The largest plane maker Boeing (BA, Financial) has been enjoying an order boom in recent years. The rise in passenger traffic and boom in the aviation industry is increasing the demand for airplanes. This is getting reflected in Boeing’s and Airbus’ (EADSY, Financial) backlogs that are at record levels. Both the plane makers have a massive order book that will keep their production lines occupied for eight to nine years. However, industry experts predict orders to cool off in 2016. What does that mean for Boeing? Is it worrisome? Let’s analyze.
A look back
In the past five years Boeing has consistently recorded a book-to-bill ratio of more than 1. This ratio calculates the numbers of airplane orders to deliveries, and a ratio of more than 1 is desirable. Boeing has bagged more airplane orders than it delivered since 2010. The chart below shows how the difference between the annual deliveries and orders have widened over the last five years. In fact, Boeing has maintained a book-to-bill ratio of over 2 since 2012.
Data taken from Boeing
The current year doesn’t look as impressive, though a lot may happen in the remaining part of the year. Boeing has won gross orders for 426 aircraft and has delivered 439 so far through July. Analysts at East Coast aerospace consultancy believe that for 2015 the company would just be able to match orders with deliveries and register a book-to-bill ratio of around 1. Even Boeing executives have been guessing that orders in the current year should come in around the same number of planes that it will deliver.
As far as 2016 is concerned, orders could fall 25% to around 563. This suggests that the order flow would slow down. As such, Boeing would be recording lesser orders than it produces and delivers for the first time in years, 2009 being an exception. AirInsight Partner Ernie Arvai’s comment at an interview suggested that orders could “bounce back” in 2017 and help the ratio turn positive. Is this a warning signal for investors?
Cloudy future or clear skies?
While several investors may start worrying about Boeing’s prospects and financial stability, there’s no such “issues in the foreseeable future,” as Bob Uptagrafft of Pacific Northwest Aerospace Alliance says. Boeing has accumulated enough orders that will keep its factories running on capacity even if the order flow dips in the next few years.
The only point of consideration could be if it’s the appropriate time to plan a hike in production rate. As a case in point, Boeing is presently weighing an increase in production of its top selling plane, the narrow body 737 from its current production rate of 42 a month to 52 by 2018. This means Boeing expects to deliver 620 737s annually. The moot point is whether there’s enough demand to sustain the production increase, particularly as Airbus too plans to raise A320 production. Not only this, Boeing executives have also signaled that the rate might go to as much as 60 a month.
There’s a slowdown in several economies across the globe, which will have an impact on the orders. China, which is one of the key aviation markets, is witnessing economic slowdown. Also, it should be noted that major airlines have already placed their orders well in advance.
Should the American major hold back the production increase and wait for a more favorable occasion? Boeing needs to weigh several factors before deciding on augmenting production capacity. All in all, the company is progressing on the right track, and investors need not be apprehensive about the order flow. The solid backlog gives Boeing a good buffer to keep its production lines busy even if orders come in slower.
