Boeing (BA 1.96%) needs to start generating more cash, and management set out a plan for doing so during its investor day conference in November. Breaking out each of its business segments, the airplane maker showed how much each one needs to contribute to revenue. This plan highlights the importance of each segment in meeting management's target of $10 billion in free cash flow (FCF) by 2025 or 2026.
Here's a look at why that figure matters so much to Boeing and its investors right now -- and what each segment has to do to get there.
Why Boeing's free cash flow matters
As a reminder, Boeing's debt ballooned and its FCF collapsed due to the grounding of the 737 MAX as well as pandemic-related lockdowns. Reaching its new FCF goals would help Boeing significantly reduce its $57 billion in long-term debt (or $39.8 billion net) that it currently holds.
However, it isn't just about reducing debt. Boeing needs to build the financial firepower to support capital investment in new airplanes. Although CEO Dave Calhoun commented recently that Boeing won't produce a new plane for at least a decade, the reality is that Boeing will need to respond if Airbus develops a new midsized plane that captures market share. To do that, Boeing will need cash.
Boeing's plan
The key parts of the plan to get to free cash flow of $10 billion by 2025/2026, as laid out in November, are as follows.
| Boeing Segment | Operating Cash Flow, 2023 | Operating Cash Flow, 2025/2026 |
|---|---|---|
| Boeing Commercial Airplanes (BCA) | $2.5 billion to $3.5 billion | $9 billion |
| Boeing Defense, Space & Security (BDS) | ($1 billion) to ($500 million) | $2 billion |
| Boeing Global Services (BGS) | $2.5 billion to $3 billion | $3 billion |
Data source: Boeing presentations.
That comes to total operating cash flow goal of $14 billion. However, the company will also need to make various payments (mainly taxes due to returning to profitability) totaling around $2 billion, and a further $2 billion in capital spending. So that leaves a total of $10 billion in operating cash flow.
What Boeing needs to do
As you can see, the critical parts of the plan count on a significant ramp-up in cash generation from the company's BCA and BDS segments. For BCA, the pathway is clear, but so are the potholes. BCA needs to ramp airplane production from a current rate of 31 deliveries per month for the Boeing 737 MAX to a rate of 50 a month. That's no easy feat, given the ongoing supply chain issues facing the industry.
There are promising signs. The company's suppliers appear to be cautiously optimistic, but the jury is still out due to the persistence of supply chain issues, which have extended much longer than many thought they would.Ramping airplane production is critical to BCA, not only in revenue, but it's a significant part of how Boeing improves its profit margin.
For BDS, the key is to work through some of the problematic fixed-price contracts it has in defense. The segment has suffered multibillion-dollar cost overruns over the years and has taken charges on programs like the KC-46 tanker, Air Force One, and the T-7A Red Hawk (pilot training aircraft). Management believes the KC-46 and Air Force One programs will have passed key milestones by the end of 2024 which will help to reduce risk on them. In addition, BDS chief Theodore Colbert told investors in November that "we have not taken on any more fixed price, big fixed price development programs since 2018 and we don't have the appetite to do so going forward."
For BGS, the key is for ongoing commercial flight departures to support commercial services growth and generate steady revenue from the military.
Boeing's future
Anyone investing in Boeing will have to be patient. The BCA production ramp-up is going to be slow and bumpy. Meanwhile, reducing risk on the problematic BDS programs is at least a couple of years away. Boeing will need to have all its segments firing on all cylinders to get to $10 billion in FCF by 2025/2026.
