TOKYO -- The rise of low-cost air carriers has prompted Boeing and Airbus to focus more on short-haul aircraft, a course correction that has exposed Japanese aircraft components suppliers to strong headwinds.
Such Japanese industrial machinery manufacturers as Kawasaki Heavy Industries, Mitsubishi Heavy Industries and IHI supply parts to major aircraft builders. But they tend to do so for larger planes, so the shift toward smaller ones is apparently taking a toll on earnings.
Boeing's net profit soared 19% on the year to $1.45 billion for the January-March quarter, but revenue slipped 7% to $20.97 billion. The rise of cut-rate airlines has brought more orders for smaller, short-haul planes, and the American company has had trouble selling its larger, costlier 777 line. Boeing had unfilled orders for 442 units of the 777 at the end of 2016, down 16% from a year earlier. With the upgraded 777X series due out in 2020, some carriers have opted to hold off on orders to build the 777.
In this environment, Boeing is apparently ordering fewer parts from Japanese companies as well as requesting lower prices.
In for a bumpy ride
Kawasaki Heavy, which works on 777 fuselages, will likely log a 4% operating margin in the aerospace segment for fiscal 2017, which ends March 2018, down 3.6 percentage points on the year. The company projects the segment's operating profit at 13 billion yen ($117 million), down 48%. "The decline [in parts orders] for 777s will reverberate," President Yoshinori Kanehana said.
Mitsubishi Heavy also supplies structural components for the 777 and other aircraft. Sales from the aircraft, defense and space segment are seen dropping 8% to 650 billion yen in fiscal 2017.
Japanese parts makers contribute about a fifth of key structural parts for the 777 and more than 30% of components for Boeing's midsize 787. Parts demand for 787s is firm. But "price demands are growing harsher," in the words of an official at aircraft components maker Jamco.
For Toray Industries, shipments of carbon fiber composite materials used in 787 airframes will likely prove sluggish this fiscal year. Parts makers are likely to continue adjusting inventories "through the April-June quarter, or July to September in the worst case," President Akihiro Nikkaku said. Toray has been producing less of the composite materials since last autumn. The chemical company sees operating profit in the carbon fiber composite materials segment staying roughly flat at 24 billion yen in fiscal 2017.
IHI, which also makes engine parts for Airbus, forecasts profit to decline roughly 30% to 37 billion yen for its mainstay aero engine, space and defense operations. The cost of producing engines for Airbus' new A320neo small jet will swell. "Early in mass production, low proficiency levels will drive up cost burdens, but in the medium to long term, profits will improve," an official in the company's finance section said.
Bracing for impact
"Coming up with countermeasures to handle reduced production is a pressing matter," Mitsubishi Heavy President Shunichi Miyanaga said. Its civilian aircraft parts business had a staff of around 6,600 as of February. The company plans to shrink the staff around 30% by April 2018 through transfers and other measures. Jamco seeks to cut costs by rethinking products from the planning stage onward.
Many investors pay attention to the performance of aircraft components operations because these businesses offer relatively high profitability. Gloomy earnings projections by makers of such parts are impacting their stock prices.
Toray ended Friday at 938.9 yen -- down somewhat less than 6% from its closing price May 9, the day before it announced fiscal 2017 earnings forecasts.
Shinji Kuroda of Credit Suisse Securities (Japan) believes that aircraft makers could be producing fewer big planes for some time, owing partly to the shift toward smaller sizes. While the effect may vary by company, civil aviation departments may continue struggling into fiscal 2018, Kuroda said.