June 20, 2022, © Leeham News: Boeing still has a deep hole to climb out of. There’s still plenty of opportunity for missteps along the way. But I’m cautiously optimistic about Boeing’s future.
LNA has been reporting progress Boeing has made in the past year toward recovery. It’s on a hiring spree to replace and add engineers, technicians and other employees who retired took early buyouts, were laid off by Boeing, and through normal attrition. This hiring spree includes positions specifically for new airplane design.
The development of a stronger safety culture and process is a critical step. Obviously, this shouldn’t have been necessary, and it was mandated by the 737 MAX crisis. Nevertheless, it’s a step in the direction of the “old” Boeing. Engineering and safety were once the greatest brands Boeing had, long before shareholder value became the top priority of the company. I’m not naïve into thinking that emphasis on shareholder value won’t return later this decade. But maybe at long last the C Suite and Board of Directors will recognize that shareholder value ultimately is generated from great engineering and safety.
With this overview, let’s get into the details.
In addition to the hiring spree, Boeing has at least nine 787s and perhaps more in rework, addressing gaps and other issues that caused delivery to be suspended in October 2020. The final stages of paperwork are with the FAA for review. Lufthansa Airlines hinted it could receive its first 787 this month, though nobody confirms this.
Although supply chain shortages slowed the production ramp-up of the 737 to the previously announced 31/mo—something that was supposed to be achieved in “early” 2022—this rate still is the target for later this year. Boeing previously alerted the chain to be ready to return to rate 52 by 2025. This is the pre-grounding rate. The rate breaks created new production capacity that enabled Boeing to offer early delivery positions vis-à-vis Airbus for the A320 family. This was crucial in some sales campaigns.
Boeing announced the program launch of the 777X freighter, a derivative of the 777-9. Shorter than the -9, the 777-8F was longer than the original concept for the 777-8 passenger version. The -8P will now be the same length as the -8F.
Boeing also is developing Increased Gross Weight Versions of the 787-9 and 787-10. The IGW will benefit the -9 if Boeing launches a 787F. There has been no discussion we’ve heard of a prospective 787-10F. Notably, there is no IGW of the 787-8, a model Boeing hasn’t wanted to build for years because of its major production differences from the -9 and -10.
Reading Boeing is often like trying to read the Kremlin. It’s very difficult. But during the administrations of Jim McNerney, Dennis Muilenburg and Dave Calhoun, Boeing has largely kept its executives away from the press. This continues to be true, with very rare exceptions.
Setting aside the two years of the MAX grounding and COVID pandemic when no large-scale media events occurred, last week Boeing held a series of press briefings in advance of the Farnborough Air Show. Previously, for years Boeing limited the attendance to a handful of trade and selected other media. This year, between 40-50 media, bloggers, and “influencers” were invited. Only lower-level officers and program managers were made available to the press—no C Suite types—but this was the norm.
While the topics were not ground-breaking news, plenty of stories and nuggets emerged. Boeing finally felt it had something to say and to say it before a wider audience, in contrast to previous events.
None of the Boeing people at the media briefings announced that Boeing will proceed with a new airplane program. Boeing isn’t ready, the MAX and 787 inventories must be reduced, 737 and 787 production must come back up to provide solid cash flow and other things must occur.
But separately from the briefings, LNA has learned enough to understand that a new airplane is in the cards. We’ve opinioned many times that we expect Boeing to announce a new airplane program in 2023 or 2024. We stand by this forecast.
There is still plenty that can go wrong at Boeing over the next few years. This is why I remain cautious.
Boeing must regain the trust of the regulators. The FAA is first and foremost, as it is the regulator to which Boeing must answer. As a result of the MAX crisis, the FAA stripped Boeing of its ability to certify each 737 and 787 as ready for delivery. The FAA is understaffed for this task. Boeing needs to regain authority.
Relations with Europe’s regulator, EASA, also was severely damaged by the MAX crisis. EASA required extra fixes to the MAX and it has serious questions about the 777X. Boeing must repair this relationship as well, along with China’s CAAC, Transport Canada, and others.
CAAC lifted its grounding order last year. But the airlines still need the authorization to return the MAX to service. Apparently, this hasn’t been forthcoming. With the lockdowns ordered by Beijing in its zero COVID policy, passenger demand doesn’t support additional capacity. Political implications between Beijing and Washington appear to continue to be a factor. But returning the MAX to service will come. Then, the 140 or so MAXes in storage ordered by Chinese airlines and lessors can be cleared out.
The production moonshot is a big risk. As outlined in our June 23 post, converging all the advanced manufacturing and digital design processes into the next commercial airplane, whatever it is, won’t be a cakewalk. Conceptually, the new production ambitions are similar to those intended for the 787 in 2004. The effort proved disastrous. While Boeing has more experience now in various aspects of advanced design and manufacturing, and these are being employed in the Defense unit, migrating these to a commercial program remains the biggest challenge.
Officials believe they have a great, unchallenged product strategy vis-à-vis Airbus. This isn’t just marketing hype. Those inside Boeing actually believe this (though there are some realists as well). But the market speaks with orders and dollars, and the numbers paint a different story. In fairness, there are some apples-to-oranges comparisons being made by both sides.
Boeing likes to dismiss the A321XLR as a niche airplane (it has more than 500 orders). But there are more than 4,200 orders for all models of the A321neo vs fewer than 1,000 for the MAX 9 and MAX 10. There have been 4,922 orders for all MAX types. Airbus reports a total of 8,086 orders for the A320neo family. That’s a 62% market share.
Boeing retains an advantage in the widebody sector. It has a backlog of 914 777 Classics, 777Xs and 787s. Airbus has a backlog of 614 A330neos and A350s. Boeing’s market share is 60%. (Freighters are included; Boeing’s ASC 606 deductions are excluded for all models because Airbus doesn’t similarly report “soft” orders.)
While Boeing officials profess optimism for the future of the 777X passenger model, many observers, including LNA, believe market fragmentation since the 2013 program launch sharply reduced the future demand for the 777-9. The ultra-long-range 777-8, with just 32 orders, is the true definition of a niche airplane.
Boeing’s years-long indecision about whether to launch the NMA, pre-dating the MAX and COVID crises, led some customers to order the A321XLR. Some of the 1,000+ MAX orders Boeing boasts about now were tied to customer compensation due because of the MAX grounding. Others were because Airbus has few production slots for the A320 family until 2027 or beyond. Boeing was able to offer delivery slots as early as 2023 in some cases. So, while the 1,000+ orders are positive, some are due to extenuating circumstances and not clean wins over Airbus.
But has Boeing’s indecision gone away? Obviously, there is a lot of work that must be done on a new airplane and the customers must be surveyed again. The supply chain must be cut in. Very little of the latter two tasks has occurred, based on our discussions with these sectors. Time is getting short for a 2023 announcement, which we see anywhere from the Paris Air Show to the end of the year. Boeing should be in the marketplace and with the suppliers now to meet this timeline. But practically, now is premature given the status of the 787 delivery suspension, the slow MAX production, and the slow clearing of the MAX inventory.
And then there is the not-so-little need to retire debt. LNA doesn’t see funding a new airplane program as insurmountable. Once cash flow returns to some semblance of normal, paying down debt and topping off R&D spending is feasible. Raising equity funding is also a possibility.
So, the bottom line is I’m optimistic about Boeing’s recovery. It will take years and there’s much that can upset the applecart. But that’s where the caution remains.