Boeing's Not Bluffing
Is growth always good? Over in Europe, preeminent planemaker Airbus seems to think so. As of this writing, management at Airbus is publicly pondering a plan to increase production of its A320 line of single-aisle airliners to a record 50 planes-per month. Here in the U.S. of A., however, Boeing (NYS: BA) sees Airbus' raise ... but feels no pressure to match it.
Boeing Commercial Airplanes CEO Jim Albaugh has often acknowledged his desire to aggressively work down Boeing's seven-year-long backlog of 737 orders. But coming off the tail end of a disastrous 787-development project, the company's fully aware of the dangers inherent in too-aggressive planning. And really -- why match Airbus on this at all?
After all, Boeing has already accelerated production of its A320-killer, the 737, four times in the past two years.
At a now-targeted 42-plane-per-month production rate (set to begin in 2014), the company could turn over its current 737 backlog once every four years, smack-dab in the middle of the "3.5 to 5 years" sweet spot that Albaugh says he's targeting. As the CEO confides, Boeing wants to avoid having to tell a customer "you can't deliver an airplane for another five, six, or seven years," which could "drive the customer to go and buy someone else's airplane." On the other hand, ramp the production rate too much, and Boeing risks overstraining its supply lines again. Too-aggressive targets could make it difficult for suppliers like General Electric (NYS: GE) , Honeywell (NYS: HON) , and United Technologies (NYS: UTX) to keep up with Boeing's demands for parts. Potentially, it could hurt profit margins as well (both Boeing's and its partners') if suppliers are forced to add shifts and pay overtime rates for labor.
Instead, at the 42-planes pace, Boeing feels it's balancing the need to provide customers the planes they want in a timely fashion against the risks of overreaching for market share. With the company now set to embark on a limited redesign of the "737 MAX" to introduce new engines to the chassis, this sounds like a smart, middle-of-the road strategy to me.
Not all growth is good. Once you've got the throttle set at "just right," it's time to switch on the autopilot and cruise.
At the time this article was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 282 out of more than 180,000 members.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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