Insight: Friday 31 July 2020: The Post-Earnings Call Outlook for Boeing

Boeing’s earnings report has been well discussed by the financial community, but a few operational issues were mentioned, however, that merit attention:

• 787 production rate cuts are now deep enough to where it no longer makes sense to maintain two production lines. While this could change in the future, in the near term recovery is unlikely for several years, and management is examining the issue
• Second, the MAX backlog will be a priority for Boeing

as intends to deliver the majority of the 450 MAX aircraft that have already been built next year. Boeing has also deferred a ramp up to a production level of 31 per month from 2021 to 2022.
• Third, the 777X is being delayed to 2022 in light of current market conditions.

These are all issues that reflect the fundamental problems that airlines and airframe manufacturers face – it is the unusual environment created by the global pandemic. The uncertainty regarding whether the pandemic will improve or exacerbate problems with a second wave will have a dramatic impact on Boeing and its customers.

Our forecasting indicates that the recovery will not be a “V” or even “U” shaped, but a slower prolonged recovery that reflects both industry and overall economic impacts. We are projecting a “Nike Swoosh” shaped recovery as we chart industry performance, with domestic operations recovering to 2019 levels in 2024, and international operations in 2025.  Boeing is hoping for a 2023 recovery, and we hope they are correct.  The data and trends, however, tell us something else.

The 787 Dilemma

The production of the 787 has been cut from 14 per month to 6. While it took two plants to produce 14, a rate of six could, and has been, produced by one facility. Given that the 787-10, the largest variant, is only produced in Charleston, SC, it would be logical for production to move from Everett, Washington to that facility.

But there are mitigating circumstances. The Charleston facility has suffered from quality issues that reached a point that customers like Qatar Airways would accept only 787s aircraft built in Everett. Recent revelations of complaints by airlines such as KLM and Singapore indicate that the fundamental problems have not yet been completely solved.

But with the State of Washington eliminating tax breaks, at Boeing’s request, to comply with World Trade Organization requirements, combined with lower labor costs in Charleston, the handwriting seems to be on the wall.

It is quite clear that when Boeing built the Charleston site, it was an attempt to circumvent the unions in the State of Washington. The current downturn provides an opportunity for Boeing to punish the unions, one of its long-term goals, by shutting Everett. But we don’t believe Boeing will move all 787 operations out of Everett, as in the near term it could be used as a completion center for Charleston produced aircraft and possibly be the site to complete the remaining 48 787-8 aircraft currently on order. Politically, moving all production from Puget Sound permanently would not be well received during the crisis.

The MAX Market

Boeing is hoping for re-entry into service for the MAX by year-end, and that it can deliver the majority of the 450 aircraft that have been built (and currently stored) next year. At the same time, Boeing is ramping up production at a very slow rate, deferring its production ramp-up to 31 per month in 2021 until 2022.

Given the COVID-19 impact on the market, in which half the world’s airliner fleet is grounded, the airlines will need to absorb a lot of new capacity if the MAX is to meet its delivery goals. We believe it is unlikely to happen in the near term. The nearly 380 MAX jets that had been delivered, but have been grounded for 18 months, will be like delivering a glut of new aircraft into the marketplace. While some airlines need and will utilize the additional capacity, others will need to park older aircraft to make room for the new aircraft, something they do not really want to do given the additional capital costs.

The 450 aircraft that have been built and undelivered can be added to that group, and the demand simply isn’t there for 830 aircraft, which would be the equivalent of a record for Boeing narrow-body deliveries within a year. That isn’t going to happen. The majority of the aircraft build would be, at a minimum 226 of the 450 aircraft delivered in 2021. While this is a more realistic target, the market is still unlikely to absorb 380 existing MAX, 226 additional MAX, and whatever low-rate production that Boeing can make in 2021.