Last week, Boeing (BA 0.25%) reported solid first-quarter earnings, despite revenue declines that impacted each of its business segments. Cash flow also improved significantly on a year-over-year basis.
Following the earnings release on Wednesday morning, Boeing executives spent over an hour discussing the company's first-quarter results and its outlook with Wall Street analysts and the media. Here are five key points they emphasized.
Boeing reported solid earnings and strong cash flow for the first quarter. Image source: Boeing.
Demand is fundamentally healthy
According to the International Air Transport Association, the 8.8% year-to-date passenger traffic growth adjusted for the leap year is well above the long-term average of 5.5%. ... These favorable industry trends, combined with our robust backlog of more than 5,700 aircraft, underpin our planned production rate increases over the remainder of this decade.
-- Boeing CEO Dennis Muilenberg
Many investors have been concerned about slowing order activity at Boeing and Airbus, especially for pricey widebody aircraft. Indeed, widebody orders have plummeted since 2014.
However, Boeing CEO Dennis Muilenberg tried to put this order slowdown in perspective. He noted that global passenger traffic continues to rise at a very strong high single-digit rate. Additionally, while airlines aren't ordering many jets right now, order backlogs remain near historic highs. (In other words, airlines have ordered jets many years in advance.)
If air travel demand continues to grow quickly, airlines will eventually need to buy many more jets. Boeing is working hard to capture its fair share of those expected future orders.
The defense market is improving, too
[W]e're seeing a flat to moderately up top line on the defense business over the next five years. Some of this is dependent on where we end up on the U.S. defense budget.
-- Dennis Muilenberg
The defense business has been a weak spot for Boeing in recent years, as "sequestration" in the U.S. has held back military spending. That's still the status quo for now.
That said, the Trump administration has vowed to rebuild the U.S. military. Additionally, Boeing has recently snagged a significant number of international orders. Its KC-46 military tanker is close to entering service, as well. Boeing's management sees good prospects for a return to growth in the defense segment if Congress approves Trump's proposed military spending increases.
Dreamliner profitability continues to improve
On the 787 program, the deferred production balance continues its downward trend with a decrease of $316 million in the quarter. And again, over the long term, we continue to focus on improving 787 cash generation, driven by favorable delivery mix, internal productivity improvements and additional supplier step-down pricing.
-- Boeing CFO Greg Smith
One of Boeing's biggest priorities for the next few years is to boost the profitability of its 787 aircraft program. For the first few years of production, the 787 aircraft program was burning cash at a rapid rate, but it has turned profitable. Now, Boeing needs to recoup its previous losses over the next five to seven years.
Boeing made some progress on that front last quarter. The 787 program's deferred production balance -- which is a rough proxy for accumulated losses -- fell by $316 million during the quarter. Still, this left Boeing with a deferred production balance of $27 billion.
The 787 family's profitability is starting to rise. Image source: Boeing.
To recover all of the deferred production losses, Boeing needs to keep boosting the 787 program's cash profitability. Management believes that a mix shift to the more-profitable 787-9 and 787-10 models, productivity gains, and supplier pricing step-downs will do the trick.
Making progress on the 777
777 production for 2017 is now sold out. ... At that rate [of 3.5 per month], we are about 90% sold out for both [2018 and 2019], including airplanes covered in the agreement with Iran Air, and we continue to have numerous campaigns underway.
-- Dennis Muilenberg
Another recent problem for Boeing has been a sharp drop in sales of its 777 widebody family. Last year, Boeing was building 777s at a rate of 8.3 per month, but by next year it will deliver just 3.5 per month. Even at that reduced rate, there are still some delivery slots available.
However, Boeing is getting closer to bridging the gap until the first 777X is delivered in 2020. Year-to-date, it has booked nine firm orders for the current-generation 777. As a result, it is fully sold out of its planned production for 2017, and it is close to being sold out for the next two years -- as long as its tentative sales agreement with Iran Air doesn't fall through.
Improving execution on development programs
Key milestones in the quarter included the FAA certifying the 737 MAX 8 for commercial service and achieving first flight on the 787-10: one month earlier than the development schedule we established three years ago.
-- Dennis Muilenberg
One area where Boeing has improved in recent years is in completing development projects on time and on budget. The 737 MAX 8 is on track to enter service this summer ahead of schedule and under budget. The 787-10 variant also began flight testing slightly ahead of schedule. And while it's still early, the 777X development program seems to be on track.
Of course, there's still plenty of room for improvement. For example, Boeing has had to absorb billions of dollars in cost overruns for the KC-46 tanker, which is also behind schedule. Yet Boeing is still performing much better than was the case with the botched Dreamliner development program a decade ago.
Improved execution on development programs will enable Boeing to continue driving free cash flow growth while keeping customers happy.
