Boeing (BA, Financial) shares went up 0.7% to $128.21 on the news of a $2.1 billion order from lease company Avalon. The order placed is for six 787 Dreamliner jets and five 737 Max aircraft. In another news, the American jet maker also bagged a $4.1 billion federal contract order from NASA for making space taxis. Boeing made space taxis would reduce the U.S.’s dependence on Russian rockets needed for manned space flight. The two news together gave good enough reasons for the stock to go up. The federal order is a decent boost at a time when discretionary budget is constrained. However the fact that Boeing’s commercial wing has always given the company a cushion during the ups and downs of its defense wing shouldn’t be disregarded – thanks to its stupendous commercial backlog.
Boosting production
As its commercial division is so core to the company’s working, it’s essential for Boeing to plan the smooth deliver of the mounting backlog. In such a case, as orders for its top selling plane 737 and its reengineered version 737 Max is increasing at a robust pace, Boeing is seriously considering to ramp up the production rate of this single aisle airplane. The jet is being produced at the rate of 42 a month currently. This was supposed to move up to 47 a month in 2017. But under the current circumstances the company is considering to boost the production level to 52 a month starting 2018, according to Boeing’ head of commercial Ray Conner who recently said this in an investor conference.
Earlier Boeing was in two minds regarding increasing the production to such a high level, but now the “significant demand” and “incredible pressure” has convinced the company that a production rate augmentation is a necessity. Boeing president and COO Dennis Muilenburg said that the company went through some very serious decision making recently to reconsider the production rate at the Reuters Aerospace and Defense Summit, but denied to comment on the result of the meet.
Peer on the same track
Boeing is not the only one wondering to increase production rate, fellow player Airbus (EADSY, Financial) is also planning to raise the production level after witnessing massive demand for its popular narrow body the A320 aircraft over and above the record level of 46 airplane a month for 2016. At the Reuters Aerospace and Defense Summit Airbus Americas president Barry Eccleston opined that by year end the company will come out with the decision of lifting the production rate.
Both Airbus and Boeing are currently carrying record orders for their single aisle offerings. Thus raising the production level is becoming an important decision for the two. It’s essential for the aero giants to identify the best production rate to make timely deliveries and convert the order backlog into solid cash flows while bolstering revenue. Boeing has a commercial 737 backlog of more than 4,000 units which translate to more than eight years of production at the current level.
Parting thoughts
Boeing estimates aircraft demand for around 36,770 units by 2033, which is worth $5.2 trillion. A major chunk of the demand will be for the 737, the A320, and their reengineered versions (737 Max and A320neo). Increasing the production rate is the only answer to this epic demand, helping both Airbus and Boeing to arrange earlier delivery slots for its customers instead of making them wait for long. With enormous narrow body backlog it’s right time for the aircraft duo to pick the correct production rate.
