Cost of Boeing airplanes at heart of job cuts

Boeing’s new cost-reduction plan has deep ramifications for Washington because the bulk of the 4,500 job cuts are likely to land here.

CEO Dennis Muilenburg asked investors to view the savings initiative as “playing offense in a competitive marketplace” even though Boeing has a $431 billion backlog of 5,800 aircraft orders.

Translated, Muilenburg means the aerospace giant needs to find ways to lower the price tag of its airplanes.

Boeing leaders worry because Airbus’ A320 scooped up 63% of the orders last year in head-to-head competition with the 737. The 737 has been Boeing’s cash cow since it was first delivered to the airlines in 1967 and for many years was considered the superior aircraft.

The A320neo is now a “very competitive machine against the (737) MAX 9,” Boeing Commercial Airplane President Ray Conner acknowledged in a Seattle Times story.

Boeing worries the trend toward Airbus is likely to continue and exacerbate unless it adjusts prices. The Wall Street Journal reports that Airbus has 1,400 more orders than Boeing for its new single-aisle airplane.

Competitive prices are essential as the world’s airlines open new routes and replace older fleets. Over the next 20 years, Boeing forecasts a need for 38,050 airplanes valued at more than $5.6 trillion.

China alone is expected to buy over 5,300 new commercial airplanes by 2033. It will become the leading country for both domestic and international passenger air travel and the preponderance of the domestic airplanes will be single-aisle aircraft.

While Boeing fights to maintain its lead in wide body aircraft, it worries that its competitors have improved their airplanes, taking away from Boeing’s technology advantage.

The new A320neo is rolling off assembly lines in France, Germany, China and now, Mobile, Alabama. The 737MAX9 made its initial test flight earlier this year, but is not scheduled for delivery to customers until 2017.

The bottom line is Boeing needs to prune its 161,000 workforce.

Boeing’s 737 sole assembly line is in Renton; whereas, the A320neo is now assembled in four facilities, giving it more flexibility to service its customers.

Just as with Boeing’s South Carolina 787 plant, Airbus’ labor costs are lower. For example, the Mobile assembly plant has five wage levels for its assembly-line workers. They start at $16.50 per hour and top out at $23 an hour as they gain skills and are approved to complete work without tight oversight.

By contrast, at Renton, Boeing’s pay scale starts at $35 an hour and climbs to $45 for higher skilled workers.

Troy Wayman, vice president of economic development for the Mobile Chamber of Commerce, told the Seattle Times, “You can live on a lower wage on the Gulf Coast.”

A CNN cost-of-living index, based on data provided by the Council for Community and Economic Research, a salary of $41,000 in Mobile is equivalent to about $50,000 in Everett.

Wages and cost of living aren’t the only issues.

In South Carolina and Alabama, infrastructure improvements, expedited permitting and lower regulatory costs spur aerospace investments. While Washington has tax incentives, Mobile and Charleston have similar incentives plus available industrial land close to the Airbus and Boeing plants for suppliers and subcontractors to locate.

The good news is Boeing’s announcement does not seem to effect the company’s program to boost 737 production to 47 per month by next year. It also does not appear to influence construction of new 777 carbon-fiber plant facilities at Everett.

While we won’t know the full impact of Boeing’s cost cutting in Washington, it is a signal that Boeing’s world is changing, and so will ours.

Don C. Brunell is a business analyst, writer and columnist. He retired as president of the Association of Washington Business, the state’s oldest and largest business organization, and now lives in Vancouver. He can be contacted at theBrunells@msn.com.