Can Boeing Make Enough Planes to Meet Demand?

We've been breaking down Wednesday's earnings report from Boeing (NYSE: BA  ) all week, after the aeronautics company put in a stellar quarter that beat Wall Street's expectations for sales and earnings as well as raising revenue guidance for the year. So far, we've looked at Boeing's pivot away from defense as well as its battle with development costs. Today, let's examine Boeing's initiative to meet consumer demand by ramping up production capacity at its assembly lines.

Boeing already has more orders than it can fill. Despite a 17% increase in order delivery compared with 2011, Boeing's order backlog increased in the third quarter from $374 billion to $378 billion. That's because while Boeing appears to be on track to hit its increased production targets, new orders for planes are growing even faster.

First, Boeing deserves credit for executing strongly on its planned production ramp-up. Despite some weakness in producing 747-8s, management advised that production increases for the 737 and 777 remain on track. Particularly commendable, Boeing appears ahead of schedule on its objective to increase 787 production from 3.5 per month last quarter to 10 per month by the end of 2013. So far in 2012, 28 Dreamliners have been delivered, five of them in the past month alone, and the third quarter also saw the first Dreamliner from Boeing's newly built South Carolina assembly plant delivered, an important milestone.

What investors didn't hear was any indication that production quotas would be raised again on the back of this strong performance. McNerney noted that "we did the easier-to-do airplanes first and now we're moving into some airplanes that require a little more work," indicating that capacity increases may top out over the next few years as the company begins to tackle the 787-9 variant of the Dreamliner, which is still in the engineering phase. If the Dreamliner is stuck at the rate of 10 per month after 2013, it would take Boeing until 2020 just to deliver the planes currently on order, never mind fulfilling any additional orders over the next decade.

At other production lines, Boeing looks much more stable. The current backlog for the 737, Boeing's most popular plane, will take the company less than two years to work through at current production levels. However, while the 838 orders for Dreamliners make up only about a fifth of Boeing's 4,100 order backlog, because of their large sticker price the 787s account for more than 60% of the total value of the backlog. With smaller competitors such as Embraer (NYSE: ERJ  ) , Bombardier, COMAC, UAC, and Mitsubishi Aircraft edging in on the 100- to 200-seat market the 737 serves, Boeing's future growth opportunity relies strongly on the 787 and other larger, technologically advanced planes that it cannot yet produce quickly enough to meet customer needs.

Boeing put in a strong quarter, and a faster delivery timetable is all to the good. However, to realize fully the $4.5 trillion market opportunity Boeing sees over the next two decades, it's simply not enough to execute well on the relatively modest production ramp-up that management has indicated will be in place into 2014.

Boeing has noted before that production could accelerate rapidly in 2015 after undergoing a "learning curve," but the company still has some daunting design challenges ahead of it, including the 787-9, a redesign of the 777, and a potential 787-10 that the company has called a question of "when, not if." Lessons learned during the production of the 787-8 will have to be applicable for these other airframes if Boeing is actually going to be able to meet customer requirements on a cash-positive basis over the next decade.

Boeing's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial minds have collaborated to provide investors with the key, must know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.

Fool contributor Daniel Ferry has no positions in the stocks mentioned above. The Motley Fool owns shares of Embraer. Motley Fool newsletter services recommend Embraer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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