Avoiding a crash - Boeing, Embraer, Bombardier

Boeing is the world's largest aircraft manufacturer.  But the Crain's headline "Boeing Loses $1.6B, slashes 2009 profit estimate" should get your attention.  Revenues in 2008 dropped some 10% - which the company blamed on a strike.  Of course, management always has some bogeyman to blame for poor performance.  But revenues have not yet recovered to 2007 levels.  Much, much worse is the fact that its newest product launch, the 787 Dreamliner, is some 2 years behind schedule, leaving industry experts skeptical of when it will get out the door.

The reason to really be wary of Boeing isn't just this one plane.  Instead, look at the market shift happening in all transportation - including aircraft.  It's unclear that the marketplace has much interest in the Dreamliner.  Boeing's Success Formula has long been to develop really big projects, billions in investment, and make bigger and bigger aircraft.  And the Dreamliner is the latest in Defending & Extending this Success Formula.  Even though the product is way over budget, really late and will be a big aircraft when it's unclear that's what people want.

From cars to buses to planes, we're seeing people change to smaller and more efficient products.  The last time you flew, were you on a big aircraft?  Or did you find yourself on a small plane from Bombardier (of Canada) or Embraer (of Brazil)?  Airlines need to keep planes fairly full if they have any hope of making a profit.  Couple that with customer desires for convenience - meaning several flights to a city daily, and you can quickly see why smaller airplanes make sense.  As a result, the leader (Embraer) in small commercial planes is growing at over 20%/year!

Meanwhile, people are getting less and less excited about flying commercial airlines every year.  TSA hassles, flight delays, extra charges for bags, there's a long list of reasons business people are looking for alternatives.  And that's where the Jet Taxi business comes in.  Whether you buy a fractional interest in an aircraft, or simply rent a plane for a single trip, businesses are figuring out that small aircraft from Beechcraft, Cessna, Lear Jets and even the new Honda jet are providing a very affordable option to commercial flying when even a few people are traveling - and with a lot more convenience.  The largest manager of this option is NetJets owned by Berkshire Hathaway - who's lead investor is Warren Buffet.

Add on top of this webinars and video conferencing.  Increasingly, people are using digital technologies to communicate without flying at all.  Again, with hassles up - and terrorism threats more real than 10 years ago - people are turning to really low cost, and ultra convenient, alternatives to traveling at all. 

So are you really optimistic about the future demand for big jet aircraft that take more than a decade to develop and get approved?  And built by a company that competes with a government subsidized player supported as a matter of national defense in Europe (Airbus)?  It's really hard to be optimistic about the future for Boeing - and the Dreamliner delays seem to just be the early warning signs of a Success Formula very long in the tooth.  Boeing is definitely stuck in the Swamp, and it's unclear the company has any effort underway to develop new options.

Comments

[Joseph Joel Sherman]

Great analysis Adam,
Bombardier and Embraer are doing well because people want more convenience of direct flights to smaller airports, and with the private tax services, exclusive treatment. The time to go in and out of a major airport, considering ground transportation is horridness in places such as Los Angeles.

For Boeing, their key competency has been to create a market standard, such as the 747, which has been successful for the past forty years. Perhaps they can continue to be successful if the focus is shifted to smaller planes with the same ease that the 747 are used.

Regarding video conferencing, this will present a wave of shifts. Tighter budgets, easier to use technology, cheaper technology, and time savings add up to make video conferencing an unappreciated threat to business travel use of large airplanes.

[Steve Dean]

You guys are forgetting that you cannot fly across the Pacific Ocean in a Bombardier or Embraer. Not to mention the operating costs are actually higher on the smaller planes.

Boeing's problem was believing in the outsourcing mantra - that all workers are fungible(except for senior management of course). They lost all control over their build processes.

And, believe it or not, when you outsource to the cheapest supplier, they don't always do a great job. I'm surprised they don't cover that in MBA school.

[Adam Hartung]

You are correct Steve that you wouldn't buy an Embraer to use for commercial cross-pacific travel. There will be a demand for big planes for a long time. But how much demand, and for how many competitors. The monster Airbus A380 sold only 13 planes within 16 months of flying. And China has announced plans to launch their large C919.

Most air travel is domestic. And while the lowest cost/seat is a full 747 - when you can't fill the big plane any longer more profit comes from flying fuller, smaller aircraft. So it becomes a matter of what the market wants - bigger planes or more frequent flights. Given how ticket pricing is done, passengers are prone to select smaller planes with more convenience.

Your comments about outsourcing are also valid. It's a horrible failure when a business uses outsourcing in search of efficiency, then ends up missing the goal. Could mean Boeing faces a triple-whammy of stagnant (or declining) big plane demand, increased competition and higher costs due to ineffective outsourcing and supply chain management.

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