The two titans of the commercial jet industry, Boeing (BA +1.96%) and Airbus, have a long-running, not-so-friendly rivalry over market share. Airbus has thrubbed Boeing recently, receiving more orders and delivering more planes every year since 2007. As of Friday, however, when both companies went off on their holiday breaks, the order tally had Boeing in a comfortable lead. Largely driven by record orders of its innovative Dreamliner 787, Boeing has secured 1,121 orders in 2012, to only 821 orders for Airbus. Now, Boeing has to keep its altitude in the face of some pretty severe headwinds.
Most urgently, Boeing will have to navigate the fiscal cliff. Historically, about half its revenue has come from its defense contracting business. The entire defense industry is preparing for a smaller defense budget and shrinking sales, with industry leader Lockheed Martin (LMT +2.43%) warning of mass layoffs that will hit in the spring if a deal isn't reached on the fiscal cliff. Anticipating a defense budget that has grown in excess of 8% over recent years, contractors will have to adjust to a "new normal" of sharp decline followed by low growth.
Boeing has made good progress in pivoting aggressively toward fast-growing commercial aviation and away from the declining defense business, cutting revenue from defense from over 50% a few years ago to only 39% in the third quarter. Nonetheless, the higher margins that Boeing earns in the defense segment still leave the company heavily exposed to the military budget for its earnings. Part of the problem is that Boeing's big-ticket planes like the 787 Dreamliner are initially entering the market at basically no profit, as Boeing works to recoup development costs. If Boeing can ramp up production of these modern jets, eventually the line could become a cash cow.
Of course, Boeing is also having problems with its program development. Earlier this month, a 787 Dreamliner operated by United Air Lines (UAL 1.34%), the first American airliner to fly the Dreamliner, was diverted off-course and forced to land after the aircraft suddenly lost speed and altitude. The next week, two more 787 Dreamliners, one operated by Qatar Airways and the other also flown by United, experienced the same problem.
"We're having what we would consider the normal number of 'squawks' on a new airplane, consistent with other new airplanes we've introduced," said Boeing CEO Jim McNerney. So far, it doesn't appear that any failures on the jets actually compromise safety. The "squawks," however, are certainly an embarrassment for a program that is already plagued by problems: Dreamliners were delivered nearly four years behind schedule after years of problems with the technology, the production, and the supply chain. If Boeing wants to keep the crown, and realize the incredible opportunity ahead of it, it must tread carefully.
