Kudos to Boeing (BA 0.25%), and congratulations to shareholders. The stock popped following Wednesday's estimate-beating second-quarter earnings release. The aircraft manufacturer continues to work its way out of trouble.
The earnings beat and the company's plans to ramp up production, however, still aren't the top reason an investor might want to own a piece of the company. Rather, the best bullish argument here is the ever-growing backlog of work to be done, the bulk of which is contractual.
But first things first.
Boeing's burgeoning backlog
For the three months ended in June, Boeing turned nearly $19.8 billion worth of revenue into a loss of $149 million. The swing to a loss from a year-ago profit of $160 million, however, reflects what should be a short-lived swell of charges to its defense operation.
Operating cash flow jumped to nearly $2.9 billion on the heels of growing deliveries, while revenue not only topped analysts' estimates of just less than $18.5 billion, but also improved on year-ago sales of $16.7 billion. It was the second solid quarter in a row from Boeing. Although the pace of this growth might be tough to sustain, continued growth itself won't be.
That's the takeaway from a less-touted detail buried in Boeing's quarterly reports.
The company's backlog of orders now stands at $439 billion, versus only $404 billion as of the end of last year. In fact, last quarter's total unfilled orders is the biggest backlog Boeing's seen since late 2019, when the number was on the way down. The growth even seems to be accelerating now.
Data source: Boeing. Chart by author.
Lots more planes needed
And there's no reason to not take this growing backlog at face value. There's no denying the COVID-19 pandemic rattled many of the world's industries -- permanently, in some regards. Air travel was not only not an exception to this disruption, but perhaps one of its top victims.
But don't be too quick to jump to conclusions based on recent perception. The air travel business is easing back to its pre-pandemic norms. It should resume its pre-pandemic growth trajectory once it does. And that trajectory? The International Air Travel Association (IATA) contends that air travel demand will double between now and 2040, expanding at a modest but persistent annual pace of 3.4% culminating in 8 billion boardings in 2040.
Problem: There aren't enough passenger jets to handle the load, yet. Research from Oliver Wyman indicates that this year's worldwide count of 27,385 commercial aircraft will grow at a similar pace of just under 3%, reaching 36,305 by 2033. Most of that growth will come from the increased adoption of cost-effective narrow-body jets like Boeing's 737 and 757, the former of which is on the verge of increased production.
Know that as part of its second-quarter report the aircraft manufacturer also told investors it intends to ramp up its current 737 output from 31 planes per month to 38, meeting the growing need. By 2026 it could be making up to 50 of the sought-after passenger jets per month.
Underscoring this demand is a bright forecast for airlines themselves, which will be paying for the planes and then monetizing them. Last month, the International Air Travel Association upped its full-year profit forecast for the airline industry from $4.7 billion to $9.8 billion. Total revenue could near 2019's record figure of $838 billion.
The point is, other relevant data jibes with Boeing's growing production backlog.
Bet on Boeing
Of course, another pandemic could upend the air travel business in the future, dragging down commercial aircraft demand with it. Political tensions might stifle international air travel. New regulations might make airlines considerably less profitable, crimping their ability to buy or lease new jets. Anything's possible.
As an investor, however, you have to embrace what's most likely. What's most likely in this case is the continuation of air travel's growth that was in place long before COVID-19 shook the business up. The industry's growth will likely still be in place long after the echoes of the pandemic finally stop ringing, too.
Lower operating costs (rooted in better technology), ongoing air travel infrastructure expansion and improvements, and sheer population growth are the key drivers of this growing, persistent demand for air travel services. And these factors are here to stay.
The only thing missing now is enough commercial planes to meet the need. Boeing's already lining up on the runway.
