Oil prices won’t dent deliveries, says Boeing

Boeing’s CEO has brushed aside concerns that continued low oil prices might see deliveries of new aircraft postponed. “Lower oil prices have not fundamentally changed our customers view on fleet planning or their commitment to existing delivery schedules,” Jim McNerney told reporters when announcing the OEM’s Q1 financial results yesterday (April 22). “The rapid return on investment from new, more efficient aircraft remains a compelling factor in purchase decisions … even if [the fuel price environment] remains well below the 15 year average,” he said.

And his confidence seems well placed. Boeing’s Q1 results confirmed that revenues from commercial aircraft deliveries are up significantly – helping to offset less spectacular results from the group’s defence arm. For the first three months of 2015, Boeing’s commercial arm generated revenues of $15.4bn, a whopping 21 per cent higher than the same period last year and driven, it says, by higher numbers of deliveries (up 14 per cent) and particularly the increase in 787 aircraft.

However, while increasing the number of 787 deliveries is boosting revenue and earnings (up eight per cent year on year), it is also having a diluting effect on the division’s profitability; with its operating margin falling from 11.8 per cent to 10.5 per cent in Q1.

And this trend is set to continue for the rest of the year. In its Q1 announcement yesterday, Boeing reaffirmed the 2015 guidance it set out in January, which states that it expects its commercial aircraft division to achieve an operating margin of 9.5-10 per cent – down from 10.7 in 2014 and 10.9 per cent in 2013.

The figures released yesterday confirmed that production costs for the 787 had increased further in the quarter – partly due to disruption in the supply of seats from Zodiac – taking the total deferred cost balance on the programme to $26.9bn. Despite this, McNerney confirmed that he OEM remained confident the programme would still become “cash positive” this year.

McNerney also revealed that the OEM is close to finalising firm orders for 18 777 aircraft, which would boost this year’s orderbook to 25.

“Demand for the 777 and the 777X remains strong,” he said. “The 777 production line is essentially sold out for 2016 approximately half sold out in 2017 and as a healthy number of slots already sold firm in 2018.”
In total Boeing secured orders for 110 aircraft during the first quarter of 2015, worth $9.8bn, far short of the 235 net orders it won in Q1 2014.

Despite the shortfall in orders compared with last year, McNerney described the pace of orders as “healthy” and remained bullish about the potential impact of low fuel costs.

“Airplane orders are highly correlated to airline profitability,” he said. “Conversations with our airline customers continue to centre on new purchases or accelerating delivery slots. Deferral requests are still running well below the historical average, these remain very good times for our industry.”

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