MIAMI — The Boeing Company held its annual investor day yesterday, with the company’s senior executives providing color on their current view of the industry and Boeing’s place within it. The presenters included newly installed chief executive officer (CEO) Dennis Muilenburg, chief financial officer (CFO) Greg Smith, and Boeing Commercial Airplanes (BCA) CEO Ray Conner. Their commentary was implicitly aimed at soothing the market after an uneven close to 2015 and opening to 2016.
Indeed, Boeing’s current competitive position vis–à–vis Airbus and even its business fundamentals have rarely been less sound. Its defense business, long a bastion of steady growth and cash flows, has yet to recover from the adverse impact of the sequester, On the commercial side of the house, its position in the narrowbody market has shifted from a 50-50 split with Airbus to clear dominance by its European rival thanks to the naked superiority of the A321neo over the 737 MAX 9. Among its widebody units, the 787 continues to wrestle withan ever increasing deferred cost bill that must be covered by a shrinking accounting block
The 777X is largely free of worry, but Boeing’s overall position is such that a strengthening dollar and Airbus dominance in the large narrowbody space have pushed the company to pursue deep cost cutting measures. And to top it all off, the venerable 747-8 is a dead man walking that will almost certainly conclude the nearly 50 year history of the Boeing 747. So it is no surprise that Boeing’s executives sought to use the investor day as a platform to allay some of the most pressing concerns. These were some of our major takeaways from each of the presentations by Boeing commercial executives (we will not provide coverage of the comments by Leanne Caret from the Defense & Space unit).
Dennis Muilenburg – CEO
Muilenburg struck an overarching and general tone, opening his remarks speaking by waxing poetic about the length of Boeing’s history and the importance of the company to global aviation. It was an attempt to set an optimistic tone for the business as it stands today, which he reiterated by pointing out the company’s absolute strength relative to where it was in 2004. And there is definitely some validity. Boeing is twice as large in revenue as it was back in 2004, and the business is much healthier on the metrics of profitability and cash flow.
But the thing about the aerospace business is that revenues and profits are a lagging indicator, and Boeing’s current financial health (whatever your view on it) is the result of Boeing’s sales and actions between 2008-2012. The worry with Boeing’s current product portfolio and business execution is that it will harm the business in the 2018-2022 timeframe as Boeing loses the 737NG and 777-300ER as cash flow “crutches.”
Greg Smith – CFO
Smith meanwhile, was able to point to the very real progress that Boeing has made on the technical side of the house. Execution on the current products, ranging from the 787-10 to the 737 MAX, whose first flight was made on the exact day promised four years ago has been nothing short of excellent, and in some senses, Boeing and Airbus have flipped (with the latter facing some issues ramping production on the A320neo and A350).
And the raw financial health for Boeing is better than its critics would charge, with a $489 billion backlog and a much more diversified set of customers and customer needs. And production has been scaling to meet that demand, with 17 production rate increases in the last six years with five more planned through the end of the decade. Of note, the 787’s current production rate of 12 aircraft per month is already a record for widebody aircraft, and that is planned to increase to 14 per month very soon. Smith also noted that Boeing is looking at increasing revenue from aftermarket services, particularly in the newly ascendant domain of support software on Boeing’s massive install base of airplane customers. And he conceded that Boeing continues to grapple with bridging production from the current generation 777 to the 777X.
Boeing hopes to pair this increased revenue with expanded margins, pushing from the current 10% figure to an aspirational goal of “mid-teens” over the next several years. Smith explicitly stated, “We’re not satisfied with our current margins,” before adding that Boeing does have a clear path to improving said margins. One near term initiative is to deliver on its current backlog and production rate increases, which has the knock off effect of improving the pricing mix of its deliveries (newer orders tend to have higher prices). This, along with increased supply chain efficiencies and sustainable development programs will help push Boeing to the double digit and eventually mid-teens margins it craves.
Ray Conner – CEO BCA
With Muilenberg trying to amp up enthusiasm and Smith focused on financial metrics, it fell to Ray Conner to defend and provide color on the current business strategy and product lineup. The core Conner’s presentation was an attempt to frame Boeing’s product lineup as superior to that of Airbus: “I do believe that we have the most efficient, and most comprehensive product lineup in the marketplace.” Conner spoke briefly about the spacing out of Boeing’s products relative to Airbus’ more closely clustered offerings (the below chart is definitely misleading – i.e. no A321 at 240 seats), but actually focused some on the freighter market, which has been in the doldrums for years now. He correctly noted that the 747-8 is the most efficient freighter product on the market bar none, but its hard to see where that will pay off for Boeing.
Conner tried to destress shareholders about the 737 MAX’s weakness against the A320neo, putting out the skewed chart below pointing to order parity across both current generation and re-engined planes since 2011.
Conner also reiterated that Boeing continues to study the middle of market (MOM) airplane with its customers, but didn’t offer many more details. And he reiterated Smith’s opening notes by doing a run through of the development highlights (and they are indeed encouraging) for the 737 MAX, 777X, and 787-10.