Boeing's Backlog Booms, but Is That a Good Thing?

When Boeing  (NYSE: BA  )  reported Q3 earnings last week, it was the headline numbers that got all the attention:

  • Revenue -- up 11% to $22.1 billion in the quarter
  • Profits -- up 12% to $1.51 per share
  • Operating cash flow -- up an astounding 76% year over year, to $2.8 billion

But beyond what Boeing accomplished last quarter, less attention was paid to the single factor that will most influence how the company performs in the quarters ahead: Boeing's "backlog" of work to be done and planes to be built.

Boeing's new 737 MAX ready for takeoff. Source: Boeing.

Records were made to be broken
According to Boeing, Q3 2013 marked its highest-ever backlog, with the company achieving $415 billion worth of orders received from its customers, still waiting to be filled (and converted into revenues). The bulk of this work resides in Boeing's commercial airplanes business, where customers have placed orders for some 4,800 airplanes, amounting to $345 billion in value, or 83% of the total backlog.

By far the biggest bottleneck in Boeing's production line is the company's uber-successful 737 line of regional jet aircraft. With more than 3,400 planes still on order, 737s account for 71% of the company's commercial backlog.

Nice as it is to know that it has all this business "in the bag", though, it does pose a problem for Boeing. At its current 38-planes-per-month rate of production, Boeing is churning out 737s at the rate of 1.7 planes per workday. By any objective measure, that's a fantastically fast pace of production and a feat of production wizardry. Yet it's still too slow.

At its current rate, Boeing would need 89.5 months -- seven-and-a-half years -- to build enough 737s to satisfy all the folks who want to buy them. And that's if it takes in no new orders at all. (In fact, Boeing took in 65 new 737 orders over just the last couple of weeks.)

Use it or lose it
Now, seven-and-a-half years is an awful lot of time to expect customers to wait around for their planes. It gives these customers a lot of time to develop buyer's remorse and change their minds about the orders they've placed. Worse, it gives Boeing's competitors -- not just Airbus  (NASDAQOTH: EADSY  )  but also up-and-coming regional airplane producers such as Bombardier  (NASDAQOTH: BDRAF  ) , Russia's Superjet, Japan's Mitsubishi Heavy, and China's AVIC -- time to poach clients and steal away orders. Indeed, competition from these rivals may have contributed to the fact that over the past 10 months, Boeing lost 131 of its 737 orders to customer cancellation -- more than 14% of orders taken in during the period.

So what's the solution? Clearly, Boeing needs to build planes faster and get these orders filled before they disappear. And, in fact, it's been doing just that. Check out the chart below, which shows how Boeing has announced multiple accelerations in its pace of 737 production over the past few years:

This week, Boeing announced its most recent production rate increase: a plan to up 737 production to 47 planes per month, or about 24% faster than its current pace. Why? Former Boeing Commercial Airplanes President Jim Albaugh went on record a couple years ago, warning that the seven-year long backlog on Boeing's 737 lineup was simply "too big" and needed to be shortened. Instead, the backlog has lengthened by six months.

Foolish takeaway
As "problems" go, Boeing's 737 salesforce being too good at their job selling planes is one of the nicer difficulties the company could have. Nonetheless, the fact remains that Boeing today has even more backlog to work through than it did when Albaugh warned of the too-big backlog problem... two years ago.

The 19-month break in announced production ramps, shown in that chart up above, illustrates the problem quite nicely, I think. For too long, Boeing has "run up the score" on its backlog number, without making the investments in production capacity necessary to ensure it can actually build all the planes it has been selling.

Management's move -- finally -- to address the problem by accelerating production is the right move to make. The only question is whether it will come soon enough to get the backlog problem in hand before even more customers decide to step out of line and take their business elsewhere.

It's time to start investing
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  • Report this Comment On November 03, 2013, at 2:16 PM, snapcap wrote:

    A lot of the 737 buyers bought delivery positions based on their scheduled growth and fleet replacement needs. If you buy a 737 slot today, you know that it will be 7+ years before you get your merchandise. Incidentally, some of those delivery slots were speculative purchases and will be resold at a profit at some point in the future. Unless a competitor can deliver a better plane in less time, Boeings order book is secure.

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