Boeing’s Huge Commercial Airplanes Backlog Will Feed Its Growth In The Coming Years

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The Boeing Company

Boeing‘s (NYSE:BA) revenues and earnings are set to grow in 2014 as it delivers more airplanes to airlines on the back of its highest backlog in years. At the end of January 2014, the airplane manufacturer had a backlog of 5,070 commercial airplanes, which is equivalent to around seven years of its production at current rates. [1] We figure driven by this record backlog, Boeing will continue to raise its production rates through 2014 and the next few years. In turn, these higher production rates will drive growth in the company’s commercial airplanes segment, which constituted more than 60% of its top line last year. [2] Looking back, over the past three to four years, this trend has been the primary driver of growth at Boeing’s commercial airplanes segment where both revenues and earnings have grown in double digits annually.

Here, we highlight the key factors that will sustain Boeing’s backlog at levels that will allow it to raise its production rates over the coming years. We figure that the recent airplane launches from Boeing such as those of the 777X and the larger 787 will compel airlines to place additional orders with the airplane manufacturer, thereby supporting its backlog. Additionally, the steady increase in global air passenger traffic driven by economic growth, increased trade and globalization will provide confidence to airlines about future air travel demand. This in turn will also drive them to continue to upgrade and expand their fleets and thus driving new orders and backlog for Boeing.

We currently have a stock price estimate of $135 for Boeing, around 5% ahead of its current market price.

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See our complete analysis of Boeing here

Recent Airplane Launches Will Support Backlog In The Near Term

Since 2010, Boeing’s commercial airplane backlog has surged every year as order inflows have exceeded airplane deliveries. During 2010-2013, the company received orders for 3,893 airplanes and it delivered 2,188 airplanes. [3] As a result, its backlog surged during this period despite steady hike in its production rates. These strong order inflows, among other factors, were driven by the launch of new airplane models, particularly the narrow body Boeing 737MAX in late 2011.

Late last year, the company launched the next generation of its best selling wide body 777 – the 777X. Boeing also launched a larger version of its current 787 Dreamliner – 787-10. Both these airplanes are promised to be more fuel efficient than their current counterparts with the 777X promised to be 12% more fuel efficient and 10% more cost efficient than its competitors. [4] We figure as airlines face increasing pressure from high fuel costs, which constitute around a third of their total operating expenses, these new fuel efficient planes will go a long way in relieving pressure off their margins. Thus, it is highly likely that orders for these recently launched airplanes will propel Boeing’s backlog through the next few years allowing it to continue to hike its production rates.

Rising Global Passenger Traffic Will Propel Airlines To Continue To Invest In New Airplanes

Another factor we perceive as equally important in sustaining Boeing’s backlog is the steadily growing global air passenger traffic. Higher passenger traffic enables airlines to raise their revenues and book higher profits. In 2013, according to figures released by International Air Traffic Association (IATA), global air passenger traffic rose by 5%, from 2012. [5] It is forecast to grow by 6% annually in 2014 and by 5% annually over the next two decades driven by growing global economy, rising trade and liberalization of air travel industry. [6] [7] This growing global air passenger traffic is helping airlines strengthen their financial health, which plays a key role in demand for new airplanes. As a result, airlines with stronger financials, seeing rising demand for air travel, will likely continue to place orders for new airplanes. Boeing being a leading airplane manufacturer with over 40% market share in global commercial airplane deliveries will certainly benefit from these order inflows. [8]

In all, we figure higher production rates at Boeing backed by its colossal backlog will continue to drive growth in its results for the foreseeable future. A similar trend is expected to drive growth at Boeing’s European competitor, Airbus, together with which it controls over 80% of global commercial airplane deliveries. [8] We figure this ongoing upcycle in the commercial aviation industry driven by development of more fuel efficient airplanes and growing global demand for air travel will continue to push global airplane deliveries higher in the coming years.

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Notes:
  1. Boeing’s unfilled orders through January 2014, February 20 3014, www.boeing.com []
  2. Boeing’s 2013 10-K, February 14 2014, www.boeing.com []
  3. Boeing orders and deliveries, February 20 2014, www.wikipedia.com []
  4. Boeing 777X to Deliver Unprecedented Efficiency and Economics, November 18 2013, www.boeing.com []
  5. Air passenger market analysis – December 2013, December 2013, www.iata.org []
  6. Financial forecast briefing note, December 2013, www.iata.org []
  7. Boeing’s long term market outlook through 2032, February 20 2014, www.boeing.com []
  8. Global commercial aircraft deliveries in 2013, February 20 2014, www.speednews.com [] []