Boeing Pricing Spineometer: 3 of 5 Vertebrae

Boeing, global aerospace manufacturer, had a challenging Q1 2024. Revenue fell 7.5% to $16.6 billion but earnings before interest and taxes rose 42% to negative $86 million over the same period last year.

A review of Boeing’s April 24 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Dominating the conversation was the recent door plug failure at their Alaska Airlines customer.  This has led to an in-depth review of quality control, changes to work processes, and a reduction in production throughput.  A corollary discussion topic was the change in leadership at Boeing.

The earnings presentation clarified the business model and business lines of Boeing.

Boeing operates with three major lines of business: Commercial Aircraft (BCA), Defense, Space and Security (BDS), and Global Services (BGS).  BCA revenue fell to $4.7 billion and generated strongly negative operating margin. BDS revenue grew to $7.0 billion with a slightly positive operating margin. And BGS revenue grew to $5.0 billion with a healthy 18% operating margin.

Given the line of business performance numbers, we can state that Boeing’s price structure would be a textbook example of a tying arrangement rather than a unit pricing or transaction-by-transaction profitability mindset.  Meaning, over an individual product’s lifetime, Boeing is willing to lose money on the upfront sale of individual aircrafts or durable products in the anticipation of earning profits on maintenance and other follow-on services and consumables to that aircraft.  This is in opposition to a unit pricing business model wherein profits are demanded on each individual transaction of item or service, regardless if it is the initial aircraft sale or follow-on sale of parts and service. (See Chapters 9 and 10 of Pricing Strategy for more details of this price structure.)

Also detected from the earnings call is the average price per commercial aircraft sold and an indication of the size of the discounts or net price after rebates related to the list price. A backlog of 5.6K airplanes worth $448 billion implies the average commercial Boeing aircraft sells for $80 million.  Roughly half the backlog is related to the 737 product line.  We would expect a broad range on the price per aircraft around this average as Boeing sells aircraft including the smaller 737 at a list price near $100 million single-aisle commercial aircraft and the larger 787 Dreamliner at a list price up to $338 million.  Combined, this data supports the claim that most new Boeing Commercial Aircraft is sold at a 40% or larger discount or after rebate price from the list price.

Given the scope of Boeing’s business, industry benchmarks would suggest 150 to 750 pricing professionals to be employed at Boeing.

1. The BCS segment would benefit from pricing professionals working with sales professionals on transactional pricing. Pricing should provide price guardrails and negotiating strategies related to larger orders. Pricing should guide salespeople regarding the use of rebates over discounts in relation to order booking volume versus actual delivery volume.  Pricing should deliver schedules clarifying the size of discounts and rebates to offer in relation to the order volume and mix.
2. The BDS segment is likely to require similar pricing professional support to the BCS segment plus that related to project management and cost estimation. The development of defense aircraft or the Atlas V rocket and associated spacecraft are high-risk challenges fraught with potential cost overruns.  Pricing and project management are necessarily intertwined when bidding on these government contracts.
3. The BGS segment requires pricing professionals highly focused on capturing profits and volumes. Aftermarket parts sales tend to be highly profitable.  But, at some point, when the aftermarket part becomes too expensive, customer will exhibit brand betrayal and sales are lost.  It is like the stick-slip model of plate-tectonics and geophysics:  Customer will stick with you up to a point, but when the tension between price and quality assurance becomes too stressful, they will slip away and an earthquake of revenue is lost.  (Your author does indeed have a physics degree.)
4. Macroeconomic and industry changes have a disproportionately high impact on Boeing performance. As such, Boeing would benefit from a the input of professional economist in navigating global political and economic turmoil.
5. Global nature of sales of fungible products, production dominantly in the United States, would expect most pricing professionals to be in the United States but have global responsibilities.

Research into the investment by Boeing in pricing yielded mixed results.

1. The number of professionals engaged in pricing overall was withing expectations. Over 150 people could be identified as managing contracting or estimating and pricing in relationship to BDS and over 200 professionals could be associated with pricing at Boeing overall.
2. However, when examining commercial aircraft or after-market sales, the pricing professional count fell well below expectations. I strongly suspect that there is an opportunity for improvement in this dimension.  Boeing would benefit from having more people dedicated to supporting sales in pricing new aircraft sales and managing aftermarket sales.
3. Pricing professionals ranged in title broadly. Specialist, Supervisor, Analyst, Lead, Manager, and Director were all titles found with professionals primarily engaged with pricing.  Our research did not identify anyone with a title of Vice President whose primary responsibility was pricing.  I strongly suspect that there is an opportunity for improvement in this dimension as well.  Boeing would benefit from having pricing professionals at a peer level to sales professionals in both BCS and BGS.

Given the importance and capability of pricing at Boeing as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May 2024.

Boeing Pricing Spineometer: 3 out of 5 Vertebrae. Great performance in some areas but woefully lacking in others.

BA (The Boeing Company) was relatively unchanged at 169 the day prior to their earnings call and 171 one week later. FY 2023 revenue of $77.8 billion with a negative 1% operating margin and negative P/E ratio near -39.

For FY 2023, a 1% improvement in price would yield 100% improvement in operating profits, changing a loss into a profit, holding all else constant at Boeing.