One of the world’s most respected analysts New York-based Bernstein is bullish on Boeing and is revising its Boeing production and delivery outlook based on new commentary from the company and its suppliers, plus robust early 2024 deliveries.
In its report “Boeing: At the bottom? Updating our delivery and production outlook; Strike risk? Remain Outperform, Target $272” issued on the eve of the Singapore Air Show, Bernstein said that Boeing had reported that 737MAX production would be constrained at 38 per month until the FAA completes its audit and approves Boeing rate increases but Boeing has confirmed that it is not likely to get to that rate till until H2 of this year.
The FAA is auditing Boeing’s production processes in the wake of the January 5, Alaska Airlines door incident where it was found bolts were missing.
Bernstein noted that the figure is lower than it had expected “[…] and the lower deliveries from production are attributed to periodic disruptions as it reworks its processes with the FAA.”
However, beyond production, Bernstein said “Boeing has roughly 200 737MAX airplanes in inventory, with 140 mostly for China and India, 25 in rework from Spirit issues, and 35 MAX-7s and -10s that still need certification.
As a result, Bernstein projects “an average of 34/month deliveries from production in 2024, plus roughly 8/month from inventory. Inventory deliveries include 25 from rework plus 75 to India and China.”
It adds that it “assumes deliveries of the 35 MAX-7s and -10s, plus 15 more in 2024 production are delivered beginning in H2 2025.”
Longer term it said that it expects that MAX production “to move above 50/month in 2026, with the remainder of excess inventory delivered. We assume in 2025 will be the end of disruptions that are causing production output to materially lag the production cadence.”
It warns however that “a risk over the next several months is the possibility of an IAM strike, with the contract expiring in September. Historically, the impact of a strike has been very short-term.”
As a result, Bernstein said it “rates Boeing Outperform, TP $272. We see investment in Boeing as about the long-term, in a market where demand should outstrip supply through the decade.”
The FAA audit will be completed in mid-March and once the FAA is satisfied with the quality of Boeing processes, it should be able to approve a 42/month rate.
However, Berstein is cautious saying that “actual deliveries from production are unlikely to reach that 42/month level right away, as quality checks and temporary production halts are likely to continue.”
It assumes “that those disruptions should be over by the end of 2024, at which point the delivery from production rate should move to 42/month and then be ready for subsequent rate breaks. We expect Boeing should be able to move above 50/month in 2026.”
Bernstein said that The International Association of Machinists and Aerospace Workers (IAM) is demanding pay rises of ~40% over the next 3-4 years in the upcoming contract renewal.
It said that the last IAM negotiation in 2014, saw a strike averted and that the ten-year deal locked labor into a position that many in the union ultimately regretted.
“Our understanding is that no more than about 10% of the cost of an airplane is tied to IAM labor costs. Before 2013, there had been strikes, with the most recent in 2005 and 2009.
Bernstein notes that deliveries fall during a strike, but recover after the strike ends so it does not rate any long-term impact on Boeing.
The deadline for the contract is September 12, while union members plan to vote on potential industrial actions around July 17.
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