As Boeing lays off 16,000 employees, the firm’s President and CEO Dave Calhoun issued a letter addressing aerospace market realities. The COVID-19-induced expected dramatic drop in airline travel, with US passenger volumes down 95%, is leading to a dramatic drop in aircraft and aircraft services demand.
“The global pandemic has changed the way we live and work,” Calhoun wrote, also expressing sympathy to those directly affected by COVID-19. “It is changing our industry. We are facing utterly unexpected challenges. But across the world, you are demonstrating the resilience, commitment and generosity to one another, our customers and our communities that Boeing people are known for. I deeply appreciate all that you do”
The pandemic is delivering a body blow to Boeing and all civil aviation business (though not so much to general aviation, defense and space)— affecting airline customer demand, production continuity and supply chain stability. The demand for commercial airline travel has fallen off a cliff, with U.S. passenger volumes down more than 95% compared to last year. Globally, commercial airline revenue is expected to drop by $314 billion this year.
As an easily foreseeable result, even in the earliest days of this crisis, airlines are delaying purchases for new jets, putting the brakes on delivery schedules and deferring elective maintenance. Boeing is also seeing a dramatic impact on the commercial services business.
All of this puts inevitable near-term pressure on cash flow. Calhoun said that Boeing is taking steps to keep liquidity flowing through business and supply chain, reducing operating costs and discretionary spending, suspending dividend payments, extending existing pause on stock buybacks, reducing or deferring R&D and capital expenditures, and accelerating some progress payment receipts with help from defense customers. Calhoun and Boeing’s chairman are also foregoing salaries for the year. The company is also exploring potential government funding options and advocating for access to credit for the entire aerospace manufacturing supply chain.
The aviation industry will take years to return to the levels of traffic we saw just a few months ago. Air travel has been booming for over twenty years and forecasts were very optimistic for the next twenty years as well. Not even two months ago we were celebrating the milestone of the new 777x maiden voyage. That was before COVID-19.
In order to meet the new reality, Boeing expects to resume 737 MAX production at low rates in 2020, gradually increasing to 31 planes per month during 2021, with gradual increases to correspond to market demand. The company plans to reduce the 787 production rate to 10 per month in 2020 and to 7 per month by 2022, continuing to evaluate the rate after that. Boeing also plans to reduce the combined 777 / 777X production rate to 3 per month in 2021 and take a measured approach to the 777X rate ramp. The 767 and 747 production rates will remain unchanged.
These new reductions in production rates and the continued impact of COVID-19 on business will force the US aircraft OEM to reduce the size of its workforce by as many as 16,000. This will add to the staggering 26+ million newly unemployed that were reported in the US over just the past month. And Lockheed Martin’s hiring of 400 new positions in Colorado does little to compensate for it.
These cuts will result in a roughly 10% reduction in the overall workforce through a combination of voluntary layoffs (VLO), natural turnover and involuntary layoffs as necessary. Areas that are most exposed to the condition of commercial customers, such as commercial airplanes and services businesses, as well as corporate functions, will see cuts for as much as 15% of the workforce. Possibly one of the worst parts of all this is that Boeing’s slow down will reflect even more dramatically on its entire supply chain, in the US and globally.
.At the same time, the ongoing stability of the defense, space and related services businesses will help limit the overall depth of the cut. And in the end, because there are so many unpredictable drivers for this crisis, the company will monitor the markets continuously and make adjustments whenever needed. In this sense, the suppliers that are able to be more flexible—such as additively manufactured parts providers for example—will be able to meet demand fluctuations more effectively.
Current priorities go to the safe return to service of the troubled 737 MAX in close coordination with the U.S. Federal Aviation Administration and global regulators, as well as ongoing progress in AM-intensive development programs, such as the 777X, 737 MAX 10 and CST-100 Starliner. The company also continues to support defense customers with progress across future franchise programs, including MQ-25, T-7A Red Hawk, MH-139A Grey Wolf and the Echo Voyager extra-large unmanned undersea vehicle. Work continues on the KC-46A tanker. The outcome of this month’s agreement with the U.S. Air Force on the tanker’s Remote Vision System means KC-46 will become the standard by which all future refueling aircraft are measured.
“Looking ahead,” Calhoun concluded, “we will continue to concentrate on what is most important across Boeing. We will continue to invest in the future. We will continue to focus on our values and to drive safety, quality, integrity and operational excellence in everything we do.”