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.