Boeing says its 'robust' backlog will carry it through any 2013 downturn
The pressure for fuel-efficient jets has soaked up nearly all of 's production slots for the next 12-18 months, which may frustrate customers and cause a dip in orders next year, but CEO and Chairman James McNerney says that does not mean business will be slack.
“We still see some opportunities in the mid-teens for widebodies, but by and large the pressure [will be] down after this year,” says McNerney, although he notes the “robustness” of Boeing's backlog—3,924 aircraft as of June—gives it plenty of work.
As if to underscore that point, as McNerney spoke during a July 25 second-quarter earnings call, Boeing was announcing that Aeromexico plans to buy 90 737 MAXs and 10, a commitment with a book value of $11 billion, although the contract's true value may only be half that amount.
How well the global supply chain thatand Boeing share will hold up to their increasing pressure for higher production rates is subject to debate. Both manufacturers acknowledge they need to monitor their suppliers carefully.
Boeing faces production pressures in both its single-aisle and widebody lineups. Airbus has greater strength in itsprogram, less so in its widebodies. After remarkable sales last year, the A320NEO program has slowed in 2012, and Airbus chief salesman John Leahy predicts the market is passing through the peak of the current order bulge.
McNerney is generally more bullish because of the continuing scramble of airlines to retire older, fuel-hungry models. His 737 MAX re-engining program lags the NEO, although Boeing expects it to catch up.
Boeing's book-to-build ratio of orders and production rates this year is likely to be higher than 1:1, largely because of the MAX, but “next year it may come down.” He predicts the 2013 order/production ratio should be about 1:1 overall, “but it will still be a strong [order] year.” Next year's order rates are unlikely to match some that Boeing has recorded since it launched MAX last year, including 150 from launch customer, 100 from , 201 from Lion Air and 75 from Air Lease Corp. But the company's expectation of 5% average annual passenger growth over the next 20 years keeps McNerney's outlook bullish.
If the company's Renton factory near Seattle could produce an unlimited supply of the MAX, airlines would discontinue ordering the now-obsoleteseries in favor of the reengined aircraft, he says. But MAX production will be limited as the company transitions from the NG to the MAX, which is to enter service in 2017. Boeing is both increasing production in Renton—to 42 aircraft per month in 2014—and factoring in the MAX, which has new engines and some changes to its wing, fuselage and landing gear. It is to open a third final assembly line for MAX but expects to work through a transition phase. NG orders are unlikely to fall off significantly until MAX deliveries begin.
The commercial aircraft industry continues to outpace many others, despite economic gloom in Europe and softness in airline markets elsewhere. McNerney acknowledges a “fragile” world economy. Yet airlines' drive to improve their operating efficiencies is keeping cancellation rates low, although some customers are asking for later delivery dates.
Slightly more than half of the orders Boeing is seeing are for replacement aircraft, an unusually high ratio for an industry accustomed to fleet expansions. McNerney says airlines are generally eager to replace their older equipment with more aerodynamically efficient models whose engines require less fuel. “People view them as a quick-payback investment,” he says of the replacements.
In that regard, McNerney maintains that the NG series is not as disadvantaged as might be thought compared to the MAX. The older airplane still offers “dramatic improvements” in fuel burn over the 1980s and early 1990s-era jets it replaces. Against those, an NG offers a 15% fuel-burn advantage, just as the MAX does over the NG.
But there is price pressure on the NG now that the MAX is available. Chief Financial Officer Greg Smith acknowledges that Boeing has a “learning curve” underway on how to price its 737 lineup. He says some “introductory pricing” offers are being made, without being specific.
“I think we've got it well understood and we're going after it,” he says of customers' push for discounts. “I'm not as concerned about it as some of the folks I've seen published so far,” he adds, in a reference to Wall Street.
McNerney says the NG discounts are similar to what he's observed previously when obsolete models are replaced. “We're not going to change that,” he says. “So our issue is driving productivity to offset it.”
The company expects to meet its 2012 delivery target of 585-600 aircraft, although it was slightly below the halfway point at the end of June.
The 737 is now being produced at 35 per month and is to reach 38 per month early next year. The 787 is at 3.5 per month and due to hit 5 per month by year-end. The, Boeing's largest aircraft and one facing tepid demand, is holding steady at 2 per month. So far, all those rates are according to plan.
Delays in the Airbus-1000 development program have left Boeing's 777 in a near-monopoly position. “Early competition hasn't come true, so pricing is a little better than we assumed a year or two ago,” McNerney says. Production is inching up to 8.3 per month in 2013 from 7.7. With the A350 not pressing it, Boeing's product strategy leaders feel less pressure to rush a design of the upgrade models they are considering. The 777X is to enter service in 2019.
The ongoing question for Boeing and its supply chain is how well 787 production holds up. Boeing's delivery forecast calls for 70-85 787s and 747-8s to be delivered this year with numbers split about evenly. Deliveries in the first half were fairly even—11 787s and 13—but below the pace needed to achieve the year-end target. The slow pace reflects customer preferences rather than production issues, McNerney says. He noted that delayed accepting three 787s; the airline is working out financing with the Indian government.
The 787 deliveries will be split between aircraft undergoing so-called change incorporation work that has bedeviled the first 60 aircraft and aircraft flowing out of final assembly without need of post-production fill-ins. Production deficiencies are no longer affecting the program, although Smith says the company must keep a “close watch” on the issue because “that's where the risk is.”
McNerney says gearbox change-outs ofTrent 1000s have been completed on four of the five 787s that experienced problems at . The fifth is expected to be completed early this week; gearboxes of Trent-powered aircraft on the production line are also being swapped out. No schedule impact is anticipated.
Aft fuselage production issues in Charleston, S.C., are the 787's current “hot spot,” but McNerney says, “I don't think it's a showstopper.” Part shortages are down 50% from a year ago.
The Aeromexico commitment offers a window into how much airline managements are trying to take charge of fleets. CEO Andres Conesa Labastida says the purchase will move the Mexico City-based carrier from a fleet that is three-quarters leased to one two-thirds owned by the end of the decade.
The long-range 787s will replace Boeing 777-200s coming off lease by the end of the decade.won the 787 engine order for its -1B powerplants, piggybacking on GE's partnership with in the CFM partnership, which is the sole engine provider for the MAX series. Aeromexico is closing power-by-the-hour maintenance agreements for both engine types, says Conesa.
Aeromexico operates 737-700/800s and has an existing order for two 787-8s.
By maintaining a fleet that is two-thirds airline-owned and one-third leased, the airline will “have the flexibility to maintain a static fleet size of 110-120 aircraft,” Conesa says. He notes that the order does not mark a large increase in capacity and is meant to replace aircraft going off lease. But Mexico's strong economic growth prompted Aeromexico to boost capacity by 7% in the second quarter.