Boeing Deals A $15 Billion Blow (NYSE:BA)


As we are nearing Boeing’s (NYSE:BA) Q3 result earnings call in October, we are also expecting Boeing to announce or outline consolidation plans for the Boeing 787. The announcement seems to be a formality as Boeing faces lower costs in North Charleston for the Dreamliner production, and demand for wide body aircraft has dwindled, and the company has been looking for ways to make its business less prone to work disruptions from the strong unions in the Seattle area.

In this analysis, we will look at why this is a major blow to the Everett assembly site.

Boeing moves Boeing 787 production Everett Washington to North Charleston South Carolina

Source: Australian Aviation

Note from Author: As we were preparing this report for subscribers, The Wall Street Journal reported that Boeing will set plans this week to consolidate production in South Carolina.

Wide body in Washington state to tumble

Moving the Boeing 787 from Washington would be a blow for the Everett facility. In 2019, the delivery volume for Everett was 172 wide body aircraft, providing significant cash inflow at a time that the Boeing was under significant pressure due to the grounding of the Boeing 737 MAX, and that pressure remains to this day. How big of a blow this would be to the Washington state becomes clear when we look at how many of those aircraft were Dreamliners, and that are 78 aircraft or 45% of the total.

Table 1: Aircraft production in Everett (Source: AeroAnalysis)

So, if we look over a 5-year period from 2019, then we know that at least 78 deliveries or 45% of the 2019 volume will be gone. Additionally, the Boeing 747 program will be terminated by 2023, taking another 6 aircraft away from the Everett output. The biggest wide body that Boeing currently produces is the Boeing 777, and the production on that program is set to fall to two aircraft per month in 2021. The Boeing 767 program which depends on a cargo variant, one for commercial service and one for Boeing’s tanker program, could see a modest reduction of 7 units, primarily reflecting high deliveries in 2019 due to previous delays. In total, the delivery activity is set to decline by almost two thirds.

On revenue level, the hit will be huge. The Boeing 747 program termination will lower the revenues by $1B, the Boeing 767 moderation would add another $1B pressure, though this is largely due to delayed aircraft from 2018 flowing into 2019. The Boeing 777 program will see lower Boeing 777-9 production than initially anticipated, and that will bring $2.8B pressure, while the biggest pressure will, of course, come from the Boeing 787 program moving away from the Everett factory halls, resulting in a $10.5B pressure.

All things combined, that means that, in comparison to Boeing’s 2019 wide body output, over in 5 years, the contribution of the Everett facility will tumble by $15.3B. The 2019 revenues were more or less a proxy for the wide body production as the Boeing 737 MAX deliveries were halted early in the year, and the Boeing 737 Next Generation backlog ran out.

We valued wide body production by Boeing at $35.2B in 2019. Losing 15.3B in Everett shows a couple of things:

  1. The importance that the Everett facility has, but is about to lose.
  2. The slowness of the market, because what is terminated in Everett isn’t coming back in North Charleston.

Current estimates by AeroAnalysis put the value decline from the Everett factory at nearly 45% of the wide body production.

Conclusion

A decision to move Boeing 787 production to a single site does make a lot of sense, given the low demand for new jets and a combination of logistics and lower costs make North Charleston the preferred production site for the Boeing 787. For the Dreamliner program, there could be some benefits to the margins, though there currently is no view on any possible write-off on the Boeing 787 equipment for assembly in Everett. For Boeing’s activity in the Seattle region, it is a blow, but one that was coming for a long time as Boeing has had a tough relation with the unions in the Washington state, and work disruptions have cost the company over the years. All with all, it is not a surprise, especially given the fact that Boeing earlier this year asked a Washington state tax break to be removed, which played a role in the trade dispute with Airbus (OTCPK:EADSF) but likely also was one of the first steps visible to the public that slowly but surely Boeing would start winding down its activities in the Washington state and its dependence on unionized workers.

What rests is a timeline to be announced for the Dreamliner production to wind down in Everett and a plan for the Everett factory, which could include in some way or for a single aisle aircraft. In the end, moving Dreamliner production to South Carolina makes sense, but it is not a decision that will be without risk.

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Disclosure: I am/we are long BA, EADSF. 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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