Boeing faces 737 production gap: analysis


737 Gap July

Figure 1: Projected Boeing 737 production gap, taking into account announced production rate increases with an assumed July effective date. Click on image to enlarge. Sources: Ascend, Boeing, Leeham Co.

Market Intelligence indicates Boeing is facing near-term challenges in filling the production gap of the 737NG, even as the company prepares to increase monthly rates. The current production rate is 42/mo, going to 47/mo in 2017 and 52/mo in 2018.

A Boeing spokesman declined Monday to specify what months the new rates become effective. Our analysis takes a middle range: assuming the rate increases become effective in either July (Figure 1) or December (Figure 2).

The 737 MAX is scheduled to enter service in July 2017, with Southwest Airlines. According to Ascend, 63 MAXes are scheduled for delivery that year. Production of completed airplanes in the first six months of the year should result in a bit of a surge in deliveries in 2017. We don’t expect many “TBDs” from the Unidentified customers to show up in 2017.

Boeing classifies orders as “unidentified”  when there is a Definitive Agreement but either (a) the customer cannot publicly disclose the order yet, usually because of shareholder disclosure regulations in the customer’s home country, or (b) the order is subject to certain conditions outside the control of Boeing’s or the customer airline’s management. Order contingencies can include approval from the customer’s board of directors, shareholders, or regulators, or finalizing a finance or lease agreement. Occasionally, an order may be marked “unidentified” when minor contractual terms are still being negotiated which Boeing expects to be resolved in short order. These orders are included on Boeing’s “skyline” (internal production plan) and in publicly disclosed order totals.

With 63 anticipated deliveries prorated over the 12 months of 2017, this suggests a production rate of 5.25 MAXes per month, a rate that is somewhat generous given historical ramp-up rates.

The projected deliveries of 269 MAXes in 2018, the first full year of MAX production, suggests a production rate of 22/mo. This is an aggressive rate as well.

737 Gap Dec

Figure 2: Projected Boeing 737 production gap, taking into account announced production rate increases with an assumed December effective date. Click on image to enlarge. Sources: Ascend, Boeing, Leeham Co.

The data is for firm orders only. Options and LOIs are not factored in.

The Boeing spokesman also declined to discuss ramp-up rates.

True, the MAX is a derivative of the NG but there are substantial differences and a learning curve to consider. In contrast, Airbus’s planned deliveries in of the A320neo in 2016, the first full year of neo production, equates to a rate of 12/mo. The following year, the second full year of neo production when the A319neo and A321neo enter service, the neo rate equates to 28/mo. Airbus appears to be overbooked during the same period Boeing has a production gap.

According to Market Intelligence, the 737 gap increasingly is worrying “Longacres,” where Boeing Commercial Airplanes is headquartered in Renton (WA). The current fuel price environment takes the pressure off airlines to place orders. West Texas crude oil is back up to $49/bbl from a brief low of just below $40/bbl. But forecasters believe oil pricing will continue to drift downward in the near future, potentially leading some marginal-credit airlines to defer not just the MAX but also NG orders that might exist.

Boeing hoped to win an important deal with Delta Air Lines when it reached agreement to sell 40 737-900ERs to the carrier. The transaction also included taking 20 Embraer E-190s off Boeing’s hands, a trade-in commitment with Air Canada in exchange for MAX orders. The Delta deal was contingent upon pilots ratifying a new contract; it was rejected, and Delta canceled the 737s–leaving Boeing with a gap for 737 slots. Market Intelligence indicates these have yet to be resold.



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