Boeing: Orders Fall Short Of Guidance

Boeing (NYSE:BA) released its order and delivery tally late last week. The company managed to rake in close to 668 orders in 2016, falling short of the 2015 figure by 13%. This is the company’s lowest order tally in six years. The total number of deliveries for the year came in at 748 planes. Earlier in the year, the Chicago-based aircraft manufacturer had forecasted to procure as many orders as deliveries in 2016. However, market conditions were worse than expected and the company missed the target by a large margin.

Additionally, the fact that the orders total lags the deliveries total in 2016 means that Boeing’s backlog of unfulfilled orders dropped by eighty, marking a fall for the first time in seven years. The way things are, we can expect 2017 to see low orders as well. For this reason, both Boeing and Airbus are now focusing their attention on delivering their swollen backlogs. To give some perspective, Boeing ended the year with more than 5,700 commercial aircraft in backlog.

At list prices, the total number of orders in 2016 would ideally bring the company close to $94 billion in revenues. However, considering all the discounts and concessions, Avitas estimates the actual revenues to be just over $44 billion. The slowing market has added immense pressure on aircraft manufacturers to reduce prices significantly in order to sell more.

In the recent past, new orders have fallen considerably as airlines slow purchases after years of record buying. Historically, orders from airlines have been cyclical in nature and it appears that the market is going through a slump at the moment. Boeing’s deliveries have fallen considerably over the last two years and will continue to do so considering the current economic environment. The weak economy has forced air carriers and governments to delay or cancel orders for new aircraft, including the flagship 787 Dreamliner. Furthermore, airliners built more than 20 to 30 years ago are still flying regular routes having been refurbished multiple times.

Furthermore, orders for widebody aircraft continue their downward trend. This is evident from the weak order activity for Boeing’s main widebody aircraft programs, the 777 and the 787, throughout 2016. The company ended the year with 58 net orders for the 787 and only 17 net orders for the 777. This is a dismal performance considering those two programs combined received more than 600 orders in the 2013-2014 period. Analysts expect 777 deliveries to decrease to about 3.5 a month in 2018, as the successor 777X model enters production. At present, Boeing manufactures about 8.3 planes a month.

In contrast, the 737 has procured close to 550 net orders for the year; almost all of the orders were for the 737 MAX variant, which is set to enter service this spring. Additionally, the company delivered about 490 737s during 2016. Consequently, the 737 order backlog swelled to 4,452 units by the end of the year. This represents close to nine years of productions at last year’s pace, or about seven years output after accounting for three scheduled production increases.

Should the production increases go per plan, we could see increased cash flows between now and 2020. Additionally, this could help offset the 777 program’s eroding cash flow during the period. Consequently, Boeing will be in a good position to benefit if widebody sales recover near the end of the decade as expected.

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