Boeing's (BA +4.05%) management continues to take a temperate approach to guidance even as increasingly positive news emerges from the industry. The key to the company's future is the successful ramp in producing its commercial airplanes. It's something that's been challenged by ongoing supply chain issues, but the good news is management's cautious tone on the matter is potentially setting the company up to overdeliver.
Boeing's production plans
The aerospace giant's key programs are the narrowbody 737 MAX (currently produced at 31 a month), the widebody 787 (produced at a low rate, with plans to hit five a month this year), and the widebody 777/777X (three a month). As a reminder, the essential parts of Boeing's plan to hit $10 billion in free cash flow are aircraft production assumptions (see table below).
It won't be a walk in the park to get there. For example, during the fourth-quarter earnings in late January, CFO Brian West told investors at a conference that the 787 "will be under the five per month production rate a bit longer than expected due to a supplier constraint that has temporarily slowed production".
Moreover, progress on the 737 is also bumpy. For example, Boeing delivered 35 Boeing 737 MAX airplanes in January, but West recently told investors to expect deliveries in the "low 20s" in February. However, he also noted Boeing was on track for its first-quarter expectations and maintained the 400-450 range outlined at the investor day event in November.
The recent news that Airbus is walking back its production plans is a further sign of fluctuating conditions in the aerospace supply chain. In December, Airbus management said: "Airbus will be adjusting the speed of the A320 Family ramp-up to rate 65 for 2023 and 2024. Airbus maintains the objective of reaching [a] rate [of] 75 by the middle of the decade."
Fast-forward to the earnings report recently released, and Airbus plans to hit a "monthly production rate of 65 aircraft by the end of 2024 and 75 in 2026" on its Airbus A320 family of aircraft (the rival to the Boeing 737 MAX).
|
Boeing Airplane Unit Production Assumptions |
2023 |
2025/2026 |
|---|---|---|
|
Boeing 737 |
400-450, 31 a month now reaching 38 a month by the end of the year |
50 a month |
|
Boeing 787 |
70-80, to hit five a month later in the year |
10 a month |
|
Boeing 777/777X |
Three a month currently |
Four a month |
Data source: Boeing presentations.
Why investors have cause to be optimistic
Undoubtedly, there are still issues with the supply chain, but unlike its key rival Airbus, Boeing appears to be taking a more considered and cautious approach to guidance. For example, West spoke recently, clarifying that there was no change to Boeing's production guidance. Still, he did say the supply chain is "getting better."
He noted: "The visibility of the constraints into Tier 2 and Tier 3 suppliers is better. And the operating rhythms and the cadences for the Tier 1s is much better" and "there is a fairly good alignment and we'll get better and more predictable and more stable as we go through the course of the year."
In plain English, it's getting easier for Boeing to see the patterns of its suppliers' deliveries and adjust its production accordingly. That's a significant plus in the highly complex supply chain necessary to produce an airplane and will help coordinate the ramp to a 38-a-month production rate on the 737 MAX at some point in 2023.
NYSE: BA
Key Data Points
As previously discussed, General Electric expects deliveries of the LEAP engine (used on the Airbus A320neo and the Boeing 737 MAX) to increase by 50% in 2023. In addition, the CEO of another aerospace giant, Raytheon Technologies' Greg Hayes, doesn't see supply chain impediments impacting the delivery of components at the rate that Boeing or Airbus need.
What it means to investors
Interestingly, Airbus appears to be paring back investor expectations for production ramps, while Boeing's management seems to be cautiously communicating with investors. That's a good thing, and given the improving narrative around the airline industry, it wouldn't be surprising to see Boeing increase its production rate quicker than many expect.
