Boeing CEO sees strong fundamentals

Feb. 17, 2016: The fundamentals of the aerospace industry remain strong in commercial and defense, says Dennis Muilenburg, CEO of The Boeing Co. Airlines are becoming more profitable, allowing them to accelerate fleet replacement, he said.

Dennis Muilenburg

Dennis Muilenburg, Boeing chief executive officer. Source: Boeing.

In his first public appearance since the disappointing 2016 earnings call guidance on Jan. 27 and news of an investigation by the US Securities and Exchange Commission over the practice of program accounting, Muilenburg faced questions at a Barclays investors conference today.

Boeing stock is off about 22% since the beginning of the year and was off about 15% since Jan. 27. Stock has been recovering in recent days. Aerospace analysts say that Boeing has been buying back the stock, propping up the price.

New airplanes reduce maintenance costs and airliners like the 787 are opening new routes, Muilenburg said. More than 90 new city pairs have been opened with the 787.

China is under-served by about 1,000 aircraft today and it will need 6,000 aircraft over the next 20 years, he said. A similar situation exists in India and Indonesia.

Boeing has 5,800 airplanes in backlog, roughly equivalent to seven years of production. In five years, Boeing will deliver “well north” of 900 airplanes per year compared with this year’s guidance of about 740.

“Our commitment to return cash to shareholders remains steadfast,” Muilenburg said.

Messaging

Muilenburg said comments by Ray Conner, CEO of Boeing Commercial Airplanes, about pricing pressure were essentially misinterpreted and not as severe as press reports concluded. Conner’s announcement to employees about cost reductions should not be viewed as defensive, but offensive in its competition against Airbus.

The SEC and whistleblower probe is a topic that Muilenburg said he comment on one way or another and expressed confidence in Boeing’s use of program accounting, the subject of the SEC probe.

Muildenburg said that a lot of the airplane sales are sold to emerging and under-served markets. While there have been some deferrals and cancellations, these have been “more than made up” by sales elsewhere.

“We’re heavily diversified” with solid customers, he said. “We continue to see a need for 38,000 aircraft over the next 20 years. When you have seven years of backlog,” Boeing is in a good position to adjust the back end as needed. “This is a different” marketplace than has been seen historically.

“We are mindful of the fact that the cargo/freighter market” is challenged. The next replacement cycle will be about 2019.

Muilenburg said that Boeing still needs to sell about 40 777s a year to build the bridge to the 777X.

Boeing will build about 12 737 MAXes this year that won’t be delivered until next year, which are part of the 42/mo production rate this year. Deliveries next year will exceed the production rate, and a smaller but similar approach will be taken with the 777 Classic/777X production and delivery rates.

Pricing

Prices have held up well, Muilenburg said. “It’s been about a 50/50 share of the [single aisle] market price,” he said. “We’ve been holding our own.” Cost reductions through production line efficiencies help margins, as do the programs of Partnering for Success and Lean-Plus cost-cutting programs.

“We’re not satisfied with the margins of our commercial airplane business today,” he said. Boeing has guided to 9% this year but the aspirational target is mid-teens. The 787 still is a low-margin program, for example.

Program accounting “is very much in line with our history,” Muilenburg said. “It’s the right way to do it because it allows us to take our current year investment” and see how it plays out over decades of a program’s life. “We invested a lot in the 787 up front. That is investment that is now behind us. We built the right airplane. Yes, it was a tough introduction, but that investment is behind us.

“We expected the program to go cash positive in the fourth quarter of 2015. It did.”

Muilenburg said separate accounting blocks for the 787-8 vs the 787-9/10 is an idea that is sometimes entertained, “it doesn’t meet [our] criteria to have separate blocks.”

Middle of the Market Airplane

“We believe today this is largely served today by the MAX on the low end and the 787-8 on the high end. But you could come to a conclusion” that a stretched MAX, or a new airplane, is something that might be needed. Boeing is going through these studies now. Muilenburg said that whatever the solution will be will be on the “backside” of the 777X. He doesn’t see a spike in research and development profile in the next five years, “because it won’t.” It will come after the 777X.

Muilenburg did not answer a specific question about how the MAX 9 competes poorly with the A321neo, instead pointing out that the MAX sales captured about 50% of the sales since its introduction. He added that Boeing isn’t chasing market share.

Advances

Muilenburg said cash advances don’t make up a material portion of the cash flow–that the cash flow story is a story of the strong fundamentals of the business.

 

 

61 Comments on “Boeing CEO sees strong fundamentals

  1. My impression is more realism landed in the Boeing board room after McNerney left. Still a bit functional 60-40 denial of what everybody knows, but alas. It’s looking back. Who’ll order MAX’s over NEO’s over the next 5 years. I guess he got some alarming sales forecasts. All big 737 users have been covered or lost and now?

    http://www.pdxlight.com/neo2.png

    • “Still a bit functional 60-40 denial of what everybody knows, but alas.”

      Interesting use of the word “about” by Muilenberg.

      • The same “functional” split when comparing the 350vs787 but of course in reverse. I suppose it all depends on your point of view.

          • No, the 787, of course.

            Evidence – Boeing’s own admission they sold 787s way too cheap and their published finances.

          • Hmmm they are selling them at a profit now and if selling planes at a loss was the key to success it certainly hasn’t helped the 380 has it?

        • @geo

          Wishful……

          So we compare a350 to b787 when we both know that they are not not direct competitors, the thing that makes the NB market so stark is the direct compatibility mode l on model. Max 8 slightly beat 320NEO whilst Max 9 flounders. Why get antagonistic in favour of Boeing products, they are easily good enough overall to provide their own riposte

          • But Airbus is not capable? Regardless speaking of wishful thinking tell the Emirates, Garuda,PAL, Virgin, Delta or Aeroflot etc… they aren’t direct competitors. I get it though, just change the question when losing the debate eh? But to turn things around no need to deflect or get your panties in a bunch when somebody posts uncomfortable facts! 😉

  2. Add in that Lufthansa is reporting 16 to 17% improvement on the fuel burn of the A320NEO (P&W GTF equipped)

    Other reports are even higher, not often out of the box meeting let alone exceeding fuel burn lately for engine mfgs.

    If P&W can get over their problems its looking very good and per note, all the big fuel improvements in the near term are a GTF solution.

    If I was Boeing I would not have been taken aback by the 60/40 split, you can only produce so many a year.

    But the trouncing in the A321 category is very bad news for Boeing, at that point Airbus does not have to compete on price, far better return.

    You continue to see the 737-9 sell, but its an incremental sale where the 737-8 is not quite big enough, its not in the same arena as the A321.

    There is a lot more going on behind the scenes at Boeing than Muilenburg is letting on in that regard.

    From the Av week report, you can clearly come up with a pretty spectacular fuel burn improvement with current (or at least ready to go) tech. If they launch now it occurs when fuel prices are back up.

    Instead od dithering like they have done so often they need to get it in gear (GTF of course!)

    That also is of extreme interest as to what RR and GE do. Sooner the launch the better positioned P&W is (and maybe the only option at least for a time)

    • Airlines and lessors have been complaining about high prices charged by Airbus for the A321neo. But still they buy them.

      What’s the position on engines if MOM does end up being a stretched MAX – is that still CFM-exclusive territory?

      • Somehow I doubt it. If I recall correctly, GE had to bid for the 777X variants.

    • Just 16 % lower fuel burn for Lufhansa’s NEO compared to the CEOs?

      This is the statistic for one aircraft over one month during a very windy season in Germany. (No – head and tail wind do not compensate each other!)

      The NEO has 180 seats while the CEOs have 168 seats. That alone is a 7 % “improvement” over the CEO for LH. With 16% for fuel burn the total improvement reaches 24 %.

  3. ” What’s the position on engines if MOM does end up being a stretched MAX – is that still CFM-exclusive territory?”

    If it’s either the MOM aircraft or/and a MAX derivative, those engines will need to be developed. Between the clean sheet design for the MOM and the elongated MLG for the MAX – 10, a new engine would need to be developed IMHO. A derated GEnx-1B or Trent 1000 could work but I’m not an expert in this realm.

    • Yes, but my question was relating to CFM’s exclusive contract with Boeing for the 737MAX. Would that extend to a 737-10 MADMAX?

      • I think Boeing could do a 737-10 with a 35K leap 1A/C or PW for a 150′ or 155′ long aircraft. Which airlines would want it though? Like the 764, it seems like an oddball to me.

    • Those listed engines would not work.

      No current optimized engine exists in the thrust range.

      I think its up to Boeing how to interpret the choice. GE might squawk privately but doubt publicly.

      GE also does not have a viable solution

      Next Gen GTF will be even better and only P&W currently has a near term path.

      In 6 years GE could come up with a GTF but it would be a scramble and not proven as they currently have nothing there.

      RR is looking at it hard but the soonest is the 2022 or better point

      • Judging by Muilenburg’s comments, a new engine around 2022 might just fit the bill.

        In the mean time, Airbus continues to sell increasing numbers of high-value A321s and airlines continue to upscale their A320 orders to A321s.

      • The question is how strong is P+Ws hold over the patents? Meaning what can the completion do? Can anybody build a gearbox without paying P+W? If so I think United Tech stocks might be onto a really good thing.

        Maybe P+W will license some of that knowhow for widebody engines, that would speed next gen widebody engines up a lot, but to who? No love lost amongst the big three, much the same feeling between them as between the big two. Strengthen GE, who compete directly in NB engines, or RR, who don’t? Relations with RR have been rocky but I guess the commercial reality is P+W are better off with RR.

        • There are more than patents to protect your IP.
          In this case they have protection for design and also blueprints, that’s standard practice in the industry

          • You never know. GTF is not new, its been on APUs (MD11 I believe) forever, also some business jet engines used it.

            The protection is in the engineers and knowledge of how to apply it, pitfalls to avoid, P& W has been working on this for a long time.

            You don’t just jump up to speed on the techy.

            RR is looking at the 2022-24 before they have it.

            GE has not started (or at lest publicly)

            And you are still in your first generation of GTF while P&W is in its second or third.

            They play their cards right they have an advantage.

            RR and P&W would be a good collaboration or even a single company if the heads could work it out.

            P&W is non existent in big, RR in small and they would bring in a killer engine in mid (MTU part of P&W for all practical reasons).

            Engines are getting to be a hugely expensive problem and the return is long term.

  4. As things look now, it seems the likelihood of a MoM having priority over a 737 replacement is getting lower.

    Not only is A321NEO outselling 737-9, Boeing itself is getting aware that the A320NEO is outselling the 737-8 too. By an unhealthy margin. http://www.pdxlight.com/neomax.htm

    So any new aircraft has to cover at 170 seats too, efficiently. Heavy, expensive shrinks will get washed away in todays competitive environment. Stretches proved more effective.

    Therefor for Boeing a serious NB that can grow into a small MoM seems most likely. The sooner, if the MAX continues to sell mainly on price, availability, relations and fleet commonality.

    And you just can’t be lean with 2-3-2 cabin on 170 seats/600NM. So single aisle, but a big one for growth.

    http://i191.photobucket.com/albums/z160/keesje_pics/Boeing%20797%20NSA%20NMA%20MoM%20keesje%20A320_zpsnwwwvmo3.jpg

    • “Not only is A321NEO outselling 737-9, Boeing itself is getting aware that the A320NEO is outselling the 737-8 too. By an unhealthy margin. http://www.pdxlight.com/neomax.htm

      The A320 NEO had a 2 year head start on the MAX 8. As of recent the bridge to the MAX via the NG has been made and with as many sales as it has a whole it hard to argue if ‘unhealthy’ is appropriate. Sales numbers model to model don’t really matter unless you’re in the accounting dept of the respective OEM. This is really only highlighted because it is a highly contested duopoly and if you’re in second place, you produce sub-par planes, management has its head in the sand yada yada.

      Look at the automobile industry. In the US, GM and Ford, before the introduction of foreign models, had the domestic market to themselves for the most part. Cue in the trickle of entrants like Honda, Nissan , Mecerdes, VW, BMW, Toyota, Mitsibishi, Subaru, Volvo. Now their main focus is just to sell as many units as possible because they can’t be bother with beating the neighbor at his game because the new movers across the street and down the block are selling comparable units at attractive prices. Same goes for likes of Japan, China, Europe.

      • “The A320 NEO had a 2 year head start on the MAX 8”

        – On 1 December 2010, Airbus officially launched its successor to the A320 Enhanced, the A320neo “New Engine Option
        – On August 30, 2011, the company’s board of directors approved the 737 MAX project.

        Lets make that 9 months and the A320NEO is 700 ships ahead of the 737-8.

        “Sales numbers model to model don’t really matter”
        ?! Who says so ?

        • No one sane.

          The -8 doing 50/50 against the A320 does not make up for the -9 doing badly against the A321.

          Keeping in mind, the -9 is just an extension of the -8, i.e. suited to airlines that need to move up but don’t need a big jump.

          the A321 offers a big jump and or range options (though I am not sure too many will take the tanks added in the belly).

          Old bad time joke in US, De-Nile is a river in Egypt.

          So while the -8 is doing well and looks very capable, the -9 is an adjunct to the -8, not a competitor to the A321 and that’s grossly obvious.

          That does not mean the-9 does not have its place, but it certainly is not a competitor to A321.

          And while I am not big on sales, a quality build is a vastly better financially . return than an ultra competitive sale, and the A321 is not only selling, its building in far larger numbers than the -9

          Like the 787 segment for Boeing, Airbus owns the A321 segment.

          Granted across an offering line there are plusses and minuses, but the A321 is a glaringly huge minus for Boeing (and they should have had more than MAX 9 in the works as it was obvious before as well)

        • Six of one, half a dozen of the other. They didn’t have a 24 month advantage, just 9 months worth of an advantage. Same thing. Advantage Airbus.

          You conveniently left out the most important part of the sentence.

          “Sales numbers model to model don’t really matter unless you’re in the accounting dept of the respective OEM.”

        • NG sales slowed as customers waited to see what Boeing was coming up with, esp as NSA was supposed to be on the table. Same happened before Airbus launched the NEO. So I don’t think launch timing was such a big decider in this.

          • My singular point was the unnecessary importance that’s given to sales figures of aircraft in the case of A and B unless you are in the accounting dept of the respective OEM, not about why NG sales suffered or why timing was a decider. The other subscriber took it another direction and I responded.

  5. “announcement to employees about cost reductions should not be viewed as defensive “=we were just trying to scare the workers.
    “Cash advances don’t make up a material portion of the cash flow “,so why are you doing it?

    • @geo

      Wishful……

      So we compare a350 to b787 when we both know that they are not not direct competitors, the thing that makes the NB market so stark is the direct compatibility mode l on model. Max 8 slightly beat 320NEO whilst Max 9 flounders. Why get antagonistic in favour of Boeing products, they are easily good enough overall to provide their own riposte

      • I think the 737-8 beating the A320NEO is great. The latter is 700 ships ahead.

      • Together with the sec probe you would guess that they are trying to cover up some sort of hole. Could be a clue that they don’t want to separate 788 and789/10. I am also a bit suspicious about the A350 programme, how can things have gone so much better for About?

          • Well they had a lot longer to plan.

            Av Week says they have up to 50 person teams with the new airlines to support it.

            that said its started to suffer the typical faults and delays, somewhat in line with the 787 though aparnalty scattered not spot (787 had a lot of computer faults that were alamrs that should have been alerts) as well as some specifi mechail and elecitrial items issues.

            Also keep in mind, once number 17 is done there is a whole lot of new in the A350 so they start again.

            Will see if they are adroit or its like driving an old brownie transmission, you miss the shift and you are in low gear until you to the hill (look that one up, been there, done that, got far too many T shirts.

          • AAB talked about supply of spares rather than anything to do with the aircraft. Ramp up of new programs is as much a sub contractor issue as anything and it appears Airbus was short of some bits.

          • Yep, no one is perfect.

            The A380 wing rib issue is a case in point. Lot in common with some early Boeing 787 fit issues particularly from Italy.

            Interesting part is we won’t know for a while if it really fixed it.

  6. “instead pointing out that the MAX sales captured about 50% of the sales since its introduction”

    A spindoctor told Muilenberg that’s the way to get terrible 2011 out of the figures. http://www.pdxlight.com/neo3.png (Maybe Randy took a nap in 2011).

      • If you look at historical A321 sales vs the nearest 737 of any era they were both built, its vastly outsold the largest 737, be it a -900, Max-9. Around 600 orders.

        A321 went into service in 1994 and 1191 have been made to date, 414 on back order (unknown if those are converted to NEO)

        a very high percentage (over 30 and climbing I believe) of the A320 series orders are A321 and so will delivering follow.

        Boeing simply has nothing to match and never did (757 had longer missions)

          • You’ll note those lines are diverging and not in a good way for Boeing. Sadly, the site hasn’t been updated for three months, but the gap continues to grow.

          • They have shown a pattern of diverging then converging to meet…

          • The trend lines are of unequal length and therefore useless in displaying how the neo and max compare at identical stages in development. A cursory glance shows the sales lines converging again.
            Not saying they will meet again but it clearly shows the market shares have been skewed somewhat by the neo’s headstart which is the point of the debate.

          • No man is as blind as he who will not see.

            In the last three years, neo has outsold MAX by 170, 120 and 485. The gap is getting bigger and bigger.

  7. A321NEO has 1100 sales

    737MAX9 has 418

    Airbus will make 30% more money I suspect on an A321 vs a MAX9 build.

    • With Boeing not revealing the breakdown of MAX orders (one wonders why?) it’s nearly impossible to get an accurate number of -9 orders. Most sources suggest that Lion will take -8s as well as -9s (indeed they’re taking -800s now).

      As you point out, regardless of how many -9s Boeing is selling, Airbus is milking a cash-rich cow with the A321. I saw a projection that 40% of 2016 A32x deliveries would be A321s!

      I also expect to see increasing numbers of A320neo orders swapped up to A321neos. It’s turning into a bit of a beast.

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