Boeing CEO Dennis Muilenburg speaks to the media after meeting with President-elect Donald Trump in Palm Beach, Florida, in December. (AP Photo/Andrew Harnik)

Boeing CEO Dennis Muilenburg speaks to the media after meeting with President-elect Donald Trump in Palm Beach, Florida, in December. (AP Photo/Andrew Harnik)

Boeing CEO pledges more profit, even though orders are down

EVERETT — In the next few years, the Boeing Co. faces headwinds: Airplane orders are down, revenue has dropped from its former cash-cow 777 program, and it’s introducing several new airplanes.

That’s plenty to handle for any corporation. Company leaders have made the challenges ahead much harder to solve by pledging to significantly increase profits and shareholder payouts. A growing number of industry analysts say something has to give.

Boeing CEO and Chairman Dennis Muilenburg has said his goal is to get the operating profit margins to “mid-teen” percentages by the end of the decade. That is about double the 7.6 percent rate the company has averaged over the past six years.

The company will get there, Muilenburg and Chief Financial Officer Greg Smith say, by continuing to cut costs, bringing in more cash from the 787 program, cranking up 737 production, expanding services for operating airplanes and putting the KC-46 tanker into full production, among other plans.

“So it’s a very real target, a very serious target, but we also acknowledge the fact that it’s going to require a lot of hard work,” Muilenburg told investment analysts and reporters during a conference call last fall.

There is growing skepticism from industry observers that Boeing can deliver on the boardroom’s promises.

“I’m not sure how they get there,” said Richard Aboulafia, vice president of the Teal Group, a consulting firm in the Washington, D.C., area.

Company leaders may be forced to walk back their promises to shareholders in the next year or two, he said.

Commercial airplane orders have dropped after a decade-long spending spree that pushed annual tallies to record highs. Boeing and rival Airbus both have seen new orders drop to less than half of what they were just a few years ago. Orders are expected to remain low for the next few years.

Boeing delivered 748 commercial jetliners in 2016. Company leaders say they expect to deliver more than 900 a year by the end of the decade, as Boeing cranks out more 737s and 787s. Airbus has similar plans to boost output.

Increasing production is critical. The 737 program brings in huge amounts of cash to the company because it makes so many of the single-aisle airplanes, which compete with Airbus’ A320 family. Boeing soon will start delivering the latest version of the 1960s-era airplane: the 737 MAX. Company leaders expect the MAX, which promises better performance for airlines, to be a big earner. The company plans to take 737 production to dizzying speeds — from 42 a month now to 57 a month in 2019.

Boeing also plans to turn out 14 of the 787s a month — up from 12 now. However, Dreamliner orders have dropped to a trickle. And last year, company leaders said they might hold 787 output at the current rate.

The company steadily is whittling down the cost to make one of the advanced technology airplanes. It shaved another $6 million to $7 million off the cost of each airplane in late 2016, based on the latest quarterly earnings report.

After eight years in production, the airplane is finally bringing in cash. However, the benefit to Boeing’s balance sheet is a garden hose, not a fire hose.

Some analysts expect 787 production to drop before the decade is out, meaning it might never deliver a big boost to the bottom line.

Airlines don’t need as many twin-aisle aircraft as Boeing and Airbus plan to make in the next few years, said David Strauss, an analyst at UBS, in a research note to investors in October.

To bring supply in line with demand, Boeing needs to drop 787 production to eight a month in coming years. Likewise, Airbus needs to trim output, he said.

Boeing is drastically cutting back production of the 777 as it develops a successor, the 777X. The 777 previously had been a profit-maker.

Some analysts — and even some suppliers — are questioning if there is enough demand to drive up single-aisle production rates.

“There are an awful lot of airplanes getting built,” and plans to build more, said Sam Pearlstein, an analyst with Wells Fargo, in an interview with The Daily Herald. “Is there enough traffic growth to support the ramp up in (737) production?”

Boeing’s defense unit can pick up some wins — such as better earnings from the KC-46 tanker program or an uptick in fighter sales — but there do not appear to be any huge paydays on the horizon.

Boeing’s new unit — Boeing Global Services — will enable the company to be more competitive in the growing market by providing services to airplanes already flying. But it is unlikely that it can generate a flood of profit in the next few years, Aboulafia said.

Meanwhile, investors expect Boeing to deliver on the promises, and Muilenburg has proven to be more focused on shareholders than analysts initially expected. The company has kept up the pace of buying back shares since he took over in 2015.

Delivering on Muilenburg’s promises might fall on suppliers.

“Clearly cost-cutting is an ongoing focus” for the company, said Ken Herbert, an investment analyst with Canaccord Genuity.

The company’s initiative to cut supplier costs, Partnering for Success, which requires 15 percent price cuts to contracts, is just getting started, Muilenburg said in a conference call last month.

The program has “made some good initial strides,” he said.

However, “there is much more still ahead of us, and that’s what drives our expectation that we are headed toward those mid-teen double-digit margins towards the end of the decade,” increasing cash each year, he said.

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com. Twitter: @dcatchpole.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.