Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
Boeing beats estimates on one-time gains
Oct. 26, 2016: Boeing Co. beat analyst estimates on one-time gains but also reported that it raised earnings guidance for the full year.
The press release with full details is here.
Revenues were down 2% year-over-year to $72.1bn. Operating earnings fell 42% to $3.65bn but net earnings fell only 21% due to gains related to taxes. Commercial deliveries were down by 17 airplanes as Boeing transitions from the 737NG to the 737 MAX.
Revenue guidance increased
“Revenue guidance has been increased $500m to between $93.5bn and $95.5bn on higher commercial deliveries,” Boeing said in its press release. “GAAP earnings per share guidance for 2016 has been increased to between $7.10 and $7.30 from $6.40 and $6.60 and core earnings per share (non-GAAP) guidance has been increased to between $6.80 and $7.00 from $6.10 and $6.30 to reflect a favorable $0.70 per share tax basis adjustment. The third quarter favorable tax adjustment for a 2011-2012 tax settlement of $0.28 per share was previously announced in the second quarter of 2016 and was reflected in prior guidance.”
Operating cash for the nine months increase 12% YOY to $3.2bn. Boeing raised guidance on airplane deliveries slightly to 745-750 from 740-745.
Earnings Call
Dennis Muilenburg, CEO
Quotes are paraphrased.
- Our view of the general business environment remains positive. We’re seeing strong demand for 737 MAX. We see some near-term hesitation for wide-body, but long-term, we remain positive. We see a return for demand early in the next decade.
- There is more work to do to finalize Iran Air sales.
- Pending campaigns will dictate 777 Classic production rates; decision should come in a few months.
- Customer demand remains strong for 737, with more than 4,300 in backlog for NG and MAX. Even at 57/mo rate in 2019, we remain oversold. 777 Classic backlog >160 airplanes. On track to transition to 7/mo in 2017. Slots now about 85% sold out. In 2018 about 60% sold out at planned delivery rate of 5.5/mo. At this time we don’t see a situation where we need to lower rates more than 1-2 month. If this occurs, it will be late 2017. If campaigns are successful, we may not have to lower rates at all. 787 program backlog 700 orders. Still hope to win orders for potential rate 14/mo by end of decade. 747-8F campaigns underway to fill production skyline.
Greg Smith, CFO
- Boeing Commercial operating margins 9.6%.
- 787 deferred production declined by $115m during the quarter. Supplier “step-down” pricing contributed.
- Initial insight into 2017 will be another year of solid financial performance. Cash flow growth in 17, 18 and beyond.
- Expect higher delivery rates next year but revenues will be flat as 737NG/MAX, 777 Classic/X mix begins.
- Any adjustment rate reductions could impact forecast, but sales campaigns will be the deciding factors.
- We have a strong foundation to grow the cash flow for the remainder of the decade and we continue to de-risk the business.
Q&A
- More than 130 new city pairs have been introduced by 787.
- We have a couple of years near-term to work through the transition to the 777X. The replacement cycle will have strong demand in the next decade.
- We think one-half a month production for the 747 is sustainable. Very Large Aircraft is a niche market that we think is sustainable. More growth in wide-body is 787 and 777. We will assess 787 rate to 14/mo over the next six months.
- Mid-teens margin for BCA is a realistic target but a challenging target. Key items is increasing profits on 787 program, burning down deferred production. Additional work on Partnering for Success. We are relentless on our broader lean-plus activities. We’re making sure we’re executing on development programs.
- 787 deferred will continue to decline in 2017 (but Smith did not give a forecast figure). It’s all about cash flow focus on that program. Great progress, but a long way to go to meet our expectation.
- Continue to return roughly 100% of free cash flow to shareholders.
- If 777 Classic production rate were reduced to a delivery rate of 3.5/mo, then we’re 95% sold out in 2018. Right now at 5.5/mo, 60% sold out. (This figure equals 40 deliveries in 2018.–Editor.) A reduced production rate would have negative impact on margins, but off-setting actions would be taken.
- We’re continuing discussions on Middle of the Market airplane. If we were to go forward it would be about the 2024/25 time frame. A 737-10 would be toward the end of this decade. We could do both.
All optimistic nonsense, inside information is always best and Ray Conner told the boys on the shop floor that that Boeing were “being pushed to the wall” by Airbus.
“Boeing were “being pushed to the wall” by Airbus.”
“Pushed to the wall” must be his favourite expression; because when Boeing won the contract with United for the 737-700, against the C Series, he also said at the time that Boeing had been pushed to the wall.
Being pushed to the wall and winning sales is not a bad thing. Just means he needs more from the folks on the floor to continue being competitive.
Scott – damn that Boeing they are eating away at the 787 deferred production costs!!! Might be slow, but they are moving in the right direction. 20 years from now you might be able to write that last blog about what it took Boeing to get that deferred cost in line with your expectations.
Good news- they are generating cash, they have some level of confidence that they can get to consistent run rates on the 777, and the two I don’t get – they think they can increase the 737 MAX and the 787? There must be some sales programs for the 787 that will drive demand in the complete opposite of what has been seen in the very recent past? If true, deferred costs will be projected to continue a consistent deline. In that case I’ll move my foreast for your last deferred cost blog to be 18 years?
I think the 787s real area is 8 – 10 a month, not 14.
there must be a good spot to have backlog vs short term ability to offer slots.
The 8 to 10 is my guess where it is.
The cash reality is that you can’t always do both, send lot of bucks to shareholder and develop products.
Kicking the can down the road bites in the end.
But there is the game of churning out more and selling at a lower price to drive the whole programme down the learning curve. In that scenario Boeing could decide to blow the A330 NEO out of the water by producing and selling below cost for an extended period of time. Boeing ‘need’ the B787 to bring in the orders and cash for another 15 years, maybe getting the costs down by retaining 12 a month production is a risk worth taking
Doing that would reduce the selling price of its -9 and -10 models as airlines flock to the ‘low price’
A big reduction in price is done anyway for a ‘large’ order, or one that includes other models, like the recent Qatar order/LOI
A 737 Max-10 not introduced with all possible rapidity is worthless. Beaten to market by at least a half a dozen years by A-321LR, in a segment that’s not huge to begin with.
Iran just took two more hostages they are trying to auction off, and harassing our ships in the Gulf. Anyone who actually thinks that even if the orders came they would be delivered, can’t see beyond their front door.
It doesn’t matter what they “think” about 747, the market and the global economy has decided for them already.
And I dare them to compete 777 on price against the 777x, a product who lack of orders is the actual story.
A well laid our primrose path.
“They are eating away at the 787 deferred production costs!!! Might be slow, but they are moving in the right direction.”
Indeed, but they need a rate of 12 or more per month, and this may not be sustainable if they don’t get enough new 787 orders. Unfortunately we seem to be entering a bear market for widebody, and perhaps for the whole commercial aviation sector. It looks like the market wants to pull the rug from under Boeing’s feet. In addition to this Boeing will soon have to deal with a sharp decline of its revenues coming from the 777 programme. And just as the 787 programme is about to become cash-flow positive the trend now wants to reverse course because of the expected lower production rates.
Fortunately for Boing the MAX has a very robust backlog and will keep the cash coming in this difficult period. However, a substantial portion of the profits might have to be reinvested in the 777X’ s development and production ramp-up. That leaves less money available for the MoM and NSA. Next year should also be a very good year, but after that profits will likely start to decline year after year.
The situation might change rapidly though and it remains difficult to predict in what direction the market will go. Still, it is becoming increasingly obvious that the exciting years we have enjoyed for more than a decade now are probably behind us. The market will eventually recover because many places around the world have not reached their full potential yet. But we just don’t know when.
yes . I read the comment “…787 deferred production declined by $115m during the quarter”
As really saying – deferred production costs are still rising but not as much as previous quarter. Thats after nearly 500 planes delivered-technically all at a loss.
I’ll take cash flow positive at face value, and a positive achievement, congratulations. My question is where are we in the learning curve? Seems to me, and just guessing not having insider information, that this is flattening out. Cash flow on 787 has been nearly positive (abt 5 mil an aircraft?) for two quarters now before finally crossing the line, I make that about a 10 million an aircraft improvement over the last 100 airframes. I can’t see them getting near avoiding a forward loss or as Scott expects trying to raise the block size. How that will go down with the SECA I don’t know.
At this point, the “learning curve” is not so much Boeing becoming better at building the 787 (though there is some of that) as supplier pricing step-downs, most of which are already negotiated. It’s pretty typical for total production costs to decline about 15% every time production doubles. So that could be an extra $15-$20 million in cash profit per plane by the end of 2019.
On top of that, I think some of the planes being delivered this year still had pretty steep launch discounts. And you still have a bunch of 787-8s being delivered now. I would guess the unit profit for a 787-10 is $25-$30 million higher than for a 787-8, so as that mix shift plays out starting in 2018, it should provide an extra boost to program profitability.
I’m still skeptical that Boeing will make up the entire deferred on a 1,300 unit block. But if it wins the Emirates order (whenever that happens — it now seems like maybe that won’t come in 2016 after all) I expect a block extension to follow shortly. Even without Emirates, Boeing is closing in on 1,300 orders.
Adding 200-300 planes to the block should be plenty to earn back the deferred and also increase the program margin.
@ Adam LW
I agree with much of what you say but your conclusion on block appears way off IMHO. I believe the accounting block needs to be far higher. Over 2000 at the very least. I also believe that the ‘partnering for success’ relationship of profit share to all tier 1/2 suppliers is a fundamental limit to the potential to gain stepdowns.
In terms of cash flow the accounting block is of no consequence, the costs are well and truly sunk, Boeing must simply attempt to generate as much free cash as they can for as long as they can
A little bit higher interest rates could have caused another “socialization” of stupid management decisions just like it happend to US car industry.
It was the best of times, it was the worst of times
And it’s all relative “fun and games” for now for BA–and AB–till the shootin’ starts in the South China Sea. (Almost “a lock” in the next five years.)
Good for aerospace. Except that wars these days come after you when you’re at home, ignore borders, have grey areas vs good/bad and low tech / high impact. So many people at the wrong places & so many smart phones. The West regularly looses (victorious withdraws, giving back power to unelected incompetent caretakers). John Wayne is so yesterday.
Always a crisis looming, will see.
China continues to be interesting without the current regime naming its successor.
And in Breaking News, UPS orders 14 747-8f with options for 14 more.
I wondered abut that. They needed to do something, be it 777F or this to secure their long term ops.
It may be the last hurrah, but it does allow it to live on for a while.
It’s a slow burner, but maybe it will make it to 150 or 175 units. At least they will be rolling off the line for the 50th anniversary of first flight.
Agreed, its just moving the goal line, but not close to out of sight.
And for me, I like it, the F is maybe the best looking Jet of all time and it will be good to see numbers through Anchorage (UPS hub)
“The F is maybe the best looking Jet of all time.”
Indeed, it simply looks gorgeous. I always liked the 747-100/200, although it took me some time to get used to its usual look; but I never liked the look of the 747-400, and even less so for the 747-8I. But the same aircraft in its cargo version is absolutely splendid. I hope the latter will stay in production a little longer than the former.
https://en.wikipedia.org/wiki/Boeing_747-8#/media/File:Boeing_747-8_first_flight_Everett,_WA.jpg
According to my knowledge about 5 to 6 B747 are white tails so Boeing has just about 8 more aircraft to be built.
So the line will close short time after the 50th anniversary.
This information is incorrect. According to http://747-8.blogspot.com/ production chart, there are 4 white tails and 2 recently completed unallocated jets, total of 6. There is a backlog of 15 orders, not including basically what amounts to letters of intents for 3 for AF1, 4 for Iran Air, and still north of 10 for Airbridge Cargo. Thats LOI on at least 17 planes and you only have 6 total unallocated so there is likely going to be additional production on top of the existing 15 in the backlog. Say 5 jets. Then add 14 firm orders from UPS and you have 34 jets which at 1/2 a jet a month is nearly 6 years. UPS also has options for 14 more. Another firm order from anyone and Boeing will likely have to increase their rate back to 3/4 a month… Needless to say, 14 firm from UPS saved the program by filling in all the missing gaps and then some that were in this nebulous cloud of ABC, Iran, and AF1. They are set for 5 years now
There are 4 747-8i white tails, 1435 LH NTU, 1495 BBJ NTU, 1519 and 1523, the UN NTUs. There are 2 -8F white tails I believe. 1437, the old Atlas NTU, as well as 1535, which just rolled out a few months ago. The other near-term unallocated unit, 1540, was recently allocated to Air Bridge Cargo.
The remaining Air Bridge Cargo frames from their LOI are 16 in number, however they will likely firm them up a few at a time from year to year as they have been doing. I believe they said they were looking at deliveries through 2022, so they wouldn’t be taking more than 2 or 3 in each given year unless they grow faster than expected.
The UPS orders are for 3 to 4 per year until 2020, and obviously that could be more or longer if they exercise any of their 14 options.
The existing backlog is really pretty low now. The 15 number they have been using in the articles is quite out of date, even as of the beginning of this month. For the -8i, there are 7, of which 4 are unlikely to be delivered (2 Arik Air, 2 UN), and the other 3 are either rolled out or in the FAL already. For the -8F, there are 7, of which 3 are rolled out or awaiting delivery and 1 is in the FAL.
Beyond the UPS and ABC orders, there is the conversion by Interpid aviation of 2 773ERs to 2 747-8Fs that happened earlier this month, although it is unclear what form exactly that will take. They have not been added as new orders at this time.
Iran, as you noted, has been stated to be taking 4, with the rumor being that two of them may be the UN NTUs. There may be a possibility that they could take more?
The prevailing thought from the Chinese firming of 300 frames in late September of 2015, including 50 widebodies, was that there were some 747-8s in there. The suspected carrier was Air China, as they are already operating the type, but it could be others, and either freighter or intercontinental.
Also, in one of their investor calls earlier this year, Atlas had stated that they were in discussions for a follow up order of -8Fs.
The UPS order will likely give not only actual frames to build, but confidence to other customers that Boeing isn’t looking to shutter the line sometime soon, thus perhaps helping at some level with other orders. If some of these other potential orders come to pass, it should give Boeing the runway it needs to see if the freighter replacement market that they have been talking about really does exist. If it does, then the line should still be up and running to take advantage of it.