1 Reason Boeing's Margins Could Continue Flying High
Boeing's stock has seemed nearly unstoppable this year -- a fully loaded cargo plane speeding past and ignoring the negative headlines hovering around its 787 Dreamliner.
Boeing recently reported a robust third quarter, and even raised guidance going forward, much to the delight of investors. One of the biggest highlights from Boeing's third-quarter results was its improvement in commercial aircraft margins -- a welcome sight after its 787 Dreamliner program has struggled to remain profitable amid budget overruns and production delays. Are the higher margins here to stay? I'm not convinced, but here's one reason it's possible.
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By the numbers
Overall, Boeing's operating margin jumped 30 basis points to 8.1%, but most of that was driven by its commercial aircraft operating margins that jumped 210 basis points from 9.5% last year to 11.6%. Of course, investors would love to see those margins remain, but as production ramps up with its 787 Dreamliner, a much less efficient and mature operation, there will be more pressure on the margins to sink back down.
But on Wednesday, Boeing announced that it would be increasing the production on its 737 program to 47 aircraft per month by 2017 -- the highest rate ever for the best-selling airliner in history. Currently 38 airplanes per month are being produced, and it will increase to 42 in the first half of 2014 before reaching its goal of 47.
That means the 737 program will produce more than 560 aircraft per year -- that's an improvement of almost 50% since 2010. It should enable Boeing to improve margins on its 737 program, which will be a big deal considering the volume of deliveries the 737 accounts for.
Graph by author. Information from Boeing's third-quarter-earnings report
Further, this production efficiency on its single-aisle aircraft will only grow in importance as Boeing predicts global growth over the next two decades to be focused on the segment, which the 737 currently leads.
Graph by author. Information from Boeing's 20-year forecast
Beverly Wyse, vice president and general manager, 737 Program, Boeing Commercial Airplanes, said in a press release:
We're taking this step to make sure our airplanes get into the hands of our customers when they need them. Our employees and our suppliers have successfully increased the production rate to unmatched levels over the last three years. This increase will lay a solid foundation as we bridge into production on the 737 MAX.
Boeing hopes for its 737 MAX to take the baton from its previous generation of 737 aircraft and expand market share globally. Over the last decade fuel costs have doubled, making Boeing's customers focus on fuel efficiency; and the 737 MAX will deliver a big advantage. Boeing recently announced an improvement to its fuel economy, which now rates 14% higher than the industry's best single-aisle airplanes.
Boeing's improved production rate on its 737 family should positively affect margins, although it won't have a significant effect for the remainder of 2013. Further, the 737 MAX's huge edge in fuel economy should bode well for sales. But the good news doesn't end there: Boeing's 737 family currently accounts for more than 3,400 unfilled orders, part of Boeing's huge $415 billion backlog that equates to 4.5 years' worth of sales, and as production ramps up it will enable the company to cash in on its enormous backlog faster.
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The article 1 Reason Boeing's Margins Could Continue Flying High originally appeared on Fool.com.
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