Boeing (BA) Q3 2023 Earnings Call Transcript

Boeing (BA 0.25%)
Q3 2023 Earnings Call
Oct 25, 2023, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's third quarter 2023 earnings conference call. Today's call is being recorded. The management discussion and slide presentation, plus the analysts' question-and-answer session are being broadcast live over the internet.

[Operator instructions] At this time, for opening remarks and introductions, I'm turning the conference over to Mr. Matt Welch, vice president of investor relations for Boeing Company. Mr. Welch, please go ahead.

Matt Welch -- Vice President, Investor Relations

Thank you and good morning. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's president and chief executive officer; and Brian West, Boeing's executive vice president and chief financial officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com.

As always, detailed financial information is included in today's press release. Furthermore, projections, estimates, and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Dave Calhoun -- President and Chief Executive Officer

Thank you, Matt, and thanks to all for joining us this morning. Let me start with a comment on the conflict in Israel in Gaza. We were saddened to see the horrific attacks on Israel and the escalating conflict in the region that is resulting in a significant humanitarian emergency. We will continue to monitor the situation.

We will focus on the safety of our employees, and we will aid those in need. As always, we'll follow the lead of the U.S. government. We will coordinate closely with government agencies, customers, and suppliers, always with safety, security, and wellbeing as our top priority.

Now, let me turn to the quarter. As you know, we ran into a few challenges over the last several months. But we've demonstrated that we know how to overcome obstacles, and we will continue to do just that. We knew 2023 would be a bumpy ride.

We have more work to do. But overall, we're making progress in our recovery, and we are on track to meet the financial goals we shared for this year and for the '25, '26 time frame, a time frame I refer to as stability. As you know, free cash flow has been our primary financial metric through this recovery. And based on our performance year to date, we still plan to be in the guidance range for the year, as well as the $10 billion target by 2025 and 2026.

This is a complex, long-cycle business, and driving stability takes time, especially as an entire industry works its way back from the impact of a global pandemic. We expect challenges to come our way. And when they do, we are transparent. We take action, and we move forward.

So, month to month and quarter to quarter, it can be tough to predict. But we're focused on the long term, and we're taking the tough actions now to ensure that the long-term future is strong. So, with that, I'll highlight a few key updates around the business. Boeing Commercial, BCA.

In commercial, demand continues to be incredibly robust. We booked about 400 net orders in the quarter, including 150 737 MAX 10s for Ryanair, 50 787s for United Airlines, and 39 787s for Saudi Arabian Airlines. With demand strong, our focus remains on delivering airplanes. We are seeing increased stability and quality performance within our own factories.

But we're working to get the supply chain caught up to the same standards. Our production system is poised for steady and efficient increases, but we won't push the system too fast, and we'll ensure the supply base is in lockstep with us. On the 737, we're moving through rework on the most recent nonconformance in the aft pressure bulkhead. That work slowed production and deliveries down in the course of the quarter.

And given our year-to-date total, we now expect 737 deliveries for the year to be in this 375 to 400 range. While a setback, we'll regain our momentum as we progress through the issue. We are keeping our suppliers hot according to the master schedule. We plan to complete the production transition to 38 per month by the end of the year and still plan to reach the key rate of 50 per month by that '25 and '26 time frame.

Important to note, with respect to our supply chain, delivery shortfalls have been driven by nonconformances, not actual supply chain constraints. On the 787, the program is demonstrating improved stability. We're now transitioning production from four to five per month and expect to meet our delivery range of 70 to 80 for the year. And longer term, we're on track for the rate step, up to 10 per month by '25 and '26.

To ensure our broader recovery and return to more normal margins, the key focus continues to be on liquidating our 787 and 737 inventory so that we can eliminate those shadow factories and focus our resources on the production floor, all of our resources. Nonconformance costs are exponentially higher on all of those finished airplanes. We still plan to deliver most, if not all of the inventory by the end of next year, which will set us on a strong path for '25 and '26. With respect to China, we are encouraged by recent signs of progress and continue to work closely with our customers on the timing of returning to delivery.

As I mentioned, supply chain performance will be a key enabler. As Spirit Aerospace Systems brings in new leadership, we're looking forward to working with Pat. Pat Shanahan is known by the Boeing Company. We have great respect for his abilities on the shop floor, and we're pleased to have recently established a mutually beneficial agreement that will enhance stability of our production system and help us deliver on our customer commitments.

A true win-win. Lastly, on the development side, we're progressing across our commercial programs, and our timelines are unchanged on the 737-7 and the 737-10 and the 777X and 777-8 freighter. A reminder, as always, the FAA will ultimately control the timing. Boeing Defense System, BDS.

In defense and space, we still have more work to improve operating performance. Results this quarter were impacted by higher estimated costs on the VC-25B program. We are maturing through this build process, incorporating engineering changes to better support the installation process, and we resolved important supplier negotiations over the course of the quarter. I'll note that none of these items will impact the performance and capability of the end product.

The increased estimates reflect the process by which we build the airplanes. And in a fixed-priced environment, any unplanned hurdles can introduce unrecoverable costs. At the end of the day, we have two airplanes to build. We're getting past these hurdles and are committed to delivering two exceptional airplanes for our customers.

Separately, as you saw, we are also expecting higher costs on a satellite program as we build out the constellation and meet our light cycle commitments for our customer. We're working on real innovation and advanced capabilities in this space and see real potential market as we deliver against this commitment. More broadly, across BDS, we're stabilizing operations and taking comprehensive actions to improve performance, including lean initiatives, contracting disciplines, factory improvements, engineering investments, and more. We're seeing some early signs of progress, but financial improvement at BDS' lower volumes takes time.

Recovery in BDS is slower than we'd like, slower than I'd like, but we're confident in the future, and our path to normalizing BDS margin performance by that '25 and '26 time frame is intact. The confidence is due in part to key milestones we're starting to hit and the strong demand we're seeing. For example, we delivered the first T-7A to the U.S. Air Force this quarter.

We also captured a key award from the U.S. Army for 21 Apache helicopters. Additionally, we continue to invest and position ourselves for significant opportunities in proprietary programs. The backlog at BDS is $58 billion, and nearly 30 percent of that is outside the United States.

We're proud of the role our products play in protecting global security and national defense. The demand is strong, we're confident in the business, and we will continue to improve operational performance to more normalized levels. Boeing Global Services, BGS. In global services, the team had another strong quarter, both on the commercial and the government side, with improved revenue and earnings relative to the third quarter of 2022.

The financials were again driven by strong operating performance and the team's ability to hit key milestones and capture new business. In the quarter, BGS delivered the 150th 737-800 Boeing-converted freighter, received an award from the U.S. Navy for PA trainer upgrade, and signed a digital maintenance agreement with multiple airlines. Our services team represents Boeing with our customers nearly every minute of every day.

The work they do to keep military and commercial fleets flying is best in class, and we're proud of the performance that they're delivering. A step-back with respect to the market outlook. Lookin across all three business units, demand for our products and services continues to be incredibly strong. Our backlog is at 469 billion, including over 5,100 commercial airplanes.

Over the next 10 years, the value of the markets we serve across commercial, defense, space, and services is estimated at $10.7 trillion, according to our most recent Boeing market outlook. Our products deliver exceptional capability in strong and growing markets, and our portfolio is well aligned with our customers' needs. The demand is there to support our recovery. It is on us to perform, and we will remain disciplined and patient in the process.

Brian, I'll turn it over to you.

Brian West -- Executive Vice President, Chief Financial Officer

Thanks, Dave, and good morning, everyone. Let's go to the next slide and start with total company financial performance. Third quarter revenue was $18.1 billion. That's up 13% year over year.

Growth was driven by higher commercial volume, primarily on higher 787 deliveries. Core operating margin in the quarter was minus 6%, and the core loss per share was $3.26. Margins and EPS were negatively impacted by unfavorable defense performance, which I'll cover in a moment, lower 737 deliveries that were in line with expectations set last month, and expected abnormal costs and period expenses. Free cash flow was a usage of $310 million in the quarter.

This reflects the lower 737 deliveries and in line with our expectations. With that, I'll turn to the next page and cover Boeing commercial airplanes. BCA booked 398 net orders in the quarter, including 150 MAX 10s for Ryanair, 50 787s for United, and 39 787s for Saudi Arabian Airlines. BCA now has over 5,100 airplanes in the backlog valued at $392 billion.

BCA delivered 105 airplanes in the quarter, and revenue was $7.9 billion. That's up 25% year over year, driven by the higher 787 deliveries. Operating margin was minus 8.6%. We saw the impact of the lower 737 deliveries, as well as expected abnormal costs and period expenses, including higher R&D spending primarily on the 777X investment.

Now, we'll give a little more color on the key programs. On the 737, we delivered 70 airplanes in the quarter, reflecting the impact of the recent supplier to select nonconformance. Since our early September update, additional areas of the aft pressure bulkhead were identified that require further inspection and rework, which you likely read about. This additional scope impacts units that had already gone through the initial rework, and it will take us more time to stabilize production and deliveries.

We've bounded the issue, understand the rework steps required, and booked a nonmaterial financial impact in the quarter. Considering these latest facts, we expect October deliveries to be in line with September and now expect to deliver between 375 and 400 airplanes for the year. Performance ultimately will be dictated by the pace of the fuselage recovery. The quarter ended with approximately 250 MAX airplanes in inventory, 85 of which are being held for customers in China.

We still expect most of the MAX inventory aircraft to be delivered by the end of 2024 but more are likely to slip into 2025 tied to the fuselage recovery. To support stability, suppliers are continuing with planned rate increases, and we're selectively managing inventory levels on certain parts where prudent. We expect to complete the 737 transition to 38 per month by year-end, and we're maintaining plans increased to 50 per month in the '25, '26 time frame. On the 787 program, we had 19 deliveries in the quarter and 50 year to date.

We still expect 70 to 80 deliveries this year. We started transitioning production to five per month in October and still plan to reach 10 per month in the '25, '26 time frame. We ended the quarter with 75 airplanes in inventory. Rework is progressing nicely, and we still expect most to be delivered by the end of 2024.

We booked 244 million of abnormal costs in line with expectations. The total estimate is now $3 billion, up a bit, and we still expect to be largely done by year-end. Moving to the 777X program, efforts are ongoing. The program timeline is unchanged, and we plan to resume production later this year.

We booked $180 million of abnormal cost in the quarter, in line with expectations. The total estimate is unchanged at $1 billion, and we expect to be done this quarter. Importantly, as Dave mentioned, we recently reached an agreement with Spirit on commercial terms associated with the 737 and 787 programs. We believe this agreement is a win-win for both companies and directly promotes our goal to drive stability and support our airline customers.

Moving on to the next page, Boeing Defense and Space. BDS booked $6 billion in orders during the quarter, and the backlog now stands at $58 billion. Revenue was $5.5 billion, essentially flat year over year, and we delivered 28 aircraft. Operating margin was minus 16.9% in the quarter.

In early September, we indicated that margins would be around minus 9%, the driver being a $482 million charge on the VC-25B fixed-price development program due to higher estimated manufacturing costs related to engineering changes, labor instability, and the resolution of supplier negotiations. As we closed the books at quarter-end, we saw another eight points of margin erosion driven by, first, a $315 million loss tied to customer considerations and higher estimated costs to deliver a highly innovative satellite constellation contract that we signed several years ago. And second, we had smaller, less material cost pressures across a couple programs, totaling $136 million, primarily driven by the MQ-25 program. These are disappointing results in the quarter and year to date.

This performance is below our expectations, and we acknowledge that we aren't as far along in this recovery as we expected to be at this stage. I'd like to point out that the team is executing a game plan to get BDS back to the high single digit margins by the '25, '26 time frame as you can see on the right-hand side of the slide. We're driving lean manufacturing, program management rigor, and cost productivity consistently across the division. We've invested in new training programs to accelerate performance on the factory floor, and we've deployed resources at our suppliers to support their recovery.

Perhaps, most importantly, we instituted much tighter underwriting standards. As you know, part of the challenge we're dealing with are legacy contracts that we need to get out from under. Rest assured, we haven't signed any fixed-price development contracts nor intend to. These moves are all fundamental to accelerating the recovery by the '25, '26 time frame.

We have detailed metrics and milestones to evaluate our performance and progress across the three areas that we've previously highlighted. First, we have a solid core business, representing about 60% of our revenue that performs in the mid to high single-digit margin range. The demand for these products is strong. In particular, volume for missile and weapons products, as well as the Apache, are very robust, given the current threat environment.

And we need to keep executing. competing, and growing these offerings. Then, we have the 25% of the portfolio representing specific fighter and satellite programs that have negatively impacted margins the past several quarters. In these areas, we took on fixed-price production contracts in a pre-pandemic environment with real technical innovation that we're working our way through.

We fully expect to see recovery in these areas as we improve execution, deliver next-generation capabilities, enroll into new contracts with stronger underwriting disciplines that more accurately reflect the prevailing economic conditions. We expect return to the strong performance levels that we've demonstrated historically on these programs as we move into the '25, '26 time frame. Lastly, we have our large fixed-price development programs that represent the remaining 15% of the portfolio, and we continue to be focused on maturing and retiring these risks. Specifically, in the KC-46A program, we're stabilized in the production system.

We've seen signs of progress and improved productivity. And as of this month, we have delivered 77 tankers to the customer. For the VC-25B, we're now maturing through the build process, and the key milestones ahead are power-on and first flight, both of which will essentially be behind us as we move through the '25, '26 time frame and represent a significant derisking of the program. For commercial crew, while it has been a long road, we're preparing to execute a successful crew flight test next year and then fulfill operational launch commitments, all of which will be completed as we exit '25, '26.

On T-7A, we just delivered the first aircraft to the Air Force this quarter and have begun critical phases of the flight test program. On MQ-25, we'll get through key build and flight test milestones and transition out of the development phase as we move through the '25, '26 time frame. We remain very confident in the T7-A and MQ-25 investments that will deliver innovative performance to the customer with a strong, long-term demand profile. So, for BDS, this recovery is challenging at the moment, but we believe the actions we're taking will begin to gain traction and then accelerate.

Fast forward to that '25, '26 time frame, fixed-price development contracts will be substantially derisked. We'll have a healthy order book underwritten with much better economics and underwriting disciplines and resilient employee base and supply chain that's executing at a much higher level. Moving on to the next slide, Boeing Global Services. BGS had another strong quarter.

They received $5 billion in orders during the quarter, and the backlog sits at $18 billion. Revenue was $4.8 billion, up 9% year over year, primarily on favorable commercial volume and mix. Operating margins were a strong 16.3%, in line with our expectations. Importantly, our commercial and government businesses continue to deliver double-digit margins.

With that, we'll turn to the next page and cover cash and debt. On cash marketable securities, we ended the quarter at $13.4 billion. And on debt, the balance remained flat at $52.3 billion. We had access to $10 billion over evolving credit facilities at the end of the quarter, all of which was undrawn.

Our liquidity position is strong. The investment grade credit rating continues to be a priority, and we're deploying capital in line with the priorities that we've shared, invest in the business and pay down debt through strong cashflow generation. And flipping to the last page on our outlook. The overall financial outlook for 2023 is unchanged from what we previously shared, including $35 billion of free cashflow generation, although the updated 737 deliveries now point more toward the low end of the free cashflow range.

We also expect R&D to come in slightly above our original guide tied to the higher 777X investments that I touched on earlier. Stepping back to address the state of the market, commercial demand remains strong across our key programs and services. Global passenger traffic was up nearly 30% year on year in August and is at 96% of pre-pandemic levels, 109% domestic and 89% international. Cargo remains healthy, and August was the first month with annual cargo growth since early 2022.

Defense demand is also robust, and the FY '24 budget continues to be in line with our expectations. Our portfolio and capabilities are well positioned to support the needs of the nation and of our allies. With demand strong, we still find ourselves in a supply constraint environment. And our focus continues to be on execution, both within our factories and the supply chain as we steadily increase production.

We're squarely focused on a meaningful step-up in operating performance, including deliveries, revenue, margins, and cash flow, all of which we expect to improve as we finish out the year. On 4Q specifically, we expect BCA margins to improve sequentially but remain negative, more in line with 2Q. And we're still not anticipating much in terms of BDS profitability. On the tax expense side, we still expect full year tax expense of approximately $250 million.

As we look into early 2024, we have seen a number of key milestones that give us confidence in building momentum across the business. The 737 factory should be recovered from the current nonconformance and will be stabilizing production at 38 per month with step-ups as we move to 50 per month by '25, '26. 787 will be stabilized in production at five per month with a focus on stepping up to 10 per month by '25, '26. We'll be further along in our inventory unwind, with better line of sight to the elimination of the 737 and 787 dual factories.

Keep in mind that correcting nonconformances gets exponentially easier when this inventory has been delivered to our customers. BDS will be further along in recovery, as I described earlier. BGS will still be generating mid-teen margins, executing on its high cash conversion, capital-efficient, disciplined growth model. And all of this will underwrite our continued strong liquidity position and enable us to further deliver the balance sheet early next year.

With that, back over to Dave for closing comments.

Dave Calhoun -- President and Chief Executive Officer

Yeah, thanks, Brian. In closing, I just want to make a couple of comments and double down on the resiliency of our recovery. We've had no shortage of challenges this year, you all know that: conformance items, development hurdles, external challenges within the supply chain, and even logistics routes. These are not uncommon in our industry.

I've heard from a few of you wondering if we've lost a step in this recovery. You might not be surprised to hear that I view it as exactly the opposite. Over the last several years, we've added rigor around our quality processes. We've worked hard to instill a culture of speaking up and transparently bringing forward any issue, no matter the size, so that we can get things right for a bright future.

As a result, we're finding items that we need to resolve. They're not newly created defects in the system. Instead, thanks to the culture we're building, we identified items from the past that we now have the rigor and the focus to fix once and for all. Our shadow factories will be shut down.

So, this process of transparency and change can be difficult in the moment. But I'm proud of our team. I'm confident we'll look back on this time period as when we got things right and we set Boeing on the right course. We still have work to do, but progress is clear and our focus is long term.

We're on the right path to restoring our operational and financial strength, and we thank you for your patience. OK, now, let's turn it over to questions.

Questions & Answers:

Operator

[Operator instructions] And our first question will come from the line of Doug Harned from Bernstein. Please go ahead.

Doug Harned -- AllianceBernstein -- Analyst

Yes, good morning, thank you. Talking about the recovery here, when we look at the 737 MAX ramp, we had thought you'd be at 38 a month production back in August. And we were looking forward to a new line that should be up and running at Everett in 2025, which looks to us that we give you capacity for well over 60 a month. But now, that 38 a month rate is still to come later this year.

And if I separate the bottlenecks here into three topics, sort of engines, Spirit, and everything else, engines appear fine. You've got a new leadership at Spirit, a new agreement. So, this is not just one part, but I guess how much has your longer-term ramp outlook changed, you know, given the Spirit issues you've had this year? You know, and if you could take those Spirit risks off the table, you know, what bottlenecks are still out there in the everything else category for the MAX? And, you know, to put it all together, what could this ramp look like if you can avoid quality escapes like the ones we have seen this year?

Dave Calhoun -- President and Chief Executive Officer

Yeah, Doug, that's the money question. We think we are synced perfectly with the constraints that we know. You talked about engine constraints. We have as clear and as transparent a relationship as we could possibly have with GE and CFM teams.

The rates that we have outlined in our guidance reflect those constraints. We all could go much higher, much faster if it were strictly a demand question, but we have to listen hard to those constraints. So, we are there. On Spirit, we really do believe that the commercial agreement -- and I can have Brian make a comment on it, he was in the center of that negotiation, the commercial agreement gives them the resources in the breathing room they need to get ahead of our rate forecast.

And maybe even more importantly, I think the selection of Pat at exactly this moment in time to sort of get them really focused on factory performance, I'm quite optimistic and quite pleased with. We've had just in the last 30 days as many interactions with Pat as we've had over the last year, even though we've had more than a hundred people embedded at Spirit. So, all the signs are good there. I feel like we took a major step forward on relieving that particular constraint.

And as you know, that is mostly a, you know, a conformance constraint. I got to tell you, these fuselages, man, they have been going over with a microscope in light of what we've experienced here in the last four months. So, all that said, those are -- you correctly articulated the constraints that we've had to deal with on the all other. We had one that has really taken aggressive steps and gotten ahead of us.

And so, I'm feeling better about all other than I have in quite a long time just because there was another one embedded. I'm not going to mention names. So, anyway, that's it in a nutshell. I am always tempted, based on demand, to tell you we can do more than 50 and get to 60.

And we are physically capacitized to do it, you're correct in that. But I can't call it out until the supply chain constraints can make it, and they haven't yet to get to those kinds of numbers. But we have a couple years to work it, and we'll continue to work it. But right now, everything we're doing is based on the constraints we know.

And that's what we've outlined to the industry. And even in these last just several months with the nonconformance issues that have sort of constrained our delivery, as we've said many times, we have kept our master schedule intact to get to that 38. We're definitely building inventory in the process, and we're paying our suppliers. So, they're not second guessing where we're going to end up.

And we think we're going to have a little bit of buffer, particularly at the front end in light of what we've just experienced.

Doug Harned -- AllianceBernstein -- Analyst

And is there any point that we should be looking toward where you might have more clarity on how that whole supply chain is going to come together for this?

Dave Calhoun -- President and Chief Executive Officer

Yeah, I -- first of all, we will definitely update guidance for next year as we get into the early part of next year, put these nonconformances in a rearview mirror once and for all, get to a stable rate at 38. And then, we're going to be anxious to build from there as fast as we can. We will give guidance based on everything we know early in that year. So, not avoiding it now, but we -- it's best we get these things in a rearview mirror.

And the good news is we really do have these in a box with respect to the scope of work that's required, and now, it's just executing against it. And our teams have done a pretty good job on that.

Doug Harned -- AllianceBernstein -- Analyst

OK, thank you.

Dave Calhoun -- President and Chief Executive Officer

Yup.

Operator

Thank you. The next question is from the line of Jason Gursky with Citi. Please go ahead.

Jason Gursky -- Citi -- Analyst

Good morning, everybody. Hey, Brian, you made some comments in September about expectations for cashflow in 2024 in the past to your goals in 2025 and described things back in September as potentially being nonlinear. So, you've had some things that have happened since then, including the push-out of some deliveries into 2024. You've incurred some more charges, I think, that were a bit greater than you were expecting in the defense business.

So, I'm wondering if you can kind of update us on the current thought on 2024 cashflow, what kind of the puts and takes that you're expecting, what's -- what are the good guys, what are the bad guys relative to 2023. And then, maybe just provide us some thoughts on, you know, the quantum of cash that you expect to generate at the company '23, '24, '25, '26, given all that's occurred here, particularly in the defense business here since you laid out those goals at your investor day last year, whether the quantum of cash that you expect to generate over those four years has changed materially. Thanks.

Brian West -- Executive Vice President, Chief Financial Officer

Yeah, thanks, Jason. Let me start with the quantum in the '25, '26 timeframe. It's 10 billion, and we continue to have line of sight to hitting that target. I think that's most important.

In terms of how we get from where we land in 2023 to that moment, yup, going to be some things we got to deal with, not going to be linear, but we've got some things that feel good about in terms of momentum. Let me just highlight a few. Of course, we'll be more specific in January on next year's free cash flow guidance, but we expect to be higher. It's too early to be that specific, but it'll be underwritten by higher BCA deliveries, both on the 737 and the 787.

We'll have made progress on the inventory wind-down that Dave mentioned. And we're also going to factor in the 777X ramp. So, those things are pretty discreet, and we just got to follow our ability to deliver in a stable environment. BGS will be steady.

BDS, as you point out, we expect cash flows next year to be better than they are this year but still likely a drag, mostly factoring in the impact of some of the charges that you mentioned that we just got to put behind us. So, we'll spell all of this out in January once we finish our planning cycle and get through 2023. But the most important thing to remember is that quantum in '25 and '26 is 10 billion. And all of the levers that we have to go from where we land this year to at that point are still very clear to us and underwritten by execution, and we know how to do that.

Jason Gursky -- Citi -- Analyst

OK. And then, Brian, just if you don't mind, the 10 billion quantum out in '25, '26, can you talk about the potential for -- where we might go from there? What are some of the puts and takes that we might see from a growth perspective beyond that $10 billion?

Brian West -- Executive Vice President, Chief Financial Officer

Yes. We're still looking forward to that stability, as Dave called it, in the '25, '26 time frame in that 10 billion. That's where we're laser-like focused. Anything beyond that is going to be outside of our planning window.

And hopefully, it's going to be underwritten by a very attractive robust demand environment, but let's get there first.

Jason Gursky -- Citi -- Analyst

Great. Thanks.

Operator

Thank you. The next question is from Peter Arment from RW Baird. Please go ahead.

Peter Arment -- Robert W. Baird and Company -- Analyst

Yeah, thanks. Good morning, Dave and Brian.

Dave Calhoun -- President and Chief Executive Officer

Hi, Peter.

Peter Arment -- Robert W. Baird and Company -- Analyst

Hey, Brian. Maybe just to talk about stability there because you just brought it up, you know, if we look at just the remaining two months of the year, if you're going to deliver about 15 737s in October, that kind of implies that you need to deliver high 30s or high 40s if you're going to be at the upper end of your range. Just kind of the confidence level around that for November, December, I mean. And if you could update us on when you talked about the -- in September, I think about the 75% of the MAX aircraft in storage had to be inspected.

What's the latest there? And just lastly, is there -- is the -- getting to 38 a month later in the year, does that impact any of your rate break decisions when you're thinking about '24? Thanks again.

Brian West -- Executive Vice President, Chief Financial Officer

Yeah, sure. So, October will be a little bit light, as I mentioned, with November and December being picked up. Remember, we had a number of airplanes that were ready to be delivered prior to this latest spear NOE, and now we have to work them through the system. We do have a good line of sight to finish in the year, and the team is laser-like focused on meeting this updated set of numbers.

And then, of course, we feel good about the free cash flow that will be dragged along with that. In terms of the 75%, that is still the way to think about how we have to touch those inventory airplanes. As we've mentioned, we know the scope. We know what's got to happen, and we're working our way through finishing that work across that cohort of airplanes.

So, that has remained unchanged, and it's just all the work we have to do in front of us, clear line of sight. And in terms of the rate breaks, you know, largely speaking, we've had a master schedule out there for some time with the required rate breaks. Of course, we're trying to get our way to 50 per month by the '25, '26 time frame. None of that's changed.

And we're still focused on executing that once we can get to that 38 as we exit this year and then move the supply chain with us, considering everything Dave described about how we see the supply chain coordinating going forward.

Peter Arment -- Robert W. Baird and Company -- Analyst

Appreciate the color. Thanks, guys.

Operator

The next question is from the line of Myles Walton from Wolfe Research. Please go ahead.

Myles Walton -- Wolfe Research -- Analyst

Hi, guys. Good morning. Brian or Dave, looking at the $10 billion target for '25, '26, is there a way that we can have confidence yet that even if BDS is nearly neutral that the rest of the organization can still get to that number? And then, also, if you can just highlight the space satellite constellation charge. I'm always a little bit curious when I first hear about it if I'm going to hear about it again.

So, maybe just lay out the trajectory of that program. Thanks.

Brian West -- Executive Vice President, Chief Financial Officer

Sure. So, I'll take the last one first. This is a particular contract with the customer that really isn't in the category of development. The way we talk about the fixed-price development contracts is very different.

We are completing the requirements for the customer. We have additional work to do to make this constellation very robust with new technology. It's very innovative, and we have to work our way through, and we will in short order. This is not going to be one that's going to be dragged out for a long period of time.

And in terms of the 10 billion, you know, we always built that with some understanding that not every piece was going to go exactly correct. There were going to be some puts and takes and we provide ourselves the room with which we could have certain things not go quite perfectly. And in the case of BDS, even though it might be a bit different than we had thought even a year ago, it's still within the quantum of us being able to deliver that 10 billion. And we have a lot of confidence that they will be contributing to that 10 billion.

Maybe not quite as much, but they're going to be positive. And, of course, BGS remains strong. BCA, we always get more and more confident. So, we still have a path to that 10 billion and just reinforce how confident we are in get -- being able to get the whole enterprise there.

Myles Walton -- Wolfe Research -- Analyst

OK. Thank you.

Operator

Thank you. And the next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila Kahyaoglu -- Jefferies -- Analyst

Good morning, Dave, Brian, and Matt. Thanks so much. And I just wanted to dig into commercial airplanes and just the operating loss there of 678 million. Brian, I know you've been out there in the trenches working with suppliers.

You called out another loss in Q4. So, maybe as you think about the production rates normalizing, you know, can you maybe parse out how much of the losses are linked to concessions, pricing, supply chain constraints, and how you expect that to turn?

Brian West -- Executive Vice President, Chief Financial Officer

Yeah. Thanks, Sheila. So, it's largely -- the fact that we were negative again in the quarter is all the spirit impact that we've described. And, you know, fourth quarter is going to be sequentially better, but it's still going to be negative.

And that's again, as we work our way through this factory disruption and we still have this abnormal running through the BCA P&L. I will tell you that in 2024, we expect margins to be positive, and that's going to be underwritten by two things, primarily BCA. It's going to be driven by higher volume for sure. And remember, all this abnormal will be essentially done, which has been a drag on the BCA margins for quite some time.

So, we just got to work our way out of that, which we will by the end of this year, and then work toward executing on the delivery targets for next year. And that will get back at a positive territory. And then, the good news is by '25, '26, we still have a view where they will be double-digit margins as they have been historically. And that will be underwritten by this.

These dual factories that Dave's talked about will be behind us. And all that labor that today is working on inventory airplanes for both the 737 and the 787 is going to go be applied to these ramps in the rates up to 50 and 10, respectively, in the 737 and the 787. So, all of that still is right in front of us, and it all still gives us confidence that we're going to be able to hit those kind of targets. And the BCA team is very focused on delivering that.

Sheila Kahyaoglu -- Jefferies -- Analyst

OK, great. Thank you.

Operator

Thank you. Our next question is from Cai von Rumohr from TD Cowen. Please go ahead.

Cai von Rumohr -- TD Cowen -- Analyst

Yes, thanks a lot. So, Brian, 777X R&D spiked up. It looks like total R&D at BCA was up about 150 million sequentially. Where do those -- where does the 777X sort of R&D number go moving forward? When does it peak? When does it come down? And also, maybe you could update us on the certification status given we're in a CR.

Are we going to make it on MAX 7 by year-end? What about MAX 10? What about achieving TIA on the 777X?

Brian West -- Executive Vice President, Chief Financial Officer

Yes. So, let's start with the R&D question. So, overall, R&D, we continue to spend on the 737-7 and the 737-10, and the uptick is, as I pointed out and as you mentioned, on the 777X and the 777-8 freighter. Now, as we move forward, you know, that range of three -- call it 3 billion, 4 billion-ish of R&D, you know, that's going to modestly go up over the next couple years.

But it's not going to do anything to disrupt our free cash flow target. And if it goes up a little bit, I think that'll be good news because we're investing in programs. So, we're not necessarily worried about that at all. And it's all within our expectations, both near term and longer term.

And in terms of the certification milestones that we have in front of us, as Dave mentioned, there's been no change to either the 737-7, the 737-10 or the 777X. We move forward, particularly, the 777X team's hard at work at trying to meet that commitment. So, there's really nothing to say other than there's a lot of people hard at work, which is why we continue to invest in those spots.

Dave Calhoun -- President and Chief Executive Officer

I always have to add because I don't want to get in a trap like we did a long time ago, the FAA makes that call, and we're going to give them all the flexibility they need. We try to interpret it the best we can, and that's what we've done. Know that there haven't been any real changes to the airplanes. So, we are mostly working design assurance documentation as required by the new legislation back at the end of 2020.

Cai von Rumohr -- TD Cowen -- Analyst

And on the issue of 777X, TIA, when do you expect that?

Brian West -- Executive Vice President, Chief Financial Officer

I don't think that we've necessarily put a date out on that for obvious reasons. So, we'll let the teams do the work, and we'll let the regulators dictate those specifics, and we're just going to follow their lead.

Cai von Rumohr -- TD Cowen -- Analyst

Thank you very much.

Operator

Thank you. And the next question is from Seth Seifman from JPMorgan. Please go ahead.

Seth Seifman -- JPMorgan Chase and Company -- Analyst

Hey. Thanks very much. Good morning everyone. Brian, with your comment that the 2023 cash flow is going to come in at the low end of the range, your expectation for growth in 2024, I guess, should we be expecting 2024 to be, you know, in the 2023 range when we're trying to get a draw beat on where 2024 is? And then, you know, within that, the 737s, sometimes, I think it's hard to bridge between production and deliveries.

If it's 38 a month exiting the year, can we say at least 38 times 12 next year plus some chunk of the inventory that's remaining?

Brian West -- Executive Vice President, Chief Financial Officer

Yeah. So, Seth, we're just going to wait until January to be able to describe any kind of range for cash flow next year. We just got to get through our planning cycle. We had to close the year.

So, just be patient with us. But we will be specific in January, the same way we were this year. And I'll also probably let you know that that would apply to your question on deliveries or how to think about them. You know, delivery is going to be higher next year.

We're going to have momentum going on this year. All of those details, we're going to flesh out and share at the beginning of the year and at the right time, and we look forward to doing that.

Seth Seifman -- JPMorgan Chase and Company -- Analyst

OK. Thanks very much.

Operator

The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Noah Poponak -- Goldman Sachs -- Analyst

Hey. Good morning, everyone.

Dave Calhoun -- President and Chief Executive Officer

Hi, Noah.

Brian West -- Executive Vice President, Chief Financial Officer

Hi, Noah.

Noah Poponak -- Goldman Sachs -- Analyst

Brian, just staying on the 737 pace for me, recognizing you're not going to give a number for next year, it sounds like. But if October is similar to September, it implies November, December are decent delivery numbers. So, is it the case that the aft fuselage issue and the incremental inspection of hand-drilled, in addition to laser-drilled fasteners, that that is kind of behind you as you get to January 1st? It's not impacting 2024 737 deliveries. And then when you're talking about being at 38 a month out, you know, in the off-the-line final assembly versus where the system is, is a different number, is there a wide gap in that to start the year? Or can we think out a real clean, stable 38 a month to start the year?

Brian West -- Executive Vice President, Chief Financial Officer

To answer your first question, the answer is yes, for sure. And in terms of how we think about the rate, you know, we -- the system, as Dave mentioned, has always maintained to be hot because we want to make sure that they know that the demand signal is there, and we want them to continue focus on that master schedule. How exactly as we start the year we'll be able to count deliveries relative to that 38, we'll see. But right now, job one is to exit -- you know, get the nonconformance behind us.

Remember, we had about a 30 aircraft growth between the second quarter and the third quarter into the inventory airplane. So, that's going to be working its way out of the system relatively quickly, which gives us confidence in the November, December time frame. And then as we think about prime of the pump for 38 per month, we're going to move toward January and beyond and hopefully some pretty good execution. So, we'll have to wait and see exactly how that plays out, but the underlying system is going to stay at 38.

And as we get through next year, obviously, there'll be certain rate ramps that we'll describe later. But right now, if we have everything be coordinated across the broad supply chain, I think we'll be fine.

Noah Poponak -- Goldman Sachs -- Analyst

OK. And I guess putting a lot of this together and everybody trying to figure out, you know, where the '24 free cash is going to land, is it kind of reasonable to think of '24 as just two halves and that some of your hesitation in giving some of those numbers is you just don't know exactly where the year starts? Is there still some 737 disruption? You know, 787 at five is a different margin than 787 at 10. Maybe BDS margins are still negative in the first half, but they're positive in the second half. And so, this next year's first half free cash flow just still have some of 2023 elements lingering in it, but that the second half will be kind of run rating into more of what your stable looks like.

And maybe second half of '24 looks -- you know, the numbers look more like second half of '22 type of free cash flow numbers, and we can comfortably think of that as run rating into your future.

Brian West -- Executive Vice President, Chief Financial Officer

Yeah. No, all of that is going to have to be something we talk about in January. Right now, we have to get the nonconformance behind us. We have to be able to hit this delivery range that we've just described.

And we have a lot to do, but confidence we'll get there. And then, we'll describe the shape of next year at the right time. I just don't want to get too far ahead of ourselves. And I do believe that as -- I do believe next year will be better, and I do believe we'll exit next year better.

How that folds up between halves, you're just going to have to give us a little bit more time as we work our way through our planning cycle and we get to January.

Dave Calhoun -- President and Chief Executive Officer

Noah, if I could just maybe add one thing to make sure everybody knows what, at least what I'm all focused on. We're going to exit this year with a little more than 100 of the return-to-service airplanes that we had at the end of 2020. That is what our shadow factories are focused on in a big way to make sure that we can bleed that down to basically nothing by the end of next year. So, the pace at which we bleed that down, we complete that rework, deliver all those airplanes dictates a lot about that cash flow.

It gets better every month. But it's going to be all about the pace at which we can do it and transfer that workforce into the production rate increases. So, we need -- there's a lot to know about that. We're going to give you our best shot at what that guidance looks like.

But by way of proxy, that is a very important achievement for us. And I'm 100% focused on it, and I know Brian is and the team at BCA.

Noah Poponak -- Goldman Sachs -- Analyst

OK, thanks so much.

Dave Calhoun -- President and Chief Executive Officer

Yup.

Operator

Thank you. Our next question is from David Strauss from Barclays. Please go ahead.

David Strauss -- Barclays -- Analyst

Thanks. Good morning, everyone.

Dave Calhoun -- President and Chief Executive Officer

Good morning.

David Strauss -- Barclays -- Analyst

Wanted to ask, you know, about the supply chain. Are there any other spots -- hot spots in the supply chain where you've either had to infuse a meaningful amount of cash like you did with Spirit or are in negotiations to do something similar to what you've done with Spirit? That's the first question. And then, the second question, I guess a clarifying comment for Brian, on the BCA margin progression next year turning positive, is that both on a program on a unit basis or would that just be on a program basis? Thanks.

Dave Calhoun -- President and Chief Executive Officer

Brian, how about I answer the first part of this one? I consider the Spirit remedy fairly unique, in fact, totally unique. I don't think that's going to have any ramifications anywhere else, and there aren't any signals that way. But the linkage really is important. As Spirit becomes stable and we get to our rates, rates solve most of the supply chain's problems.

We got to get to those rates so that they can make the kind of money that they associate with those rates and we get to where we need. So, there is a linkage, but it's not a copycat linkage, and there's no sign of that happening.

Brian West -- Executive Vice President, Chief Financial Officer

And in terms of the margins on both unit and program, they'll be positive. And program, we'll have growth. So, we look forward to describing that as we get closer to January, but both.

David Strauss -- Barclays -- Analyst

Great. Thanks very much.

Dave Calhoun -- President and Chief Executive Officer

Yup.

Operator

Thank you. And our next question is from Rich Safran from Seaport Research Partners. Please go ahead.

Rich Safran -- Seaport Research Partners -- Analyst

Dave, Brian, Matt, good morning.

Dave Calhoun -- President and Chief Executive Officer

Hi, Matt.

Rich Safran -- Seaport Research Partners -- Analyst

I got a two part tanker-related question for you. First, with Lockheed dropping out, when do you expect an award? And what could that do to your overall assessment of program profitability? I'm basically assuming here that you would have to review the accounting on the program. Second part is with deliveries restarting, what's being anticipated? I mean, how much of a catch-up should we expect in 4Q? And is that being factored in your guide?

Dave Calhoun -- President and Chief Executive Officer

Well, let me just comment on the tanker. I'm not surprised at what we all read with respect to Airbus now going on their own. They will go. So, we shouldn't expect them to sort of vacate.

I do like what it ultimately does for us and the competition. We are not afraid of competition. And yes, that next contract matters a lot. We have to ultimately underwrite the cost and get this right.

And as we've committed to you all along, we're going to stay disciplined on that front. And no, there's not -- this isn't program accounting, it's contract accounting. So, I don't think we're going to have any implication associated with lots and an additional contract. Now, I'm not the accountant.

So, I'll ask Brian to collaborate.

Brian West -- Executive Vice President, Chief Financial Officer

Yeah. No, exactly. We don't see that changing. We'll just add to volume like we do with any kind of extension.

And in terms of your question in the fourth quarter, of course, any kind of deliveries and cash flow are going to be factored into our look for the quarter and going forward. So, that's all baked in.

Rich Safran -- Seaport Research Partners -- Analyst

Thanks a lot.

Dave Calhoun -- President and Chief Executive Officer

Yup.

Matt Welch -- Vice President, Investor Relations

And that concludes our call this morning. I appreciate everybody joining. Thank you again.

Dave Calhoun -- President and Chief Executive Officer

Thank you.

Brian West -- Executive Vice President, Chief Financial Officer

Thanks.

Operator

Thank you. And that completes The Boeing Company's third quarter 2023 earnings conference call. [Operator signoff]

Duration: 0 minutes

Call participants:

Matt Welch -- Vice President, Investor Relations

Dave Calhoun -- President and Chief Executive Officer

Brian West -- Executive Vice President, Chief Financial Officer

Doug Harned -- AllianceBernstein -- Analyst

Jason Gursky -- Citi -- Analyst

Peter Arment -- Robert W. Baird and Company -- Analyst

Myles Walton -- Wolfe Research -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Cai von Rumohr -- TD Cowen -- Analyst

Seth Seifman -- JPMorgan Chase and Company -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

David Strauss -- Barclays -- Analyst

Rich Safran -- Seaport Research Partners -- Analyst

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