Rising Commercial Airplane Deliveries Lift Boeing’s Profit, Outlook

Boeing‘s (NYSE:BA) fourth quarter revenue and profit rose sharply driven by higher commercial airplane deliveries. The airplane maker’s revenue rose to $24.5 billion and its profit rose by nearly 20% annually to $1.5 billion in the fourth quarter. During the quarter, Boeing delivered 195 commercial airplanes, up from 172 airplanes that it delivered in the fourth quarter of 2013. ^[1] These higher airplane deliveries were driven by production rate hikes that Boeing implemented at its 737 and 787 programs in early 2014. This solid growth from the commercial aviation business was partially offset by lower revenue and lower profit from Boeing’s defense business, which is bearing the impact from weak U.S. military spending.

For full year 2014, Boeing delivered a record 723 commercial airplanes to airlines, surpassing Airbus, which delivered 629 airplanes in the same period. Looking ahead, Boeing expects to deliver between 750 and 755 commercial airplanes to airlines in 2015. ^[1] These rising airplane deliveries, driven by production rate hikes, should continue to drive growth in Boeing’s results in 2015.

We currently have a price estimate of $148 for Boeing, approximately in line with its current market price.

See our complete analysis of Boeing here

Rising Commercial Airplanes Sales

Improving airline profitability, rising air passenger traffic, and recovering air cargo traffic is driving strong demand for new commercial airplanes. These trends have resulted in large orders for both Boeing and Airbus in the past few years. To cater to this demand, Boeing has increased its production rates. At the start of 2014, the company hiked its 787 production rate to 10 airplanes per month, from 7 per month. Thereafter, in March 2014, the company raised its 737 production rate to 42 airplanes per month, from 38 per month. These production rate hikes for 787 and 737 airplanes raised Boeing’s commercial airplane deliveries to 195 in the fourth quarter, from 172 in the year ago period, driving growth in its results.

However, the company’s commercial airplane margins fell slightly in the fourth quarter as the share of 787 Dreamliners increased in the overall delivery mix. Boeing currently makes a loss on every 787 it sells. The company anticipates this program to break even by the end of 2015, and the program margins are expected to expand beginning in 2016, with further production rate hikes.

In the fourth quarter, Boeing continued to see strong order inflows for new commercial airplanes. Overall, in 2014, Boeing received orders (net of cancellations) for 1,432 commercial airplanes. The company delivered 723 airplanes during the year. So, despite production rate hikes, Boeing’s backlog climbed in 2014, reaching $440 billion or nearly 5,800 airplanes at the year end. ^[2] At current production rates, this backlog is equal to nearly eight years of production.

Separately, with the sharp fall in oil prices, there have been concerns that airlines could reduce their investment in new fuel-efficient airplanes. However, Boeing’s CEO said during the earnings call that lower fuel prices will benefit the company. We hold a similar view: lower fuel prices will boost airline profits, leaving them with more cash to invest in new airplanes. With lower oil prices the incentive for airlines to invest in new fuel-efficient airplanes may be lower, but airlines will still buy new airplanes as these purchase decisions are taken with a long-term view.

Weaker Defense Sales

On the flip side, Boeing’s fourth quarter growth from commercial aviation was tempered by a decline in its defense contracting business, which constitutes about a third of its top line. With lower U.S. defense spending, Boeing’s defense contract volume has steadily shrunk. Full year defense sales fell by 7% per year to $30.8 billion in 2014, and the company expects these sales to further fall to a range of $29.5-30.5 billion in 2015. ^[1] However, there are a few large defense contracts, such as the U.S. Air Force new Bomber, that are expected to be awarded in the current year. Boeing is partnering with Lockheed to bid for this new Bomber contract, which is expected to be worth $80 billion.

All in all, Boeing finished 2014 with strong fourth quarter results, and the commercial aviation up-cycle will likely continue to lift the company’s results in 2015.

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1. Boeing’s 2014 Q4 earnings form 8-K, January 28 2015, www.boeing.com [↩] [↩] [↩]
2. Boeing Commercial Airplanes Achieves Milestone Year for Deliveries, Orders in 2014, January 6 2015, www.boeing.com [↩]