If you knew nothing else about Boeing (BA +1.24%) or aviation, you'd probably still recall the 787 Dreamliner, thanks to the many headlines it appeared in this year. Despite grounded 787 airplanes, battery issues, budget overruns, and profit-sapping production delays, the 787 will be a great source of profit in the future. But for now, the 787's struggles will make Boeing's 737 its key to keep surging past quarterly earnings estimates.
Unfortunately, Boeing's rival Airbus brought its own next-generation single-aisle plane to the market first, and controls a significant share early on. Can Boeing and its 737 catch up?
Fuel costs
One of the biggest selling points for Boeing's single-aisle 737 MAX is its fuel efficiency. As you can see below, the cost of fuel has doubled over the last decade as a percentage of airline costs.
Graph by author. Information from Boeing's 2013-2032 outlook presentation.
When compared to today's most fuel-efficient airplanes, a fleet of 100 737 MAX jets will emit 286,000 fewer tons of CO2 and save almost 200 million pounds of fuel per year. According to Boeing, that translates into $100 million in cost savings.
Future growth
Boeing recently increased its 20-year forecast to predict demand for 35,280 new airplanes, valued at $4.8 trillion. More telling, however, is where the specific aircraft growth will take place.
Graph by author. Information from Boeing's 2013-2032 outlook presentation.
Almost 70% of new deliveries will be single-aisle airplanes -- growth that Boeing hopes to capture with its fuel-efficient 737 MAX. The value of this new single-aisle growth is estimated to reach nearly $2.3 trillion over the next 20 years, and it's even more important when you consider the 787 Dreamliner's temporary struggles to maintain profitability.
In addition to that growth, Boeing's decision to reengine the 737 airplane, rather than develop a new plane from scratch, saved the company about $15 billion, enabling strong cash flow from 737 MAX sales. That will add into Boeing's already improving free cash flow.
Graph by author. Information credit: Morningstar.com
What to keep an eye on
The 737 is already the company's best-selling jet, and Boeing's turning out 38 aircraft per month. Boeing is considering strategies to bump that production up to 42 per month, since management expects a few hundred more orders for its 737 MAX to file in over the next year. The improved production should help juice margins and offset some of the 787's initial margin weakness.
One issue facing Boeing is that its main competitor, Airbus, was the first to market with its own new single-aisle jet, the A320neo. Thanks to its first mover position, Boeing's rival has racked up sales and taken nearly 60% of early orders, according to Morningstar.
Fortunately for investors, Boeing has an enormous backlog of orders worth $410 billion, which gives it a secure revenue stream while it tries to catch the rival A320neo. The 737 family comprises almost two-thirds of unfilled orders, which that should provide plenty of time for the company to make a smooth transition to the 737 MAX -- which boasts an 8% fuel-burn advantage over the A320neo -- and begin to take back market share.
This race for single-aisle supremacy will be key for investors to watch going forward, since it represents immense future growth in the global airline fleets. If Boeing can take the sales lead back from rival Airbus, the company will be an even stronger investment going forward.
