Boeing announced its results this week and its quarterly profit beat analyst estimates. Boeing predicts it should do well in 2015 by converting more of its order backlog into deliveries. One of the key items everyone is watching for in this regard is 787 deliveries, and the long road back to profitability for a program that began with multiple disasters.
But the story at Boeing is more than about 787 deliveries. If one looks at the portfolio of Boeing’s Commercial Aircraft Division, it is clear the rise in profitability is driven by more than 787. Since 2000, Boeing’s big story has been 737. In 2012, the 737 (131-200 seats) peaked at 90% of annual orders, largely because of the successful introduction of the MAX that year. By 2014 737 orders declined back to a more normal mix of 65% of annual orders. The recent strong growth in interest for its widebody offerings, with the launch of 777X is notable, particularly since the company makes higher profits per aircraft with wide bodies, and higher margins with lower cost development programs that are derivatives of existing types.
737 orders also slowed, relatively speaking, because there has been a resurgence in orders for aircraft with more than 400 seats. Boeing’s 747 was its sole aircraft in this category and experienced few orders. However, the arrival of the 777X has changed that segment’s profile. In 2014 this segment accounted for 19% of orders compared to only 2% in 2000. The 777X will soon be Boeing’s largest aircraft with the impending shut-down of 747 production expected after the delivery of the final two aircraft as Air Force 1 replacements to the US government in 2018.
When we look at deliveries over the same period in the following chart, several things are obvious. First, industry growth has been significant, with higher production rates in recent years. Second, there has been a remarkable drop in deliveries of aircraft with between 100-130 seats. Deliveries of larger aircraft are more profitable, and Boeing has either successfully moved customers to these aircraft, or airlines have themselves decided that up-gauging improves their bottom line.
From 2011 we see a steady rise in deliveries for the 200-300 seat category, driven by production increases in the 787. The chart indicates how the 787 delay hurt Boeing, and at the same time resulted in higher orders for the rival Airbus A330. By 2014, at 17%, this was the second most delivered aircraft size at Boeing. Analysts are pleased with Boeing’s 787 performance because by all the evidence, Boeing is going to deliver even more in 2015 and in the years ahead.
The current concern at Boeing is whether 777 production can remain at current levels prior to the introduction of the 777X, which has already taken on orders. With a significant the hole in the backlog before the 777X is introduced in 2019, we believe that Boeing will be forced to cut back on 777 production prior to the introduction of the 777X.
From the delivery chart it is clear that if the growth trend continues, particularly in wide-body aircraft, the future should bode well for Boeing margins and profitability.
Contrast this performance with that at Airbus. Airbus orders remain largely dependent on the 131-200 seat segment (A320 & A321). This gives Airbus strong order numbers, but they are at the lower margin per aircraft size category when compared to orders at Boeing. Note that like Boeing and Airbus have both seen a sharp decline in interest for the 100-130 seat segment.
In terms of Airbus deliveries we can clearly see the company’s dependence on the A320 in the chart below. The A318 and A319 have dropped in volume like similarly sized Boeing’s. There is also a gap in the 301-399 market that Airbus needs to fill with its A350, and hasn’t penetrated well at all. The recent announcement of higher seating capacity for the A350-1000 certainly will help that aircraft in this highly competitive segment.
In summary, Boeing’s aircraft portfolio looks to be the more profitable at this stage, with a higher proportion of wide-body aircraft. The key for Boeing is filling the gap between 777 and 777X. Airbus, by contrast, needs to reignite its A380 program, ensure a smooth ramp up in deliveries of the A350, and fill the gap between A330 and A330neo. The A320 family is carrying the majority of the near-term load for Airbus while A350 ramps up.
Which position would we like? Airbus appears to have the better offering in the narrow-body range, particularly with the A321 versus 737-9MAX. But Boeing outflanks Airbus, with smaller 787, equivalent 787-9 and -10 models to A330/neo and A350-900, and two 777 models equivalent to the largest A350-1000 and one significantly larger. The A380 is clearly superior to the 747-8, but in a smaller market niche.
The Bottom Line
Today we cant really say that one company will have superior margins or a strong advantage over the other. If the 787 didn’t have such massive overruns, eroding margins, Boeing would have had a potentially significant advantage, and be well on the way to additional models. But given the realities of the situation, the 787 will likely take another decade to merely break even. What could have been a substantial strategic advantage for Boeing was lost. As a result, both companies are well positioned for profits in the coming decade, with Airbus potentially benefitting from a weaker Euro as it sells aircraft in $US, and Boeing benefitting from a more robust portfolio in the wide-body market. Competition is good for everyone, and the two players remain poised for an interesting battle over the next decade.