Boeing And Airbus Narrow Body Expansion Hits The Wall

Aug. 13, 2018 8:21 AM ETThe Boeing Company (BA), EADSFGE, UTX23 Comments
Edward Ambrose profile picture
Edward Ambrose
1.94K Followers

Summary

  • Increasing narrow body production is very profitable for Boeing and Airbus but much less so for the engine builders.
  • Boeing worked through the order backlog of models using older engines so it is hitting the limits on availability of new engines.
  • Both manufacturers have recovery plans for 2018. However, they face limits on future production increases. Analysts had counted on these increases to justify the stock price.

Boeing (NYSE:BA) announced that it has suffered delays caused by a lack of engines and fuselages on the 737. Aircraft without engines are parked outside the Renton, Washington plant. Engine shortages occurred in the second quarter and this increased in the third. Airbus (OTCPK:EADSF) had nearly 100 planes without engines, a number that it is working down. Both companies are sold out through 2024. Higher production is justified by the market demand, but it is dependent on engine availability. Unless more engines become available, stock prices will fall.

Boeing and Airbus Profitability

Both manufacturers have recovery plans. When the planes are delivered, the cash flow will be back on plan. Both have yearly increases in production and they have talked about raising production over the next few years. Airbus talked about going to 70 to 75 aircraft per month over the next two to three years. Airbus is more dependent on the narrow bodies so this problem is worse for them.

Boeing and Airbus have a lot at stake. Boeing increased production in June to 52 per month and the 2019 increase to 57 is still on, but it may not be achievable. This is an increase of 60 aircraft per year with average revenue of $50 million. It totals $3 billion per year. Renton has been upgraded and automated. It is the most efficient narrow body plant in the world. Therefore, the cost to produce an extra 60 units is largely the purchased parts. That is not trivial because it includes the fuselage. However, the incremental profit could be $1 billion. Airbus costs are higher but the increase is highly profitable. Analysts’ valuations include the expectations of future increases, which will be delayed.

Engine Manufacturers

The Leap engine for the 737 and 320 is shipping behind schedule. In the past, Boeing

This article was written by

Edward Ambrose profile picture
1.94K Followers
I am not the typical analyst. I have unique skills, honed by years of successful Mergers and Acquisition accomplishments, to find beaten down stocks that have the potential for recovery and growth. These companies are helpful in balancing a portfolio as well as beating the market. This experience left with strong appreciation for fundamental analysis of a company’s businesses rather than the whole corporation, to find what will drive the results. ed.ambrose9@gmail.com 609 685 2290

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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