Aerospace giant Boeing can afford a business upgrade
Boeing nearly went bust in the 1970s trying to get the 747 airliner off the ground. Yet its iconic passenger jet became wildly profitable and effectively drove rivals like Lockheed and Mcdonnell Douglas out of the business. It might be time to repeat the trick. Now that the $225 billion aerospace giant is reporting record profitability, boss Dennis Muilenburg can afford to take the plunge with a new jet, and potentially extend Boeing’s lead over Airbus. Developing a new aircraft is a gamble. The cost is staggering and it can take the better part of a decade, during which conditions can change drastically.
Boeing’s 787 has yet to live up to its potential. It uses less fuel and emits less carbon than previous models, but Boeing underestimated the challenge of, essentially, building a plane out of plastic.
The financial crisis of a decade ago didn’t help, pushing carriers into the red. The 787 went into service three years late in 2011, and Boeing has yet to recoup over $25 billion in deferred production and tooling costs.
Yet the Dreamliner, as the 787 is called, isn’t a failure. It’s Boeing’s most popular wide-body, with 145 delivered last year. The company has also worked out production bottlenecks. Muilenburg plans to ratchet up output of the 787 as well as the single-aisle 737 this year.
That should juice operating margins, which Boeing raised by nearly 4 points last year to 13 per cent, almost twice the level of European rival Airbus. The company raised its upper earnings forecast for this year by one-third at the end of January.
That ought to simplify Muilenburg’s deliberation over whether to build a new mid-market airplane to fill the gap between the shorthaul 737 and the 787. Boeing now has hard-won experience with composites, and Airbus is making inroads with a long-range version of its A321.
With operating cash flow expected to rise nearly 13 per cent to over $17 billion this year, according to I/B/E/S estimates from Refinitiv, Boeing could invest $15 billion on a new project over sixplus years without diminishing the nearly $12 billion in dividends and buybacks it showered on shareholders last year.
Conditions look fit for take-off.
THE 787 WENT INTO SERVICE THREE YEARS LATE IN 2011, AND BOEING HAS YET TO RECOUP OVER $25 BILLION IN DEFERRED PRODUCTION AND TOOLING COSTS