The American aerospace behemoth Boeing (BA, Financial) announced its intention to increase the production of the 787 Dreamliner from its current 12 per month to 14 per month starting in 2019 as revealed by CEO Dennis Muilenburg.
The 787 production is evenly divided between the two plants at Everett, Washington, and North Charleston, South Carolina, which means seven Dreamliners will be produced at each assembly unit from 2019.
In the past, the company’s executives had planned to deliver 16 787s from a single assembly plant in Everett. Due to some technical problems, 787 production could not be carried out as desired by the executives, and production came down to 12 per month in 2008 and 2009. In 2014, the company could see the possibility of increasing 787 productions to 14 per month to increase production efficiency which would help the company offset a huge $18 billion in deferred production costs accumulated through 2015.
Increasing 787 productions
The production increase does make sense. Boeing has a robust Dreamliner backlog of 689 aircraft as of August which is equivalent to nearly five years' order at the current production rate. Considering the strong demand for the airplane, the company expects to continue bagging more orders from airline operators, thus increasing the backlog further. A healthy backlog for the company gives a good revenue visibility for the future.
Besides increasing the production rate, the company must try and win as many orders as it can so as to have a healthy book-bill ratio. If the book-bill ratio is less than 1, it implies that the company has delivered more aircraft than the number of net orders it got. According to Boeing’s website, the company delivered 89 Dreamliners through August whereas it won orders for 78 Dreamliners through Sept. 12. As such, Boeing must focus on winning sufficient orders – i.e., at least one order for every plane it delivers – or increasing the production rate would not be feasible in the long term.
Company senses growth potential for 787
Muilenberg remains optimistic regarding the growth potential of the 787 Dreamliner. He expects the demand to expand and grow in the near future. Having won only 42 787 orders in 2014, the company bounced back in 2015 and 2016 where it won 99 and 80 orders for the 787 Dreamliner. This year, the company has won 78 orders (excluding the tentative deals made by Malaysia Airlines to sell eight Dreamliners) with more than three months remaining.
Last word
The news regarding boosting the 787 Dreamliner’s production rate comes at a time when the Chicago-headquartered company is trimming the production rate of the 777 in Everett. The output of the program has reduced to five per month from 8.3 planes a year ago. The production rate for the 777 is expected to shrink further to 3.5 per month as the airplane maker is slowing the line to prepare for the 777X flight test. Ramping up the production of the Dreamliner will support the company’s cash flows, which is crucial since Boeing’s cash generation from 777 will be falling until the 777X hits the runways. What remains to be seen is if Boeing is able to bag enough orders to sustain the augmented production rate.
Disclosure: I do not hold any position in the stock mentioned in this article.
