Over the past year, Boeing (NYSE:BA) has started to talk about its services business as a key priority for growth over the next decade. The aerospace giant hopes to roughly triple its support and services revenue to $50 billion by 2025.
On Monday, Boeing showed just how serious it is about the services market. As part of a broader reorganization and management shakeup, the company is creating a new services business segment that will be an equal to the existing commercial and defense segments. This will help investors track Boeing's progress in growing its services business.
Huge growth potential here
Services have been an important part of Boeing's defense business for a long time. Military aircraft need constant upkeep, due to their high performance characteristics. This tends to drive a steady stream of support revenue for defense contractors like Boeing.
Through the first three quarters of 2016, Boeing generated $7.5 billion of revenue from the services and support segment of its defense business, up 14% year over year. This accounts for about a third of Boeing's defense revenue. The segment's year-to-date operating margin is 12.3%, well above the company average.
Boeing's management sees opportunities to continue growing defense services and support revenue, both in the U.S. and abroad. But it sees even bigger opportunities in the commercial aircraft services market.
Today, analysts estimate Boeing's annual commercial services revenue at $7 billion-$8 billion. (Boeing does not break this revenue out as a separate segment right now.) That would represent a little more than 10% of the commercial aircraft segment's revenue.
In other words, services are a much smaller piece of Boeing's total revenue in the commercial airplanes segment than in the defense segment. This provides a lot of room for growth.
Boeing creates a new segment
On Monday, Boeing announced that it will put the commercial and defense services businesses into a new business segment called Boeing Global Services. Boeing CEO Dennis Muilenberg appointed company veteran Stanley Deal as CEO of the new business unit.
In his new role, Deal will report directly to Muilenberg. Thus, this reorganization could ensure that the growing services business receives more attention from Boeing's senior management.
Due to this reorganization, Boeing will break out its services revenue in its quarterly reports beginning in late 2017. This will allow investors to track the company's progress toward its goal of $50 billion in services revenue by 2025. That's important, because right now Boeing only reports services revenue for the defense segment -- investors are left to guess the amount of services revenue generated by the commercial airplanes business.
Services could help lift Boeing's profit margin
Boeing's management has set its sights on an aggressive goal of generating a mid-teens operating margin, up from single-digit territory today. Some of its margin growth potential comes from cost cuts across the company. However, growing higher-margin services revenue is also a key avenue for margin expansion.
Boeing's early efforts to grow its services revenue have already started to bear fruit. For example, it signed several big services agreements at this year's Farnborough Airshow.
As the company's new services segment takes shape, Boeing may develop a clearer plan for how it will achieve its growth goals within the services market. Investors should keep a close eye on its progress, as a robust services business could help Boeing offset the cyclicality of aircraft orders in the future.