Boeing | Fundamental Analysis | Short scenario info update.

21 Sep 2021

Boeing has started to regain order momentum in 2021 after two crises - the 737 MAX flight ban and the COVID-19 pandemic. In the first eight months of this year, the aerospace giant received 315 net orders for commercial aircraft. That is a welcome change after two years of negative net orders.

However, Boeing continues to fight hard to produce aircraft reliably and pass them on to customers. That will cause the company to continue to squander cash and could jeopardize its future recovery.

Boeing received 53 gross orders in August. Leading the way was the 737 MAX, with 35 orders from several customers, including Alaska Air and United Airlines. Boeing also recorded 11 orders for the 777 freighter - mostly from unspecified customers - and seven orders for the 787-9 Dreamliner (also from unspecified customers).

Net of cancellations and other adjustments, Boeing recorded 45 net orders in August. This increased orders to 4,164 commercial jets. By comparison, Airbus attracted 99 net orders last month. While Boeing still leads in orders for 2021, Airbus has many more orders in its portfolio, nearly 7,000 as of Aug. 31.

Airbus' significant order lead - especially in the narrow-body market - is a concern for Boeing. But Boeing's inability to deliver aircraft in large volumes is a much more pressing problem.

Last month, the company delivered just 22 commercial jets, compared to Airbus' 40. Similarly, in the first eight months of 2021, Boeing delivered 206 aircraft, while Airbus delivered 384.

The 787 Dreamliner series has been a notable upset in this regard. Boeing delivered just 14 787s in 2021, all from March through June. Just two years ago, the company was building and delivering 14 787s each month.

Over the past year, Boeing has identified several types of manufacturing defects affecting some Dreamliner aircraft. So far, the company has been unable to agree with the Federal Aviation Administration (FAA) on a method of inspecting previously built 787s to make sure they are free of defects, which led to the latest supply halt.

More than 100 787s are currently stuck in the company's warehouses. According to The Wall Street Journal, Boeing won't be able to resume deliveries until at least the end of October.

The longer the delivery pause lasts, the greater the risk of triggering contract provisions that would allow customers to cancel orders without penalty. Given how slowly the demand for long-haul aircraft is recovering, many will not hesitate to take this chance.

Boeing's progress in eliminating the 737 MAX inventory is also disappointing. The company had about 425 737 MAXs in inventory at the beginning of the year, and in the first half of 2021, that number was down by only 35. With 22 additional 737 MAX deliveries in July and just 14 in August, Boeing made little progress in reducing 737 MAX inventory this quarter.

In the near term, Boeing's slow pace of aircraft deliveries will hurt cash flow. (Airlines typically pay most of the purchase price of an airplane after it is delivered.) Last quarter, Boeing delivered 79 commercial airplanes and drained $705 million in cash. Given that aircraft deliveries will reach the same level in the third quarter -- and with a weaker product mix -- Boeing will again be rapidly burning through cash.

In addition, the excruciatingly slow pace of shipments of the 737 MAX calls into question underlying demand for the model. Airbus has had no problem turning over significantly more A320neo family aircraft to customers this year, despite the pandemic.

Looking ahead, the 787 production problems will make Boeing's recovery more difficult. Boeing has already begun cutting production of the 787 family from 14 to 10 planes a month in 2020. With only 428 direct Dreamliner orders left, of which more than 100 have already been built, even a production rate of 10 months will be difficult to maintain in the near term (unless there is a surge in orders).

If customers start to exercise the right to cancel orders, Boeing could be forced to keep production well below ten aircraft per month for the foreseeable future. It will undoubtedly limit future profits and cash flow.