Boeing Raises Commercial Production Rates On Strong Aircraft Demand

by Trefis Team
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    Quick Take 

  • Rising air travel in emerging markets and the replacement of older airplanes in mature markets like North America and Europe are resulting in strong demand for airplanes manufactured by Boeing
  • Strong demand coupled with a backlog of over 4,450 airplanes, which at current production rates will take Boeing more than 7 years to deliver, is causing Boeing to raise production rates of many of its models including 737, 777 and 787
  • Higher production rates will lead to increased deliveries which will drive profit growth in 2013

Boeing (NYSE:BA) is increasing the production rates of many of its models including 737, 777 and 787 in its commercial airplane business on strong demand and a healthy backlog. Higher production rates will lead to increased deliveries which will drive growth in company profits in 2013.

In emerging markets like Asia-Pacific and Latin America, demand for air travel has been rising which is pushing airlines to expand their fleets in these regions. In North America, growth in passenger travel is outpacing increases in flying capacities. This is driving up occupancy rates (the percentage of seats occupied in a flight) and airplane utilization rates (the percentage of time spent flying by an airplane) to record levels boosting airlines’ profitability. This is allowing airlines in North America to replace their older planes with newer ones.

In all, air travel demand in emerging markets and replacement demand from more mature markets like the U.S. and Europe are driving growth in Boeing’s orders and backlog. At the end of February 2013, Boeing’s total unfilled orders for commercial airplanes increased to 4,472 from 3,771 at the beginning of 2012. [1] [2]

We currently have a stock price estimate of $82 for the company, approximately in line with its current market price.

See our complete analysis of Boeing here

Production rate for Boeing 737s being raised to 38 airplanes per month

Currently, Boeing is increasing the 737 production rate to 38 airplanes per month, and this is set to rise further to 42 airplanes per month in the first half of 2014. [3] Continued growth in demand for 737NG models (737-600/-700/-800/-900ER) is forcing the company to hike its production rates. Boeing is presently sitting on 1,951 unfilled orders for 737NGs, and at the above rates it will take the company over four years to make these deliveries. [1]

Additionally, orders for the fuel-efficient 737MAX which is under development is adding to the backlog provided by 737NG. This model generated a record breaking 914 orders in 2012. [4] It has continued its strong performance in 2013, notching 121 orders in January and February. [5] However, 737MAX’s order tally for the full year 2013 will likely fall short of its 2012 level. A similar phenomenon was observed for Airbus when orders for its newly launched A320neo declined in 2012 after setting a record of 1,226 in 2011. [6] Boeing had launched the 737MAX in late 2011 in response to the launch of Airbus’ A320neo in 2010.

In all, unfilled orders for Boeing’s 737 series rose to 3,136 through February 2013, up from 3,074 at the end of 2012 and from 2,365 at the end of 2011. [1] [4] [2]

Production rate for Boeing 777 hiked to 8.3 airplanes per month

The company also recently ramped up production of its wide body Boeing 777 to 8.3 airplanes per month (100 per year), from 7 airplanes per month. [7] Improved efficiencies achieved through manufacturing innovation also contributed to the rise in 777′s production rate. Currently, Boeing takes 48 days to build a 777. Total unfilled orders for this model stood at 363 at the end of February 2013. [1]

Production rate for Boeing 787 being raised to 10 airplanes per month

Boeing is also raising the 787 Dreamliner production rate even though it is not delivering these planes due to the grounding order from the Federal Aviation Administration (FAA). This indicates that the company is confident that it will resolve the 787 battery issue in a timely manner and get requisite approvals from the FAA (See Boeing Hopes To Return 787s To The Skies Soon With Its Proposed Fix). The 787 program is currently manufacturing at a rate of 5 per month, which is set to rise to 10 per month by the end of 2013. [8] At a recent aviation conference, Boeing Commercial Airplanes CEO Ray Conner said that part of Boeing’s 787 supply chain had already reached supply levels commensurate with a production rate of 7 airplanes per month. [9] Unfilled orders for 787s were 841 through February 2013, up from 799 at the end of 2012. [1] [4]

Increased competition in certain categories will hamper further production rate hikes

Looking ahead, further production rate hikes for certain Boeing models particularly the wide body 777 and 787 will face pressure from the entry of Airbus A350 in mid 2014. Airbus says that this model will be more fuel efficient with lower operating costs than the Boeing 787 Dreamliner.

Additionally, production rates of other models like 747 are being held steady by the company due to a fall in their demand. Demand for 747′s freighter version has dropped recently due to the decline in global freight and cargo markets. As a result, backlog for this aircraft has declined over the past year. Total unfilled orders for 747 were 67 at the end of February 2013, down from 97 at the end of 2011. [1] [2]

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Notes:
  1. Boeing’s unfilled orders through Feb 2013, March 12 2013, www.boeing.com [] [] [] [] [] []
  2. Boeing’s order book at the end of 2011, January 5 2012, www.boeing.com [] [] []
  3. Boeing 737 program starts building at higher production rates, January 29 2013, www.boeing.com []
  4. Boeing’s order book at the end of 2012, January 3 2013, www.boeing.com [] [] []
  5. Boeing’s Q1 2013 order details, March 12 2013, www.boeing.com []
  6. Order for Airbus A320neo, March 12 2013, www.wikipedia.com []
  7. Boeing rolls out first 777 at increased production rate, March 12 2013, www.boeing.com []
  8. Boeing says strong demand pushing commercial production rates higher, March 11 2013, www.boeing.com []
  9. Boeing Commercial Airplanes CEO Conner to speak at JP Morgan conference, February 26 2013, www.boeing.com []
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