Ethiopian Airlines may soon place a $7.5 billion order with Boeing, according to a media report. This would take Boeing BA +0.00% 2015 orders to over 460 commercial airplanes. This compares with 815 net orders for Airbus. Both Boeing and Airbus have hefty backlogs in commercial jet orders. In the most recently reported figures, Boeing’s and Airbus’ backlogs stood at over 5,650 and 6,750 commercial jets, respectively. Given the sheer size of the backlog, it will take longer times for both companies to fulfill the orders at current production rates, which, in turn, could reduce the inflow of new orders. Having said that, both Boeing and Airbus are considering an increase in their production rates. In fact, Boeing has so far delivered 580 airplanes in 2015, of which, 101 were 787s. The initial target was to deliver 100 787s for the full year and it is likely to end up somewhere around 130 by end of the year, in our view. So, Boeing is working on enhancing the production capacity and clearing the backlog faster, so as to best accommodate customers needs and minimize cancellations.
So far in 2015, Airbus has emerged to be the winner in terms of total orders and commitments secured, with a backlog that is much larger than Boeing’s $500 billion. A huge backlog may not be healthy in the long run, as any signs of a negative macroeconomic environment can result in more delivery deferrals. It is evident that during distress, such as the recessionary period, orders as well as deliveries see a slowdown. China is seeing slower economic growth and that has already sparked fears among investors and global equity markets have corrected. If indeed China’s economy continues to see slower growth, the demand outlook for airplanes might change slightly. There is always a risk of oversupply, especially in emerging economies, which, in turn, would result in order cancellations. So, the airline manufacturers are aiming for faster delivery but there are constraints on the supply side. Suppliers to both commercial jet manufacturers feel their capacities are already tapped out, and it thus becomes more difficult to continue increasing the production rate. Also, if demand slows down, Boeing will have more flexibility to tune its production rate in the U.S., as compared to Airbus, which is based out of Europe with stricter labor laws and unions.
For now, Boeing plans to raise its 787 production rate to 12 per month in 2016 and then to 14 per month by the end of this decade, from 10 per month currently. Boeing also plans to raise its 737 production rate to 47 per month in 2017 and then to 52 per month in 2018. At this pace, it will take more than 7 years for Boeing to clear the existing backlog. This surely is a long waiting time for airlines, although lead-times for commercial aircraft are notoriously long. Also, Boeing is not competing with Airbus alone, but also with newer players in commercial airplanes segment, such as China’s Comac C919, Brazil’s Embraer and Canada’s Bombardier .
On the brighter side, Boeing sees around half of its airplane demand coming from replacements over the next two decades, reflecting a good mix of low risk as well as high growth opportunity in the coming years. Overall, we feel Boeing is well placed for growth in the foreseeable future, given its increased production rates. This will help manage its backlog and move faster on production of newer airplanes, possibly the envisioned – middle-of-the-market – which is generating a lot of excitement in the industry.