenburg preparing to take Boeing? The Chairman and CEO talks confidently about refreshing the company for its second century of operation, going after the marketplace wherever that happens to be, leveraging One Boeing, connecting, exploring, leading and inspiring with one goal in mind – furthering success. In part this is all about driving excellence and of how the company intends to invest in the future. One thing is for sure, Boeing intends to not only be the best in aerospace but to push its various global industrial champions to achieve new levels of performance.
Commercial airplanes will probably always be what Boeing is best known for and as already said, the company sees this activity continuing to grow. Boeing sees the global marketplace diversifying and that as a globally networked passenger market it is a much less cyclical market as a result. To that end the company admits that it has recently witnessed some hesitancy in wide-body demand. Nevertheless, the company continue to be very confident for the longer term cycle including a big wide-body replacement cycle that it also expects will kick in over the next decade and in which its 777 and 787 families of aircraft are well aligned.
Muilenburg confirms that both defense and space markets remain solid and that he anticipated some re-strengthening of the US defense budget. However, the jury remains out on this and he sensibly talks of the need to find an alternative to sequestration. Meanwhile, countries across the Middle East region including Saudi Arabia, Qatar, across the Asia Pacific region and also countries such as the UK, Australia and New Zealand are all spending money on defense and buying Boeing products such as P-8 Poseidon Maritime Patrol Aircraft, Apache, Chinook helicopters and V-22’s, F-15 Eagle. Potential for F/A-18 Super Hornet is also strong and in April Boeing flew its T-X trainer aircraft for the first time, a capability that it has huge hopes of winning in the competition against Lockheed Martin.
Apart from growing and motivating further Boeing success Dennis Muilenburg has plenty of other matters on his plate not least the vexing issue of lingering WTO issues, the recent decision to ask the Department of Commerce and US International Trade Commission (ITC) to investigate subsidisation and pricing by Bombardier of its ‘C series’ jet. Pleasingly, news on the KC-46 tanker get better and I understand that this is performing well and now approximately 73% through the test programme.
Boeing has already warned that second-quarter revenue would be “a little lighter” as both commercial jets and U.S. Air Force KC-46 tanker deliveries are likely to be concentrated more towards the back half of the year. Key to the Muilenburg Boeing strategy is stability combined with long-term planning.
(Due to a short vacation, Commentary will return on Monday July 3rd)
CHW (London – 25th June 2017)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785