Why Boeing’s 787 Is the Wrong Plane to Watch

If you knew nothing else about Boeing (NYSE: BA  )  or aviation, you'd probably still recall the 787 Dreamliner, thanks to the many headlines it appeared in this year. Despite grounded 787 airplanes, battery issues, budget overruns, and profit-sapping production delays, the 787 will be a great source of profit in the future. But for now, the 787's struggles will make Boeing's 737 its key to keep surging past quarterly earnings estimates.

Unfortunately, Boeing's rival Airbus brought its own next-generation single-aisle plane to the market first, and controls a significant share early on. Can Boeing and its 737 catch up?

Fuel costs
One of the biggest selling points for Boeing's single-aisle 737 MAX is its fuel efficiency. As you can see below, the cost of fuel has doubled over the last decade as a percentage of airline costs. 


Graph by author. Information from Boeing's 2013-2032 outlook presentation.

When compared to today's most fuel-efficient airplanes, a fleet of 100 737 MAX jets will emit 286,000 fewer tons of CO2 and save almost 200 million pounds of fuel per year. According to Boeing, that translates into $100 million in cost savings. 

Future growth
Boeing recently increased its 20-year forecast to predict demand for 35,280 new airplanes valued at $4.8 trillion. More telling, however, is where the specific aircraft growth will take place. 

Graph by author. Information from Boeing's 2013-2032 outlook presentation.

Almost 70% of new deliveries will be single-aisle airplanes -- growth that Boeing hopes to capture with its fuel-efficient 737 MAX. The value of this new single-aisle growth is estimated to reach nearly $2.3 trillion over the next 20 years, and it's even more important when you consider the 787 Dreamliner's temporary struggles to maintain profitability.

In addition to that growth, Boeing's decision to reengine the 737 airplane, rather than develop a new plane from scratch, saved the company about $15 billion, enabling strong cash flow from 737 MAX sales. That will add into Boeing's already improving free cash flow.


Graph by author. Information credit: Morningstar.com

What to keep an eye on
The 737 is already the company's best-selling jet, and Boeing's turning out 38 aircraft per month. Boeing is considering strategies to bump that production up to 42 per month, since management expects a few hundred more orders for its 737 MAX to file in over the next year. The improved production should help juice margins and offset some of the 787's initial margin weakness.

One issue facing Boeing is that its main competitor, Airbus, was the first to market with its own new single-aisle jet, the A320neo. Thanks to its first mover position, Boeing's rival has racked up sales and taken nearly 60% of early orders, according to Morningstar

Fortunately for investors, Boeing has an enormous backlog of orders worth $410 billion, which gives it a secure revenue stream while it tries to catch the rival A320neo. The 737 family comprises almost two-thirds of unfilled orders, which that should provide plenty of time for the company to make a smooth transition to the 737 MAX -- which boasts an 8% fuel-burn advantage over the A320neo -- and begin to take back market share. 

This race for single-aisle supremacy will be key for investors to watch going forward, since it represents immense future growth in the global airline fleets. If Boeing can take the sales lead back from rival Airbus, the company will be an even stronger investment going forward.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2013, at 7:42 PM, SOBEflyGuy wrote:

    Boeing after absorbing McDonnell Douglas, cornering Lockheed (Lockheed-Martin) Convair (General Dynamics) out of commercial aviation manufacturing finds itself inept and incompetent to deliver a global product.

    AIRBUS with the A380 A350x are giving them a run for their money with the ill fated B787 and the dated B777. When Concorde went out of service there was no attempt to tap on that marketshare they neglected back in the late 1960's when they abandon the SST project that Aerospatiale Concorde with limited support was able to deliver.

    Boeing needs to get back into innovation and taking commercial flying to the next level, not getting by if they're going to survive in the industry!

  • Report this Comment On August 30, 2013, at 9:46 PM, Cuencanolenny wrote:

    The Concorde never made a dime in profit, every flight was heavily subsidized. The SST was dropped for two reasons, the revision to sound barrier over the USA, and that it wouldn't make any money for the customers. Consequently the effort was put behind the 747 which has been a success. The A380 will take a very long time to make a profit, if ever. Boeing's decision not to enter that market was sound, there simply isn't room for two of these behemoths and the cost is staggering to develop. The decision to outsource engineering and fabrication of the 787 was a major mistake, of that there is no question and that is a management mistake. But most importantly Douglas and Lockheed went out of business because no one bought their airplanes. With regards to "absorbing" McDonnell Douglas you are wrong. Boeing was cash strapped, McDonnell was swimming in cash and had no future for its aircraft having lost bids on major new programs, several of which have gone way over budget and/or were unbuildable designs which is what McDonnell always offered. At any rate, McDonnell bought Boeing and you only have to look at the stockholders and managers to see that. This is the change that has hurt Boeing, they should have left them alone as they were doing a fine job before and have been saddled with poor management philosophy since then.

  • Report this Comment On August 30, 2013, at 10:48 PM, Pacificox12 wrote:

    While Airbus has certainly made up huge amounts of ground in the commercial aviation field, throwing an A320 up against a 737, is like coming to a gunfight with a fork. No way financially, safety, history, easy of flight, landings and takeoffs Airbus has a chance in this market. The 737 fuselage is largely derived from the DC3, 80 years of flight properties second to none. The 737 may be the most complete and perfect design of all time, and smartly Boeing just keeps this gem at the front of the class... Sorry Airbus, stick with the widebody war, when you hit this market the 737 cleans your clock. Has for 50 years

  • Report this Comment On August 31, 2013, at 3:13 AM, RIATdog wrote:

    @Pacificox12

    Unfortunately, with just 40% market share in new-gen sales, the 737 is the one getting its clock cleaned.

  • Report this Comment On August 31, 2013, at 3:36 AM, SeniorMoment wrote:

    The Boeing 737 is derived from the DC3?

    Wow.

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