The largest aircraft manufacturer Boeing (NYSE:BA) recently reported its first quarter 2014 earnings. The company registered record commercial backlog of $374 billion, which is expected to continue increasing with every quarter. One of the main drivers of the backlog is the Boeing 737 model which is the most popular among airlines.
Boeing’s 737 Order Book and Deliveries
In the last quarter, Boeing’s earnings from the commercial aviation got a good boost on the back of higher 737 deliveries. Boeing delivered 115 737s against 102 delivered in the year ago period. Deliveries should rise as the aerospace major has increased the production rate of the single-aisle aircraft to 42 a month from April. If the company consistently manufacturers 42 plane in the current quarter, it would deliver 126 737s pushing revenue even higher.
This is welcome news for company investors at a time when 737 backlog is growing. Increase in deliveries means higher revenue for the company. This would also help in widening profitability margins as the company would be able to allocate fixed costs with higher number of planes. But Boeing is not satisfied with this. As competition is heating up with European rival Airbus (EADSY), the American major is working hard to enhance its offerings. After witnessing hard time with the 787 Dreamliner technical snag, the Chicago-based aircraft maker took the simpler and more certain route of building a jet on a existing platform rather than making a new plane altogether.
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Re-engineering for Success
Boeing is upgrading the current generation 737 to build the 737-Max. Airbus is also working on the proven platform of its extremely successful single aisle A320 to make the A320-Neo.
Both these jets are receiving huge orders as they claim better comfort and more fuel economy. Airlines are spending a lot on aviation fuel, which make for more than one-third of the operating expenses. The 737-Max claims double digit (around 14%) fuel efficiency with reduced carbon emission over current generation of single aisle planes. So there’s no doubt why the 737-Max, which is scheduled to enter service in 2016, is getting huge attention and bagging massive orders.
Undelivered units under firm orders
Source: Boeing 2014 Q1 10Q
From the above chart we know that 74% of the firm backlog is that for the 737 model. Even in the current quarter the 737 family of jets continues to get orders from airline operators.
On May 14, the aircraft maker announced that it would deliver 50 737 planes to China-based low-cost carrier Jiuyuan Airlines. The comparatively new airline proposes to offer both international and domestic service to its passengers. The total order for 50 planes also comprises orders for the next generation 737 Max, although the number hasn’t been decided yet.
The 737 Max is available in three versions and would cost the airline operator between $85 million and $109.9 million per aircraft. Jiuyuan Airlines had revealed its intentions of placing orders for 26 jets in March, but was considering both Airbus A320 and Boeing 737 at that time. Ultimately Boeing 737 got the orders, and that too double the numbers that were claimed earlier.
Another airline operator, Libya Airlines is said to be in negotiation with regional aircraft maker Bombardier’s CSeries, but is also considering Boeing’s 737 Max as demand for air travel is soaring. Libya’s sister airline operator Afriqiyah Airways is holding talks with Boeing to place orders for the 737 Max as its time for the airline to replace its current fleet of Airbus A320. So there’s another potential order that the company might expect in the near future.
Single aisle jet should see steady demand in the next two decade as air traveling is becoming more and more popular across the world. Boeing predicts the size of single aisle market to grow phenomenally in the next 20 years. The company estimates demand for nearly 24,670 jets to come over the next two decades, where Asia Pacific would be the biggest market. This means that this period would be extremely crucial for the aircraft major, and could prove highly beneficial as it’s bringing the 737 Max. Given that this industry is a duopoly of Boeing and Airbus, the massive demand for this segment would bring big gains to each of them. Boeing should get ready and boost its production rate even more so that it can smoothly manage the backlog and take in further orders as demand soars.