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2022 USC Boeing Case Competition

Soaring to Success

Leo Zeng, Ethan Hughes, Kailyn Xu, JC Arce

USC Marshall School of Business

March 2022

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2

2021 was a rebuilding year

BDS

BGS

BCA

The Team

Leo Zeng

Ethan Hughes

Kailyn Xu

JC Arce

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Table of Contents

Road to Recovery & Prosperity

03

The Anchors: Financial Outlook & Innovation

02

The “Clean Sheet” Market

01

Market Overview
Leading Up to Innovation
“Technology Push” Aircraft
Preview of Market Success

The 2020 Trifecta
Assessing Work Blockage
Examining Stepping Stones
Inspecting Managerial Trends
Flying to the Future: 10-year forecast
A Glimpse into Innovation: Composite Material

Soaring to Success: Three-Tiered Plan
Debt Recovery
Middle of the Market Positioning
New Applications for 3D Printing Technologies

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The “Clean Sheet” Market

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Market Overview

Key Figures
Industry revenues in 2020 totaled $328 billion which is the same as 2000
2.2 billion global passengers in 2021, 50% decrease from 2019
3.4 billion expected passengers in 2022, demonstrating a positive trend returning to post-pandemic levels
COVID-19 Pandemic
Elevated standards of cleanliness: 60% of passengers want airlines to continue Covid-19 era cleaning protocols
Leisure travel will return to pre-pandemic levels in 2023, with business travel returning in 2025
Digitalization will transform the travel experience
The Gap
A space exists in the market between shorter and longer range flights
Consumers prefer point-to-point travel instead of layovers when possible
End of the age for 767 and 757
The Mix
Diversification of the fleet to provide more options for customers
More flexibility for flight schedules

The Gap

The Mix

(Mortensen, 2019)

(United Airlines, 2022)

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Leading Up to Innovation

6

Financial Constraints

Aggressively

targets “middle of the market”

737 MAX incidents

NMA announced to fill gap between 737 MAX & 787

“Clean Sheet”:

planning for late 2020s service entry

COVID-19 Impact

2015

2016

2017

2018

2020

2019

2021

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“Technology Push”: A Tale of Two Planes

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“Technology Push”: Competitor Analysis

Solidifying Foundation

Igniting Innovation

Uncovering Risk

- Seating Capacity: 220-270 pax.

- MoM Penetration:

center of the market → serves high demand long haul and mid-range routes

- Seating Capacity: 180-220 pax.

- MoM Penetration:

lower end of the market → serves low demand long haul routes or high demand routes with facilitation of A330neo

- Range: 4,700nm/8,700km

- Engine: 33,100 lbs of thrust

- Cabin:

- single-aisle

- small window

- large overhead bin

- Market share: 275+ purchases have been made to replace 757 and expand LCC routes

- End to End: low risk because of low trip and operations cost from the A320neo family and crew competence

- Range: 5,000nm/9,300km

- Engine: 50,000 lbs of thrust

- Cabin:

- twin-aisle

- agile window

- light interior material

- Market Share: immense interest in North America market (DL, UA)

- End to End: moderate risk due to the nature of a new product line (manufacturing capacity, integration, technical support)

Leo

- to dive deeper in the alignment of our new aircraft idea to that of Airbus’s, we separated our analysis into foundation, innovation, and risk.

- as we can see in the seating capacity, our aircraft is targeting the center of the MoM while our competitor’s product is only attractive to the lower end of that market, putting us in an advantageous position

- from a more technical standpoint, our product’s signature will be the utilization of composite material to extend the range of the product. On the other hand, A321XLR focuses on the volume maximization of the cabin to optimize onboard experience

- as to risk factors, our product has a higher risk due to the nature of a new product line versus Airbus’s line extension. However the effect of these issues will be mostly diminished via our staged implementation plan

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Preview of Market Success

Strengths

Strong market position: well established in the industry
Company culture of innovation, research and development

Weaknesses

Business travel may never fully recover to pre-pandemic levels
Some fear and regulatory concerns after 737 crashes

Strong growth in new markets, specifically low-cost airlines both domestically and internationally
Demand for leisure travel is expected to comeback in 2022

Opportunities

Threats

Airbus A321XLR is set to enter the midsize market in 2023, gaining market share before Boeing can
Airlines are downsizing long haul flights for single aisle planes

(ICAO, 2020)

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The Anchors: Financial Outlook & Innovation

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Delayed, Deferred, Grounded: The 2020 Trifecta

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2 problems that contributed to Boeing’s debt:

Boeing 737 Max accidents in 2018 and 2019

20 month grounding of the entire fleet

Covid-19 in 2020

Decreased revenues from lack of travel
Cut production due to decreasing demand

Seeking Alpha, 2021

How much money was lost?

$18.4B from 737 MAX
$12B from Covid
$6.5B from 777X, production issues

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Assessing Work Blockage: Debt

12

Before we can even start considering a new plane, Boeing must take action to alleviate the massive debt incurred → We are assuming that by 2026, Stockholders’ Equity will be a net positive.

Boeing long term debt for 2020 was $61.890B, a 210.04% increase from 2019.

Boeing long term debt for 2021 was $56.806B, a 8.21% decline from 2020.

3 metrics to analyze debt levels and financial health:

Debt to Equity Ratio: Boeing currently has negative Stockholders’ Equity, which is even more concerning than the debt amassed

Debt to Equity Ratio on 12/31/2021: -3.862
Shareholders are unable to cover outstanding debts in the case anything happens

Debt Coverage: Operating cash flow negative, debt not well covered

Boeing net operating cash flow for 2021 was -$3.416B, a 81.44% decline from 2020.
Boeing annual free cash flow for 2020 was -$18.410B, a 652.66% increase from 2019.

Interest Coverage: A ratio used to assess a firm's ability to pay interest expenses based on operating profits (EBIT).

-505M/2.682B = 0.2x: 2021
-8.413B/2.156B = -3.9x: 2020

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Examining Stepping Stones

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Boeing currently has negative stockholders equity
Interest coverage ratio, -3.9 in 2020, indicating Boeing has trouble with interest payments on debt

Short-Term Liquidity Analysis

Industry Average Current Ratio (2020):

Boeing Current Ratio (2020):

1.4

0.9

Capable of paying its obligations short-term
Current Assets > Current Liabilities

Long-Term Solvability Analysis

Boeing Debt to Equity Ratio (2020):

Industry Average Debt to Equity Ratio (2020):

-3.46

-1.73

JC (Kailyn)-

We analyzed boeing’s short and long term financial health based based on the current ratio and debt to equity ratio, and also compared it to the aviation industry standard.

As you can see, Boeing is positioned well, and is more capable of paying its obligations short-term because it has a larger proportion of current assets compared to its current liabilities in the short term

However, Boeing’s Long-term debt is one of the biggest factors that hinders growth. Even though it is currently higher than the industry average, Its interest coverage ratio, -3.9 in 2020, also indicates that Boeing is not good about interest payments on debt. Boeing currently has negative stockholders’ equity, another red flag for the company’s finances as Shareholders are unable to cover outstanding debts in the case anything happens

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Inspecting Managerial Trends

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$60

$40
$20
$0
	2020	2021


$1




	2020	2021

($56.81)

$58.26

$62.29

($15)

($10)

($18.41)

($5)

($3.42)

$62.97

$58.08

$0

$15

$30

$45

$60

$75

2020

2021

Revenues (Billions)

Long Term Debt (Billions)

Operating Cash Flow (Billions)

(Boeing, 2021)

Kailyn -

https://www.macrotrends.net/stocks/charts/BA/boeing/long-term-debt

https://www.wsj.com/market-data/quotes/BA/financials/annual/balance-sheet

Despite the company’s ongoing struggles, shares have more than doubled from the coronavirus sell-off earlier this year, though the stock remains down more than 30% year to date.

the stock’s growth is a sign that Boeing could reduce its debt obligations and address long-term strategic challenges

As you can see,, revenues have been increasing over the past year, this is a positive trend for us as following the recertification of the 737 max and lifting of coronavirus restrictions

another positive trend is the decreasing long term debt. while we still have issues with negative stockholders equity, these two metrics are showing hope of returning financial health

Operating cash flow While it is still in the negatives, there is a massive increase from 2020, as business activities resume back to normal

These will all help with the stockholder equity problem

in general, we are going in a positive direction when compared to 2020

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Flying to the Future: 10-year forecast

10-year forecast

Good News

Travel coming back
737 Max recertified globally
Production rates back to normal

High Growth Potential before others enter market

Additive Manufacturing meets Generative Design

What are we looking forward to?

Increase in Demand

15

Gap in the Market

Innovation & Technology

Potentials

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A Glimpse into Innovation: Composite Material

With the new aircraft, we will…

Adapt generative design

AI driven 3D printing material
55% lighter than traditional method

Utilize Vanema’s product Octaspring

Honeycomb design
Reduce material by 50% & weight by 30%

Changes in 3D Design and Applications

Seats (220-270)

On average, an economy seat will weight 12 kg; new implementations will reduce the weight to 8 kg
On average, a business class seat will weigh 100 kg; new implementations will reduce the seat to 70 kg

Food and Beverage Carts

Cart weight reduced by 20%
Reduce 10 kg per plane

Overhead bins

Currently the standard 60 inch overhead bin can hold up to 6 bags
On average, 1 more carry-on per passenger. One overhead bin weighs about 20 kg

Vertical and Horizontal Stabilizers

Reduce weight by 20% on both

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Why Additive Manufacturing?

Boeing already utilizes AM; 70,000 3D-printed production parts fly through Boeing commercial and defense programs
AM Production Center set up at Boeing Interiors Responsibility Center (IRC)
Boeing and GE contract can outsource and avoid additional manufacturing costs

Kailyn -

Your carry-on laptop actually costs an airline an extra 33 cents in gas

Every pound costs fuel, and with this knowledge in mind, we set out to make our new nma lighter

Generative design- a process where a computer AI is able to determine the strongest and lightest way to design a part which can then be 3D printed

3D printed components are by about 55% lighter than those produced with traditional methods

Vanema’s product Octaspring- uses a honeycomb design that reduces the amount of materials by 50%, and reduces weight by 30% per seat

passing it back to ethan to summarize our recoomendations

Interior cabin design:

Seats (220-270)- using a 3D printed honeycomb design for seat cushions, materials can be reduced by 50%; seat legs, armrests, and tables will utilize generative design to create 3D printed components that are both stronger and lighter than conventional parts (30% reduction in weight overall per seat)

On average, an economy airplane seat will weight 12 kg; these new implementations will reduce the weight on average to 8 kg
On average, a business class seat will weigh 100 kg; 70 kg

Two configurations-

220: 22 (660 kg) business and 198 (792 kg) economy seats (1,452 kg total)
270: 27 (810 kg) business and 243 (972 kg) economy seats (1,782 kg total)

Food and beverage carts- generative design and 3D printing can reduce the weight of these carts by 20%

Currently they weigh on average 12 kg * 4 per plane
Reduction of 10 kg per plane

Overhead bins- the standard sized 60 inch overhead bin can hold up to 6 bags when turned on their side; on average, there should be room for one bag per passenger. One overhead bin weighs about 20 kg

Two configurations-

220: 38 overhead bins (220/6 = 36.66667, rounding up to 38- can’t be odd number) 38*20 = 760 kg
270: 46 overhead bins (270/6 = 45, rounding up to 46) 46*20 = 920 kg

Vertical stabilizer- the vertical fin on the back of the plan can utilize 3D printing along with generative design to reduce weight by 20%

220: 1,400 kg

270: 1,700 kg

Horizontal stabilizer- the horizontal fins on the back of the plan can utilize 3D printing along with generative design to reduce weight by 20%

220: 2,200 kg

270: 2,700 kg

2 per plane

220- 1,452+10+760+1,400+4,400 = 8,022 kg

270- 1,782+10+920+1,700+5,400 = 9,812 kg

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Road to Recovery & Prosperity

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Soaring to Success: Three-Tiered Plan

Tier 1

Rebuild stakeholder trust
Improve financials (interest debt repayments) and growing Boeing’s free cash flow to generate new aircraft investment fund

Target an underserved market
Attract consumers with product integrity to build a resilient “Middle of the Market”
Prioritize safety before profitability

Use of existing technologies for new applications
Increase cost-efficiency via sustainability efforts in the new design
Launch of new aircraft in 2030

Recovery

Repositioning

Rejuvenation

Tier 2

Tier 3

4 fiscal years (2026)

4 fiscal years (2030)

Ethan -

Our recommendation is broken into 3 tiers with the main goal being the successful launch of our new plane utilizing the new technologies discussed earlier
Recovery: this entails rebuilding stakeholder trust by improving our financial standings as a company; once our debt to equity ratio is net positive, which we estimate will take about four years, we will move into tier 2
Repositioning: this will involve research + development of the new proposed aircraft to target the MoM, while also ensuring that safety is a top priority; we assume that R&D should take about 4 years given that many of the technologies are already in use or are in final development and then the aircraft is set to be released
Rejuvenation: this stage includes the launch of the new aircraft utilizing new technologies discussed before, increasing fuel and cost efficiency

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Retrospect on the Plan: RAID Analysis

Risks

Assumptions

Issues

Dependencies

MoM could be monopolized by Airbus
Global trends move away from MoM flights

Debt is alleviated enough to start R&D
No other major extenuating circumstances (Covid, war)

Production will go according to plan, manufacturing capacity has momentum to grow
Stockholder trust returns

Expensive initial cost for AM technologies
Demand for downsizing airplanes

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Thank you!

Any Questions?

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