By Dan Catchpole
July 25, 2018, © Leeham News: The cash keeps flowing at Boeing. The aerospace giant posted free cash flow of $4.3bn for the second quarter of the year, despite recording $426m in costs related to its delay-ridden KC-46 tanker program.
Boeing continues to work on closing the business case for its New Midsize Airplane (NMA), a business case unlike any the company has done before, Boeing chief executive Dennis Muilenburg said in a conference call with reporters and investment analysts.
“We’re looking at it both from an airplane and downstream services standpoint, so an integrated lifecycle view,” Muilenburg said. “Again, where can we create value for customers?”
The flip side of that question is where can Boeing create future revenue opportunities?
“Depending on the customer set, there’s a different value proposition for different airlines,” Muilenburg said. “In some cases, we can reduce operating costs, in some
cases we can help them reduce capital investment costs. So, we’re factoring that entire equation into our business case.
“It does give us more parameters to look at, more ways to construct a business case for the future, and taking that wholistic lifecycle view, you know, just gives us a more robust business case,” he said.
Capitalizing on lifecycle services revenue could be key to getting the NMA to pencil out. Plenty industry insiders privately express skepticism about the business case for the NMA. The day before the Farnborough air show began, Boeing said it would put off deciding on the NMA to 2019.
However, the company insists it will still deliver the plane in 2025.
Boeing is “doing the appropriate long-lead work to protect that 2025 EIS,” Muilenburg said during Wednesday’s conference call.
The company sees a market for 4,000 to 5,000 airplanes.
Boeing’s increased integration of services and aircraft sales will affect how the company sells the NMA, the CEO said. It will influence “how we can tailor a value proposition for different customers, and it will drive different ways for how you might design such an airplane.”
If Boeing launches the NMA, its engineers will incorporate digital capabilities and flexibility into the design of the aircraft, “so that it can enable optimized services for customers,” Muilenburg said.
“It’s not only something that factors into the business case, but it also factors into how we design the airplane,” he said.
Muilenburg did not give any more insight into where Boeing is with settling on a narrowbody or widebody design for the NMA. Customers want a widebody with narrowbody economics, “and that’s frankly the challenge of closing the business case,” he said. “It goes back to all the work we’re doing on transforming our enterprise to drive efficiency in development, production and support. And if we build the confidence and the data we need to make a business case that closes, we’ll launch, and if we don’t, we’ll continue down the path with our current product lines.”
He reiterated, “it’s important that we get (the business case) right, and we’re going to take the time to get it right.”
Muilenburg and Boeing CFO Greg Smith struck a cautious tone during the call, repeatedly underscoring that the company was not overextending itself.
When asked about 737 production rate increases, Muilenburg said Boeing is “very focused on being disciplined about our rate decisions in our production ramp up,” despite consistent market pressure to increase output.
President Donald Trump’s mention of a “space force” drew praise from Muilenburg during the call.
“I’m very encouraged by what I see as the administration leaning forward on investing in space,” including space exploration and militarization.
Space contains growth opportunities for Boeing going forward, from low orbit satellites to deep space exploration, he said. “We’re going to continue to lean forward in that business. It is an important investment area for us.”
The first two 777X production planes are in low-rate production. The 777X program is the primary driver behind a $1bn increase in inventory during the second quarter of the year. The 737 ramp also contributed.
The tanker charges broke down across Boeing’s three revenue divisions. Commercial airplanes posted a $307m charge, while defense posted $111m in higher costs. Boeing Global Services also reported an $8m charge related to the tanker program, reported Bloomberg.
“Management has previously expressed confidence that there would be no more tanker charges, and yet they keep coming,” Rod Stallard, an investment analyst with Vertical Research Partners, noted in a research note on Boeing’s quarterly earnings.