The plan to lean on the existing family of aircraft for years to come might work. And it might be the best option for a wounded Boeing (ticker: BA). It might not be what shareholders want to hear, though. <\/p>\n
\n
Calhoun took over Boeing in January 2020, amid the worldwide 737 MAX grounding and just before Covid-19 decimated demand for air travel. \u201cI became CEO at an interesting time,\u201d he says. An understatement. <\/p>\n
The MAX still looms large for the company. The grounding, which ran from March 2019 to November 2020, along with the pandemic, blew a hole in Boeing\u2019s balance sheet. The company now carries more than $47 billion in long-term debt on its books. At the end of 2018, before the second deadly MAX crash, that figure was less than $11 billion. <\/p>\n
That incremental $36 billion in debt taken on kept the company afloat during the twin crises, but it could have also financed a new medium-size aircraft that would compete more effectively with the
\n Airbus
\n (AIR. France) A320neo family of aircraft. <\/p>\n
The A320 planes have been a success, taking in roughly 8,800 orders. To be sure, Boeing\u2019s competing MAX family of jets has performed well in the market, taking in almost 7,000 MAX orders.<\/p>\n
Still, Boeing has captured about a 44% share of total orders, which is a long-term risk to Boeing\u2019s financial performance. The company doesn\u2019t want to cede too much market share over time to its rival. More orders mean higher production and lower per-unit costs, giving the market-share leader a profit advantage.<\/p>\n
Calhoun just doesn\u2019t sound concerned. \u201cI\u2019m not worried about it at the [Boeing] portfolio level,\u201d he says, adding there are areas of strength for both Boeing and
\n Airbus
\n and that a new aircraft from either company will need substantial technology upgrades. \u201cIt can\u2019t be incremental.\u201d <\/p>\n
That argues for neither company producing a major new aircraft until the next decade, when new wing and engine technologies are ready to be integrated into a commercial airliner. <\/p>\n
Boeing also has the larger version of the 737 MAX coming\u2014the MAX10, which can seat roughly 230 passengers and will compete more effectively with the A321neo.<\/p>\n
The problem for Boeing is that the MAX 10 isn\u2019t certified yet. Boeing expects to start shipping it in 2024. Boeing expects to ship the shorter MAX 7 in 2023, also after receiving the Federal Aviation Administration\u2019s blessing. <\/p>\n
The MAX 10 is a similar size to the A321neo, but Boeing has a commercial hill to climb. Airbus has taken in almost 4,700 orders for the larger A321neo aircraft, more than half of the total for the A320neo family. Boeing has taken in about 600 orders recently for MAX 10 aircraft. That\u2019s roughly 35% of all recent MAX orders. <\/p>\n
The total number of MAX 10 jets on order isn\u2019t available. Boeing didn\u2019t immediately respond to a request for comment about MAX 10 orders. The 35% level of recent orders is lower than the ratio of A321neo orders to the whole though. (Airlines could adjust existing orders when the MAX 10 is certified.)<\/p>\n
\u201cIn the immediate term [the company] is fine, more than enough demand vs supply, so even with a 60\/40 split Boeing should be well placed to make good returns on the MAX,\u201d says Vertical Research Partners analyst Rob Stallard. \u201cThe question is what happens when demand eases, as airlines clearly want the A321 versus anything else.\u201d <\/p>\n
Calhoun has another lever to pull to solve the market share dilemma: Price. \u201cEither guy can price their way to equilibrium,\u201d he says. Cutting price to maintain 50% share is an option and a reason he doesn\u2019t want to produce a new plane that is only a little better than existing aircraft. <\/p>\n
It makes sense, and it isn\u2019t too different from a comment
\n Tesla
\n (TSLA) CEO Elon Musk made recently at his company\u2019s annual meeting of shareholders. \u201cSomething\u2019s got to be done to achieve a supply-demand clearing point for volume,\u201d he said.<\/p>\n
Tesla cut prices aggressively at the start of 2023. Musk cited lower demand amid rising interest rates and a weakening economy. Cuts worked. Tesla picked up market share in the first quarter, but it came at the expense of profit margins. <\/p>\n
The car-versus-plane situation isn\u2019t exactly the same. Musk sees a weak economy and Boeing investors are worried about the product lineup. Demand for planes also looks solid. Whatever the underlying reasons, investors don\u2019t like price wars. <\/p>\n
A commercial aerospace price war would look nothing like EV cuts. For large commercial jets, there are only two players. There are dozens of car manufacturers. Pricing for new and used automobiles is a click away. Pricing for planes isn\u2019t transparent. Investors couldn\u2019t ever be sure a price war was happening. Still, cutting price to maintain market share for narrow-body jets could be worth 1 or 2 percentage points of profit margin for Boeing. That would be a headwind to the stock in the long run. <\/p>\n
Boeing\u2019s commercial airplane business reported an operating profit margin of almost 14% in 2018 while shipping more than 800 jets. It will be a while before it gets back there. Wall Street projects an operating loss for the division in 2023 and a profit margin of about 7% in 2024. <\/p>\n
Total aircraft deliveries are the main reason. Pricing and inflation matter, but they are not the dominant factors. Boeing is expected to deliver about 540 plans in 2023 and 675 in 2024, well below the 800-per-year pre-crisis level. <\/p>\n
Airbus is expected to produce operating profit of about 9% in 2023 and 10% in 2024. Investors will just have to wait and see if rising deliveries at Boeing closes the margin gap.<\/p>\n
Write to Al Root at allen.root@dowjones.com<\/p>\n<\/p><\/div>\n
Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Boeing CEO Dave Calhoun is convinced Boeing doesn\u2019t need to develop a new plane this decade. If that hurts market share, he can just cut prices. Call it a Tesla-like strategy for managing aircraft demand. The plan to lean on the existing family of aircraft for years to come might work. And it might be […]<\/p>\n","protected":false},"author":1,"featured_media":16867,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-16866","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\n
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