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How Boeing Plans To Respond To Its Grand 737 Backlog

August 15, 2014 | About:
Quick Pen

Quick Pen

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The Boeing Company (BA) is on a roll with total contractual backlog of $426,046 by the end of the second quarter of 2014. The humongous backlog is owing to the rising demand for commercial aircraft. The defense segment of the American aerospace major is facing difficult time as the Federal has curbed its discretionary spending, which has had an impact on the defense budget. However, the commercial plane segment is helping the company overcome and more than set off for the lull in the defense segment. Of all its commercial jets, the 737 contributes the maximum towards the backlog, as seen in the chart below.


Undelivered units of respective aircraft under firm orders, Data taken from Boeing 10Q Q2 2014

More than 75% of the total firm order is for the company’s top-selling jet 737. Boeing has been receiving massive orders for the aircraft from airlines all over the world. While this is a good development for the company, the Chicago-based mammoth also needs to ensure that such huge orders should to be delivered on time. It’s only then that the company will maximize benefits creating solid cash flow and increasing returns to investors.

So how can the company do that? Boeing needs to ascertain an optimum level of production rate, which is neither too high nor too low. If the production rate is higher than required, it means that Boeing would produce the plane reasonably ahead of its scheduled delivery, creating inventory that calls for additional unwanted cost. On the other hand, if the production rate is low, then the company will not be able to serve its customers on time, thus leading to delay in delivery. Both situations are undesirable.

Increasing production rate
Boeing currently produces 737s at the rate of 42 a month. The next production boost was supposed to happen in 2017, when the production rate is planned to go up to 47 a month. Earlier during the year, the company’s top executives said the company was also considering an additional production boost to 52 per month, sometime in 2018-2019.

However, much ahead of the decided date, on Thursday a senior executive of the company said that Boeing’s considering announcing this fall its plan to further augment the production rate of 737. Several 737 clients have asked the company to increase the production rate of the single-aisle plane on a number of occasions. Finally the company is working to address the same in the next couple of months, says CFO Greg Smith.

Boeing’s been very active in increasing its production whenever the need was felt. In an investor conference held by the company, Smith said that in the past four years Boeing has hiked its production rate for different aircraft programs up to 17 times. This isn’t done. The jetmaker plans to announce three more hikes in the production rate in the near future – this includes the one for 737.

A boost
Raising the production rate would enable the company to deliver the aircraft to airlines and lease companies before the scheduled delivery slots. In addition, it would also increase Boeing’s ability to take further orders for the narrow body and dispatch them within the slated time. Finally, it would also help the company pull up the consolidated sales figure and bridge its gap with Airbus’ (EADSY) single isle A320.

Parting words
The demand for single-aisle planes is expected to grow at a robust rate, and both Boeing and Airbus shall be big beneficiaries. If Boeing ramps up the production rate of its popular jet, it could assist the company in clearing its epic backlog smoothly. Let’s stay tuned to watch how the lead commercial plane maker builds its strategy to tackle the ever growing backlog.

About the author:

Quick Pen
A seasonal writer with a Management Degree in Finance and interests in automotive, technology, telecommunication and aerospace sectors.

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Comments

garrygr
Garrygr - 3 months ago

The firm order chart is misleading, as far as financials go, which is the bottom line for any for profit company. For example, the 777 and 787 programs are much more relavent to Boeing's bottom line than one might expect from the firm orders chart. How about putting up a chart of the revenue each aircraft program delivers for Boeing?

Quick Pen
Quick Pen - 3 months ago

Hi Garrygr, I agree with you that wide-body aircraft have good profit margins, but that cannot undermine the importance of the 737s at all. I am sure you must be aware that the 787 Dreamliner program isn't fetching profits for the company at this point of time. In fact the deferred cost of the project is estimated to escalate to $25 billion by 2015. So the 787 project will take good amount of time to become profitable, or even break even. It's only the solid deliveries of the 737 (and also the 777) which is helping Boeing in its top line and bottom line growth. It was only in the second quarter of 2014 that Boeing delivered 30 Dreamliners - definately positive news for the company. But in all this what remains to be seen is if Boeing can continue to deliver 30 Dreamliners quarter after quarter.

Through my chart above, all I wanted to convey is the weightage of 737 undelivered order on the total backlog of the company and justify that it's a good idea to ramp up production. Also, if you follow Boeing, you must be aware that the company does not bifurcate its revenue on the basis of commerical aircraft program. It gives a consolidated revenue figure from its commercial aircraft segment. Giving you Boeing's 2013 10K link below:

http://www.sec.gov/Archives/edgar/data/12927/000001292714000004/a201312dec3110k.htm

I hope you are satisfied with my explanation. Thanks for your feedback.

garrygr
Garrygr - 3 months ago

Thanks, Quick Pen, appreciate your taking the time to respond. I'm painfully aware of the 787 problems, being a long time BA investor! ;-) Profits by program, I imagine, would be hard to figure. However, I've seen estimates for the actual cost of Boeing and Airbus models, for example for the Farnbourogh airshow orders, Avitas estimated the value (future revenue) for the orders. So I was assumming one could ascertain the revenue from the delivery numbers? Profits, not so much. ;-)

Quick Pen
Quick Pen - 3 months ago

Ascertaining the revenue from the delivery mix is difficult because Boeing does not provide the the value for which a particular aircraft has been sold. Though we do have the list price of every model that the company sells (given in the company website), but there are discounts given by both Airbus and Boeing, so we do not know the exact price for which the sale of a given aircraft takes place.

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