Boeing’s top leadership Wednesday waved aside analysts’ concerns — about the 787’s ultimate profitability, delays with the Air Force tanker and the growing challenge of Airbus in the single-aisle market — and touted a future of increased jet deliveries and higher profits.
Boeing’s top leadership Wednesday waved aside analysts’ concerns — about the 787’s ultimate profitability, problems in development of the Air Force tanker and Airbus’ growing challenge in the single-aisle market — as executives touted a future of increased jet deliveries, higher profits and floods of cash in the years ahead.
They insisted that the deferred costs on the 787 Dreamliner will be readily recouped and reported that all the company’s major airplane-development programs are on track.
Among the rosy projections, however, one firm new data point emerged that points to a large dent in the cash flow toward the end of 2018.
Commercial Airplanes boss Ray Conner said that when the 777 production rate drops in 2018 to 7 jets per month from 8.3 per month today — as the program transitions to making the first of the new 777X jets — the delivery rate will actually drop to about 5.5 jets per month through 2019.
Most Read Business Stories
- When private jets ferry billionaires to small-town Idaho
- High court declines to take up fight over airline crew rest
- How full does SSD need to be before Windows begins to slow? Can Windows 11 be reset to default settings?
- Alaska used-car prices run amok in a 'ridiculous' market
- She bought a house in Seattle for $36,000 in 1973. How can she release some cash?
That’s because the production rate for that period will include 777X test aircraft that won’t be delivered to airlines, as well as empty “blank” slots inserted into the flow to allow mechanics more time to build those first 777X models.
This means that while Boeing is delivering 100 of the expensive, highly profitable 777s this year, in 2019 that should be down to just 66 of the jets — a significant, if temporary, blow to cash generation in that year.
But by then, Boeing hopes to be rolling out 14 Dreamliners and 57 narrowbody 737s a month to make up some of the 777 deficit.
Conner said that the initial model of the new MAX jet, the 737 MAX 8, will be delivered to Southwest Airlines some months earlier than previously suggested, in the first half of next year.
He said the performance of the MAX flight-test airplanes indicates that it’s “right on the money” in terms of promised fuel efficiency.
Likewise with the KC-46 tanker, which is also undergoing flight tests. “The U.S. government is going to get a better airplane than they even know,” Conner said.
Defense side boss Leanne Caret said Boeing has a fix for a recent issue with the load on the tanker’s refueling boom that will be tested in flight within the next couple of weeks.
The bullish presentations were delivered to Wall Street analysts at the company’s annual investor conference, held this year in Bellevue. The event itself was not open to the public or press but was webcast live.
Opening the proceedings, Boeing Chairman and Chief Executive Dennis Muilenburg declared the company “financially healthy and strong” as it approaches its centennial in July, and outlined the goal of making Boeing “an enduring global industrial champion” in its second century.
The key will be executing the planned jet production rate increases, for the 737 and 787 in particular, as well as smoothly introducing the jet maker’s new airplanes: the 737 MAX, the 787-10, the 777X and the KC-46 tanker.
Muilenburg said Boeing has just successfully increased 787 production to 12 jets per month from 10, a record for any widebody jet program.
Chief Financial Officer Greg Smith said this higher volume, along with the greater number of larger and higher-profit 787-9 and -10 models in the mix going forward, will generate a copious cash flow.
And he said the pricing on the next 900 Dreamliners to be delivered will be much better than the pricing on the 400 delivered to date.
The prices of the early 787s were drastically lowered by early launch deals and by settlements with airline customers over delays.
Smith said the improved pricing and higher production rate ensure that Boeing will recover the huge accumulation of deferred costs on the 787, which now total $29 billion.
In making this projection, he emphasized that Boeing is not depending on future cost savings, but simply on delivering the next 900 airplanes on time.
“The path to recover the $29 billion is grounded in existing contracts with customers and suppliers,” Smith said.
The CFO’s sunny projections extended to the company as a whole.
In the first quarter of this year, hit by accounting charges related to the 747-8 and tanker programs, Boeing delivered a profit margin of just 7.9 percent, down from 9.1 percent a year earlier.
Yet Smith said Boeing will hit double-digit margins in the next couple of years and has an “aspirational” goal of margins in the midteens by the end of the decade.
Boeing’s Commercial Airplanes unit will have to contribute most of the cash and profit.
Conner said air-travel growth continues to be strong and, despite increased investor worry about a possible down cycle looming in the airline business, he sees no threat to the huge backlog of jet orders.
He conceded that the South American airlines, especially those in Brazil, are currently in financial trouble, but said Boeing is “not as exposed there.”
He also said the low price of oil could be suppressing orders from the giant Middle Eastern carriers, especially Etihad of Abu Dhabi.
“If oil prices come back, the Middle East will be OK,” Conner said, “Hopefully, we can get through this and oil prices will start to come up.”
That’s a hope unlikely to be shared by many of the world’s airlines.
Conner said that as the sales success of Airbus’ A321 presses the 737 competitively at the larger end of the single-aisle market and the entry of the Bombardier CSeries does the same at the smaller end, Boeing is studying ways to improve its 787 MAX 9 and MAX 7 models with larger versions.
At the same time, Boeing has been weighing for more than a year a possible new airplane — dubbed the Middle of the Market or MOM airplane — that’s intermediate in size between the largest 737 and the smallest Dreamliner.
“We are looking at a number of options,” Conner said. “No decisions have been made.”
Conner also talked about why he was so frank with employees in a webcast with employees in February, when he talked about how Boeing was “being pushed to the wall” by aggressive pricing in sales campaigns against Airbus and Bombardier.
He said he did so to let all employees understand that the tough competition Boeing faces puts their jobs on the line.
His intent, Conner said, was “to bring it to life for them, so we can get this competitive culture we need to have.”