New York — Our new CORPORATE INNOVATION PROJECT shows what types of innovation are accretive and why. Look at the commercial aircraft business. Airlines are being killed by today’s fuel costs and many are reconsidering orders placed in recent years with EADS (Airbus) and Boeing. Which will suffer most? Which can scale profitability in a down market?
The chart shows that EADS, which gets a NORTH RIVER MANAGEMENT GRADE F (it takes half a year to turn a sale into cash) is moving in the opposite direction from B- Boeing. As I advised in October, 2006, this would create an opening for a newcomer.
Any newcomer would, however, take business from mostly Airbus because of its relative weakness. Bombardier, also an F grade operation but one that is improving rapidly, read the numbers the same way and moved into the core of Airbus’ business: low-to-middle capacity planes.
Of Airbus order book of 3,634 aircraft, 83.5% are for small and medium sized planes. It has orders for only 200 of the $15 billion super jumbo A380, about 26% of expectations and less than half way to break even. And it has committed another $15 billion to a plane, the A350, to compete with Boeing’s fast selling 787. You can see from the chart that what made very little sense several years ago makes still less today and the company cannot survive in its current form.
Boeing, by contrast, has a quarter of its order book in only one plane, the 787, which outsells the A380 and A350 combined by 50%.
Ask who between EADS and Boeing will survive a market down turn better and the answer is Boeing. Its improving grades mean that its working capital efficiencies generate higher rates of OFCF and, therefore. greater OFCF-R&D and OFCF-SG&A ratios than EADS. And these are getting better all the time.
In addition, the higher the cash velocity, the higher the Customer Information Premium and the lower the risk of misjudging the market.
With its low cash velocity driving a customer information deficit, EADS is, on the other hand, leaving itself wide open.
China is already talking of entering, as I said it would in late 2006.
Bombardier has beefed up its own cash and capital velocities, and aimed at the soft underbelly of Airbus — the small to medium planes it needs to finance the A380 and A350 — using a scaled-up model of an existing product and innovative new supply chain. Bombardier is thinking more like Apple than General Motors.
Now that fuel cost-driven cancellations are coming in, the hardest hit is Brazilian Embraer, at 2.23%. Next comes Airbus at 1.84%. Then Boeing at 1.73%. Bombardier has none.
Bombardier launched it’s low-risk model into a recession, always a smart move. First, its planes will not be ready until the airlines have absorbed fuel costs into their business models. Those airlines that will not survive will already be gone, taking the incumbents order books with them. And Bombardier’s focused and recession-adjusted business model will have scalable profitability built in.
All this depends on Bombardier improving its Management Grades, which, while it shows every sign of trying to do, is no simple matter.
You can see, however, that the key innovation here is not product or technology. It is the supply chain. Airbus’ supply chain is a political invention and can only be changed by French President Nicholas Sarkozy and German Chancellor Angela Merkel deciding jointly. Bombardier can attack this with impunity by optimizing its own supply chain to gain the highest cash velocity in its business.
Airbus has struggled with this issue for years and I will advise more on this shortly. But, once again, the tight relationship between management grades and accretive innovation is the dominant force. You have to be a fool to ignore it.