How Boeing and Airbus Are Shaving Costs

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Last week, Boeing Co. (NYSE: BA) told its salaried employees that beginning in mid-October overtime pay will be strictly limited. The policy affects non-union salaried employees and some unionized employees, including engineers. The change affects a total of about 80,000 Boeing employees.

The Seattle Times cited an internal company memo that said the company is discontinuing its paid overtime for U.S.-based salaried employees, except in certain cases, due to a “highly competitive market.” One employee told the Times that for many employees “this is a pay cut.”

Boeing paid salaried employees their regular hourly rate plus $6.50 per hour as part of the company’s “extended workweek” plan. The extended workweek policy is now getting the axe.

To date in 2016, Boeing has fired nearly 4,000 employees in Washington, cut advertising spending and put the squeeze on supplier to lower their prices, all in an effort to boost profits. The company reported a per-share loss of $0.44 following the write-down of just over $2 billion on three of its aircraft programs. Third-quarter earnings are currently expected to reach $2.62 per share, up from $2.52 a year ago and $1.83 in the first quarter of this year.

One of the costs that hit Boeing’s earnings last quarter was a write-down of $847 million in after-tax charges to the 747 program. The venerable passenger jet could even be phased out completely by the end of the decade. And that slowdown in the very large aircraft (VLA) market is giving Boeing’s arch-rival Airbus more than a few headaches as well.

The superjumbo Airbus A380 has received a disproportionate amount of news coverage recently after Singapore Airlines announced that it was not renewing a lease for the first A380 it received in 2007. Scott Hamilton at Leeham News noted that Singapore “routinely flips its fleet about every 10-12 years” and that the airline has an additional five A380s on order from Airbus.

That is not to say that Airbus does not have some problems, both with the A380 and some other programs. The biggest problem is slow delivery of the A320neo, Airbus’s single-aisle, bread-and-butter airplane.

Airbus has announced that it is trimming its production rate on the A380 from 24 to 12 per year by 2018. At that rate, according to Leeham News, the company cannot make money on the airplane.

Deliveries of the A320neo’s geared turbo-fan (GTF) engine, built by United Technologies Corp.’s (NYSE: UTX) Pratt & Whitney division, are expected to reach about 150 this year, the low end of an estimated 150 to 200 deliveries. Next year’s deliveries have also been scaled back, from a prior projection of 400 to a new range of 350 to 400. The shortfall is due to a problem with the engine’s fan blades that may not be completely solved until late this year.

An additional issue also has plagued the A320neo and the A350: slow deliveries by seat provider Zodiac. The delays have led to compensation claims from Airbus customers.

No surprise, then, that the world’s largest aircraft makers are tightening their belts. Boeing, especially, needs to keep revenues up in order to meet its projection for $10 billion in cash flow this year. Delivering more airplanes at lower costs is critical to that effort.

Boeing stock closed at $127.48 on Monday, up about 0.6% for the day, and was up fractionally in Tuesday’s premarket. The stock’s 52-week range is $102.10 to $150.59, and the consensus 12-month price target is $149.27.