Last Wednesday, Boeing (NYSE: BA) delivered another solid quarterly earnings report. Most importantly, the company's run of strong cash flow continued, allowing it to return even more cash to its shareholders.
On Boeing's earnings call, CEO Dennis Muilenberg and CFO Greg Smith elaborated on how the company aims to maintain its momentum in the coming years. Here are five key highlights from their remarks.
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Lofty goals remain in place
In the Q3 earnings report, Boeing raised its 2017 cash flow forecast. The company now expects to generate operating cash flow of approximately $12.5 billion this year, substantially above its initial forecast of $10.75 billion.
This means that Boeing will face much tougher year-over-year cash flow comparisons going forward. Nevertheless, Smith reiterated the company's projection that cash flow will improve each year through the end of the decade. This implies that Boeing will be producing stellar free cash flow results by 2020.
The services business gets off the ground
During the third quarter, Boeing began operating its services portfolio as a separate business segment. (Previously, services offerings were housed in the broader commercial and defense segments.) Boeing expects to produce services revenue of $14.0 billion-$14.5 billion in 2017 -- but it has big growth aspirations. The segment's revenue could rise as high as $50 billion within a decade, according to management.
Boeing believes that having a unified services business to serve commercial jet and defense customers will be a big competitive advantage. In the short run, management sees substantial growth opportunities in spare parts, maintenance, and aircraft modifications.
Longer term, Boeing has a huge opportunity to add value through analytics solutions that glean insight from the massive amounts of data generated by airplanes. The company is already gaining traction in this area, but it is just scratching the surface of the market's potential.
Another 737 production increase could be in the cards
Rising production of Boeing's workhorse 737 jets will be a key driver of the company's projected cash flow growth. Last quarter, Boeing increased production from 42 a month to 47. It is already preparing to increase production to 52 a month next year and 57 a month in 2019.
Despite this planned production growth, demand for narrowbody aircraft continues to outpace supply. Boeing has seen another uptick in 737 orders and commitments this year, supported by the launch of the new 737 MAX 10 model. As a result, Boeing is evaluating pushing 737 output even higher. The biggest constraint on raising production beyond 57 per month is ensuring that the supply chain will be able to keep up.
The 777 situation is stabilizing
Among Boeing's five commercial aircraft families, the 777 has been the biggest disappointment recently. Last quarter, Boeing reduced the 777 production rate to five per month, down from 8.3 per month just a year ago. Furthermore, monthly deliveries to customers will decline to 3.5 per month for much of the next two years as Boeing shifts to building the next-generation 777X.
However, Boeing has seen a modest uptick in orders for the current-generation 777 recently. Just since the beginning of September, it has booked an order for six 777s from Aeroflot and an order for 10 777s from an unidentified customer, while China Southern Airlines has announced plans to buy eight more 777s. Boeing has now filled its 777 order gap for the next few years, addressing a potential risk to its cash flow forecast.
The 767 could make a comeback
Not too long ago, it looked like the aging Boeing 767 family was on the way out, ready to be replaced by the 787 Dreamliner. However, Boeing has seen surprisingly strong demand for the 767, which first entered service 35 years ago. FedEx (NYSE: FDX) has added 48 767 freighters to its fleet since 2014. It has another 68 on order through 2023. Meanwhile, production of the KC-46 military tanker is ramping up on the same assembly line.
It now appears that Boeing has a shot at winning a big order for 767-300ER passenger planes if it can boost its output. (At the current production rate, the 767 line is virtually sold out through 2023 just based on orders from FedEx and the U.S. military.)
It would be a bold move for any airline to buy such an outdated model. But the 767-300ER could be a good stopgap measure while airlines wait for better options from Boeing and Airbus. And 10-15 years down the road, any new-build passenger 767s could be converted to freighters for the likes of FedEx and UPS, providing more work for Boeing's services business.
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