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Each year, Boeing (BA) and Airbus (OTCPK:EADSF) engage in a fierce order battle. In 2017, Airbus won that battle by numbers, but in terms of dollar value, which AeroAnalysis ultimately considers to be more important, Boeing easily outperformed Airbus.

For 2018, Boeing expects order inflow to be moderated. That’s a pretty vague term, but it does not make it less interesting to look at orders and deliveries on a monthly basis to assess the overall appeal of aircraft on the commercial market. By looking at the orders, we can see a combination of willingness to commit with pricing, product, and availability coming together. Special attention will be paid to the mix of single-aisle aircraft and wide-body aircraft, knowing that a single-aisle aircraft costs roughly half or a third of a wide-body aircraft, depending on the model.

In this report, AeroAnalysis will have a look at the order inflow and deliveries for Boeing in July 2018. If you missed the June edition, you can read it here. The article is paywalled but is freely available to subscribers and trial members of the AeroAnalysis Marketplace service.

Orders in July

Figure 1: Orders Boeing July 2018

During the month of July, Boeing received a total of 30 orders valued $3.0B after discounts:

  • GOL Linhas Aereas ordered 15 Boeing 737 MAX 8 aircraft.
  • An earlier commitment from Hawaiian Airlines (HA) for 10 Boeing 787-9 aircraft was firmed.
  • An earlier commitment from Qatar Airways for 5 Boeing 777F ircraft was firmed.

Cancellations increased from 149 to 152 reflecting 3 Boeing 777 orders being canceled. For the program, it marks the second month in a row this year of receiving cancellations bringing the number of cancellations to 7 which is something that is not helping Boeing in selling enough aircraft to keep the delivery slots occupied as it prepares for the service entry of the Boeing 777X and full transition to Boeing 777X production.

July was a very weak month where Boeing booked 30 orders versus the three- and five-year average of 65 and 122 units. In the first 7 months, Boeing booked 487 net orders versus 400 net orders last year. So, Boeing is having a strong year and it will be interesting to see whether they can keep that positive momentum all the way to year end.

In July, the Farnborough International Airshow was hosted and the jet maker had announcements covering 715 aircraft. After removing the noise, we came to 88 orders that could be reflected in the order book in the next months. Out of these 88 orders, Boeing booked just 30 orders. Although Boeing does make mention of orders being added to the book once all contingencies are cleared, it remains rather vague in the wording used in press releases and that is definitely a major point of improvement. What stands is that normally we see over half of the firm agreements announced during the show being added in the month of the airshow. This year Boeing added only 34% of the firm announcements to its book in the same month. While we are convinced the remaining orders will find their way to the order book in due time, we think that Boeing should adopt a uniform style in its announcements clearly stating what are firm orders, firm orders pending finalization and which orders are commitments. The way the press releases currently are compiled we there is room for interpretation and since we are talking about products that cost tens of millions of dollars, being transparent is key. There is a whole lot of momentum that is created during the air shows, but I think it should not go at the expense of the transparency and clarity of press releases.

Deliveries in July

Figure 2: Deliveries Boeing July 2018

For 2018, Boeing has set a delivery target of 810-815 units. In December 2017, AeroAnalysis set a 2018 delivery target of 816 units at the low end. Boeing is more or less meeting our expectations here.

In July, Boeing delivered 39 aircraft, down 43 units from a month earlier:

  • Boeing delivered 29 Boeing 737 aircraft, including 12 of the MAX variant. The delivery volume was far below the increased production rate of 52 aircraft per month.
  • Boeing 787 deliveries were 4 units below the production rate of 12 aircraft per month.
  • No Boeing 777 deliveries occurred.
  • The Boeing 767 and Boeing 747 deliveries are more or less driven by the delivery schedules of airlines during the year than by slot availability. One Boeing 747 and 1 delivery took place for the Boeing 767.

The delivery volume during the month of July was disappointing, we can be brief on that. The delivery profile has been choked in the aftermath of supply chain issues on top of the relatively low deliveries that we got used to in the first of month of the quarter. This doesn’t come as a surprise. Earlier we observed that Boeing has been starting the quarter with low delivery numbers only to pick up towards quarter end. Pushing out the deliveries at quarter end means that the deliveries in the subsequent month will be lower. This month does not dodge that pattern. In our view, the peaking towards quarter end has been a sign of strain in the supply chain. In late July, we saw a clear accumulation in unfinished aircraft caused by late arrival of fuselages and other primary systems such as electronics and turbofans. As much as 40 deliveries were impacted and observers say that at this moment there are as much as 50 deliveries impacted. Many of these 40 deliveries would have been delivered in July, if parts would have arrived and installed in time. Boeing currently has the Renton facility running at 52 aircraft per month, delivering just 29 units in the month means an efficiency of just 55%.

On average, Boeing needed 72 deliveries to reach its target by year-end. Even if the efficiency of the facility in Renton would have been 100%, there still would have been a gap of 10 deliveries between the average requirement and the ‘corrected’ delivery number or in other words, even if the Boeing 737 line would run smoothly deliveries would still fall short. For that shortfall, we have to look at the Boeing 787 and Boeing 777 program. The Boeing 787 lines run at a combined rate of 12 aircraft per month and Boeing delivered just 8 aircraft during the month meaning that the ‘shortfall’ is 4 units and on the Boeing 777 program the line is running at 3.5 aircraft per month excluding the Boeing 777X test aircraft that are in production but we saw no deliveries occurring during the month. So, added to the lower single aisle deliveries are 7-8 lower wide body deliveries.

Delivery numbers are obviously influenced by timing and we rarely see a delivery figure that one-to-one matches the production rate, but what we are clearly seeing in the July delivery numbers is Boeing’s vulnerability to supply chain issues and the absence of Boeing 777 program deliveries, which is one of Boeing’s most established programs and on unit basis has been the company’s cash cow.

We believe that the supply chain issues on the Boeing 737 program are so serious, that they will be impacting 3rd quarter results. For the 4th quarter a strong rebound will likely occur, but there is no room for error.

Book-to-bill ratio

For 2018, Boeing remained somewhat vague on the subject of the book-to-bill ratio, expecting “moderated” order inflow.

Obviously, shareholders are hoping to see Boeing having a book-to-bill ratio of 1 or higher for the full year, AeroAnalysis currently is expecting it to be between 1 and 1.25.

In July, Boeing booked 30 gross orders while delivering 39 aircraft, indicating a 0.77 book-to-bill ratio driven by low order inflow and low sales. In terms of value, this ratio was 1.08 reflecting strong order inflow for the Boeing 777 and Boeing 787. For the first seven months of 2018, the gross book-to-bill is 1.53 and 1.56 in terms of a value. So Boeing is having a good year so far, but what the book-to-bill ratio does not capture are the supply chain challenges.

Conclusion

In July, we continued to see wide body order inflow but it was far lower than we’d expect based on the firm order announcements made during the Farnborough International Airshow. Normally, we see a majority of the orders announced during the airshow being added in the same month and that is something we did not see happening this year and this month. We often see investors using the airshow order announcements to justify higher share prices. I think we see now quite clearly why an order announcement should not justify higher share prices; An order announcements even when firm does not get added in the book until all contingencies are fully cleared. So a firm order announcement does not equal a logged sale in he same month and definitely does not add to the financials to the same extent as a delivery. With backlogs stretching years, the positive impact on earnings is not felt until years later. Nevertheless, I think it is nice that jet makers choose airshows as stages to announce their orders and give a peek in their pipeline, but it shouldn’t go with vague wording in press releases.

On delivery side, we are seeing the impact of supply chain strain. Possible issues are something I’ve warned for in the past and we now see how it impacts Boeing’s numbers. For now, we think the issues can be contained within the year where Q3 deliveries will be lower and made up for in Q4 but since there are further rate increases on the horizon it is key that the jet makers and supply chain assess their ability to support further rate hikes and what investments and expansions are needed to support that rate in the supply chain and from jet maker side.

Overall, we do expect that Boeing will be able to meet its delivery target though there likely will be pressure on the delivery schedules of the Boeing 737 and Boeing 787. Looking at orders, Boeing has a good momentum as it captured some key customers for its aircraft, but the pool is finite, meaning that Boeing is going to depend more and more on repeat orders going forward.