Challenging Months Ahead For Boeing

Each year, Boeing (NYSE: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 October 2018. If you missed the September 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 October

Figure 1: Orders Boeing October 2018

During the month of October, Boeing received a total of 18 orders valued at $1.7 billion after discounts:

  • Aviation Capital Group ordered 3 Boeing 737 MAX aircraft.
  • A business jet customer ordered 1 Boeing 737 MAX BBJ.
  • Turkmenistan Airlines ordered 3 Boeing 737 MAX aircraft.
  • Two unidentified customers ordered 1 and 2 Boeing 737 MAX aircraft, respectively.
  • An unidentified customer ordered 1 Boeing 777-200LR.
  • Boeing Capital Corporation ordered 1 Boeing 787-9.
  • Farnborough Airshow order: Vistara ordered 6 Boeing 787-9.

The order for the Boeing 777-200LR is a rare one. No Boeing 777-200LRs have been ordered since the order by a Boeing Business Jet customer in 2013 and Iraqi Airways was the last airline to order the type in December 2012. The last deliveries of the type date back to 2014.

Cancellations increased by 7 units, 5 for the Boeing 737 MAX and 2 for the Boeing 787. We found that GECAS canceled an order for 1 Boeing 787-9, which subsequently was taken up by Boeing Capital Corporation and 1 unidentified customer canceled an order. Hainan Airlines Group and Juneyao Airlines were revealed as customers for orders that were previously not identified and Scoot Tigerair, a Singapore Airlines subsidiary, took over 2 slots for the Boeing 787 converting them from the -10 to the -8 variant, marking a negative dollar value conversion.

The changes for the Boeing 737 MAX are harder to track, in fact we couldn’t quite place the cancellations. We noticed that Nok Air orders were reduced by 2 while the Primera bankruptcy that we discussed previously has led to the removal of 8 orders from Boeing’s order book. The unidentified customer tally went down by 1 after Shenzhen Airlines, 9Air and possibly Hainan Airlines and ICBC Leasing were revealed as customers and 3 unidentified orders came in. Possibly the NOK Air reduction was covered by the unidentified order for 2 aircraft while the Aviation Capital Group took over 3 slots from Primera. That way you do get to 5 cancellations.

October was a below average month where Boeing booked 18 gross orders versus the three- and five-year average of 67 and 55 units (net), only the order inflow in October 2014 has been lower in the past 5 years. In the first 10 months, Boeing booked 642 net orders versus 544 net orders last year. So, Boeing is having a strong year, and it will be interesting to see whether the company can keep that positive momentum all the way to year-end.

Deliveries in October

Figure 2: Deliveries Boeing October 2018

For 2018, Boeing has set a delivery target of 810-815 units, which has been reaffirmed in October. 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 October, the company delivered 57 aircraft, down 30 units from a month earlier:

  • Boeing delivered 43 Boeing 737 aircraft, including 22 of the MAX variant.
  • Boeing 787 deliveries were in line with the production rate of 12 aircraft per month.
  • Boeing delivered 1 Boeing 777F, significantly below the program production rate.
  • FedEx Express (NYSE:FDX) took delivery of 1 Boeing 767-300F aircraft.
  • There were no Boeing 747 deliveries during the month.

Delivery numbers were far below the average requirement for Boeing to reach its delivery target. Boeing shares headed lower as the October delivery numbers came in. Apparently, it was a surprise which I hardly understand.

The Boeing Company CFO, Greg Smith, already said on the 7th of November that deliveries for October would come in light:

The deliveries for the balance of the year will be backloaded. You’ll see a lighter October than you would typically, and you’ll see higher-than-production-rate delivery profile for November and December.”

That’s a first sign and in a note to readers on the 10th of October, we already pointed out the likeliness of a soft October month:

What we’d like to point out is that part of the surge in deliveries occurred to meet internal targets. September is the last month of Q3, so every delivery that Boeing can get out of the door goes towards Q3 earnings. Roughly 55 percent of the deliveries occurred in the last 7 days of September, that gives reason to wonder what we can expect in October.

From the content of the bullet point item released by Seeking Alpha, we cannot conclude that deliveries were lower than expected. We think that deliveries were in line with what you should be expecting based on what has been communicated by Boeing and October being the first month of the quarter.

Year-over-year, deliveries increased by 15 units while the delivery target increased by 50 units. This reconfirms that despite a recovery in the delivery profile, Boeing is not there yet, and it needs to hit the rate of 55 single-aisle deliveries on top of the shortfall in earlier months to reach its delivery target. On average, Boeing needs to deliver 92-93 aircraft per month in the remaining 2 months.

Book-to-bill ratio

For 2018, the company 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 October, Boeing booked 18 gross orders while delivering 57 aircraft, indicating a 0.3 book-to-bill ratio driven by low order inflow. In terms of value, this ratio was 0.42 reflecting an appreciable mix between single aisle and wide body aircraft. For the first 10 months of 2018, the gross book-to-bill is 1.3 and 1.45 in terms of value. The company is having a good year so far, but what the book-to-bill ratio does not capture are the supply chain challenges that Boeing is currently addressing. It’s good to continue capturing orders, but it is a smooth and efficient output that matters.

Conclusion

In October we saw order inflow that was below average, marking the slowest month of the year with just 18 sales, but nothing is lost with that.

On the delivery side, things went as expected as Boeing deliveries fell at the start of a fresh quarter. As widely communicated before, the delivery profile is backloaded.

Overall, we do expect that the company 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 during the year, but the pool is finite, meaning it is going to depend more and more on repeat orders going forward.

By |2018-12-02T22:16:51+00:00November 15th, 2018|Categories: Regular|Tags: , , , |0 Comments

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