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.
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.
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.
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.
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.