Boeing's (BA -0.73%) stock has slumped a bit since the company's earnings report last week, even though it beat analysts' first-quarter earnings estimates and reaffirmed its full-year guidance.
To some extent, investors might be reacting to recent news that Boeing's two main U.S. Dreamliner customers -- United Continental (UAL -1.46%) and American Airlines (AAL -1.08%) -- are canceling or deferring some of their orders for the aircraft.
However, both airlines insisted they are still very excited about the Dreamliner. Moreover, the biggest impediment to more Dreamliner sales right now is the lack of near-term availability. As a result, having some customers choose to take the Dreamliner later -- or to buy other Boeing aircraft instead -- probably isn't reason to be pessimistic on Boeing's future.
Two U.S. carriers make fleet plan changes
As part of its latest earnings report on April 23, United Continental confirmed plans to switch 10 of its Dreamliner orders to the larger Boeing 777-300ER. The carrier had been hinting that it would do this for the past few months, so this shouldn't have surprised anyone.
United seems interested in using the 777-300ER to add more seats at its busy Newark, N.J. hub, where slot constraints prevent it from adding extra flights. With fuel prices having dropped so much over the past year, United plans to keep its Boeing 767s flying longer, which reduces its need for Dreamliners to replace those planes -- for now.
Meanwhile, American Airlines announced the following day that it had agreed with Boeing to defer the delivery of five Dreamliners scheduled to arrive next year to 2017 and 2018. The stated purpose was to reduce American's international growth rate in light of unit revenue weakness in several regions.
Notably, executives at both United and American said they remain committed to the Dreamliner -- indeed, both airlines still have big Dreamliner order books. Their recent order changes were driven by short-term tactical adjustments, not big strategy changes.
The Dreamliner backlog is strong
In evaluating the impact of Dreamliner order changes and cancellations on Boeing, it's important to remember the size of the Dreamliner backlog.
Boeing has captured about 1,100 orders across its three Dreamliner variants: the 787-8, the 787-9, and the 787-10. As of the end of March, it had only delivered 258, leaving a backlog of 847 planes. At Boeing's current production rate of 10 Dreamliners per month, that represents seven years of production. Boeing plans to increase output to 14 per month by the end of the decade; but even so, it is more or less sold out through 2020.
This is a significant impediment to sales. For example, Airbus won an Delta Air Lines order for 50 wide bodies last fall. One key reason it beat out Boeing was its ability to start delivering next-generation wide bodies in large numbers by 2017. Delta would have had to wait longer to get a significant number of Dreamliners.
Boeing is making the right moves
The high global demand for airplanes in the Dreamliner's size class has some counterintuitive implications for Boeing.
First, Boeing should welcome -- and perhaps even actively seek out -- deals like United's to swap Dreamliner orders for 777s. Based on the massive Dreamliner order backlog, Boeing will have no trouble finding other airlines to take any Dreamliner slots that might open up in the next few years.
Second, Boeing should also welcome the new low fuel price environment. On the surface, it might seem like Boeing should be worried about the threat of airlines like United and American keeping older, less fuel-efficient aircraft flying longer.
However, airlines will need to replace their old 767s sooner or later. If they're willing to wait until after 2020 -- by which point competition for Dreamliner delivery slots will be more muted -- that's actually better for Boeing. Boeing's management seems to be comfortable with these dynamics. CEO Jim McNerney remains confident that the Dreamliner is a great investment for airlines at today's fuel prices. He has also stated repeatedly that customers are mainly asking about accelerating deliveries rather than deferring them.
Accordingly, Boeing is 100% focused on increasing Dreamliner production from 10 per month today to 12 per month in late 2016 and 14 per month by the end of the decade. The only thing limiting Boeing's ability to sell more Dreamliners is its ability to build more of them. As long as the production increases go reasonably well, investors shouldn't worry about Dreamliner sales.