Brushing aside concerns about overproduction, Boeing said Thursday it will raise output of the 737 at its Renton plant to 52 planes a month in 2018, up from the current 42 and triple the rate of just a decade ago.
This remarkable ramp-up “definitely means both job security and … more jobs for Renton and the Puget Sound,” said Bev Wyse, the Boeing vice president who runs the Renton assembly plant.
Boeing’s decision has some risks attached, however.
It assumes no downturn will cool today’s hot market for single-aisle jets, which has brought Boeing more than 1,000 orders for the 737 in each of the last two years.
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And it will require precision execution of a plan involving hundreds of global suppliers.
Ambitiously, managers in Renton plan to undertake the unprecedented production ramp-up at the same time a new 737 model is introduced. The 737 MAX 8 is due to enter service in 2017, and the larger MAX 9 in 2018.
Wyse said in an interview that by the time the rate hits 52 per month, fully half the planes rolling out — 26 jets — should be the MAX model.
Program spokesman Adam Tischler added that most, if not all, planes coming from the Renton plant by decade’s end will be MAXs.
In the next few years, Boeing will be hiring in Renton both to staff a new third assembly line — starting up next year and dedicated to MAX production — and to ramp up production on the two current lines.
“We’ll bring on people to help us produce the MAX, then we’ll go to 47 a month in 2017, then 52 in 2018,” said Wyse. “All positive for the current workforce and the region.”
Wyse wouldn’t put a figure on the anticipated employment increase, but Boeing has hired steadily in Renton as 737 production rates have soared.
Data reported to the state Department of Revenue show that at the end of 2005, when 737 production was at 21 jets per month, Boeing had 9,300 employees in the Renton area, including 3,500 production workers.
By the end of 2012, the latest year for available state data, production was up to 35 jets per month and the total head count was just shy of 12,000 people, including 6,000 production workers.
“We’re super proud of how the team has performed,” Wyse said.
The aggressive hike to 52 jets per month aims to leverage Boeing’s massive backlog of more than 4,000 unfilled 737 orders to substantially boost the company’s cash flow near-term.
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Boeing salespeople will immediately have 60 extra planes a year to offer airlines shopping for jets to be delivered four years from now.
Some analysts believe Boeing executives are intent on boosting investor confidence by signaling the company’s continued ability to rake in cash toward the end of the decade.
That confidence has been hit lately by two concerns that have weighed down Boeing’s stock since its all-time peak in January.
Some investors clearly worry that the sales backlog — big as it is — is not entirely solid, with a few airlines around the world reducing their growth plans.
Last month, for instance, Air Berlin canceled an order for 15 long-range 787 Dreamliners and 18 single-aisle 737s.
The second concern on Wall Street is that Boeing doesn’t have enough 777 orders to maintain production of that big jet at 100 planes a year through the end of the decade, when the 777X is due to debut.
The 777 is a cash cow. Data from aircraft-valuation firm Avitas show that while the 737 market prices range from $40 million to $55 million per jet, depending on the model, every 777 that rolls out brings in about $165 million in cash.
A 777 rate cut would be a big hit to cash flow.
Though Boeing insists it can sell enough of today’s 777 models to keep up the current production rate until the 777X arrives, Wall Street analysts are skeptical.
Ken Herbert, an industry financial analyst with investment bank Canaccord Genuity, stressed the positive cash impact of the 737 production-rate increase.
In a note to investors in August, he estimated that the 737 accounts for more than half Boeing’s profits.
“Boeing is struggling to demonstrate that there is upside to cash-flow estimates right now,” Herbert said in an interview. “They don’t have a lot of levers to pull. The 737 is a phenomenal lever. They’ll keep pulling this one.
“It’s all about how much of that backlog they can monetize,” he added.
Herbert said the planned ramp-up could potentially leave Boeing exposed in an economic downturn.
“If things start to crumble in that order backlog three or four years from now while they are pushing rates this aggressively, that would reflect poorly on this decision,” he said. “But it’s way too early to make that call.”
Another risk attached to raising production rates is the difficulty of executing it smoothly. Much rests on the ability of the company’s complex, worldwide supply chain to keep up.
In 1997, Boeing doubled its overall production rates. When suppliers failed to deliver parts on time, the assembly lines in Renton and Everett choked and had to be halted for a month.
That crisis shocked the company, which was forced to announce almost $3 billion in unanticipated costs and lost money for the first time in 50 years.
Rob Stallard, an analyst with RBC Capital Markets, acknowledged this risk in a note to investors Thursday.
He added that as a result of the experience in the late 1990s, Boeing is now “far more paranoid and focused on signs of strains” among its suppliers.
Rival plane-maker Airbus, which has many of the same suppliers, is widely expected to match Boeing’s rate hike, increasing the stress on the supply chain.
Wyse said her team has developed a successful formula in recent years of stepping up roughly 10 percent per year.
“We’ve done it very successfully,” she said. “We stay extremely close to the supply chain.”
As for the risk of a downturn in demand and collapse of the backlog, Boeing sees no end in sight to the aviation boom that’s been going more than a decade.
It’s fueled both by the demand for jets to replace aging airline fleets in the developed world, and by the growth of low-cost carriers in emerging markets.
“We didn’t even have to drop down (production rates) during the 2008 recession,” Wyse said.
“When we look out, we don’t see a downturn at any time for several years, even beyond these rate increases,” she added. “Frankly, we could sell higher. We just think it’s disciplined to take this step right now.”
The prospect of improved cash flow didn’t immediately help Boeing stock, which has fallen more than $3 in three days. Shares ended Thursday down 50 cents at $124.17.
Dominic Gates: (206) 464-2963 or email@example.com