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Boeing: Orders Taking Off, but Deliveries Still Grounded

Boeing (NYSE: BA) has started to rebuild its order momentum in 2021, following the dual crises of the 737 MAX grounding and the COVID-19 pandemic. Through the first eight months of the year, the aerospace giant has captured 315 net orders for commercial jets. That's a welcome change after two years of negative net orders.

However, Boeing continues to struggle mightily on building jets reliably and handing them over to customers. This will cause the company to continue burning cash and could imperil its future recovery.

Another month of solid orders

In August, Boeing booked 53 gross orders. The 737 MAX led the way with 35 orders from a handful of customers, including Alaska Air and United Airlines. Boeing also recorded 11 orders for 777 freighters -- mainly from unidentified customers -- and seven orders for 787-9 Dreamliners (also from unidentified customers).

Image source: United Airlines.

Net of cancellations and other adjustments, Boeing logged 45 net orders in August. That boosted its backlog to 4,164 commercial aircraft. By contrast, Airbus (OTC: EADSY) recorded 99 net orders last month. While Boeing still has a comfortable lead for 2021 order activity, Airbus has far more orders in its backlog overall -- nearly 7,000 as of Aug. 31.

Deliveries lag badly

Airbus' massive lead in orders -- particularly in the narrow-body market -- is troubling for Boeing. However, Boeing's inability to deliver airplanes at a high volume is a far more pressing concern. The aircraft manufacturer delivered just 22 commercial jets last month, compared to 40 for Airbus. Similarly, through the first eight months of 2021, Boeing delivered 206 jets, while Airbus delivered 384.

The 787 Dreamliner family has become a noteworthy disappointment on this score. Boeing has delivered just 14 787s so far in 2021, all between March and June. Just two years ago, it was building and delivering 14 787s every month.

Over the past year, Boeing has identified multiple types of manufacturing flaws affecting certain Dreamliners. So far, it hasn't been able to agree with the Federal Aviation Administration (FAA) on a method to inspect previously built 787s to ensure that they don't have defects, leading to the latest delivery halt.

The company now has over 100 787s stuck in its inventory. Boeing may not be able to resume deliveries until at least late October, according to The Wall Street Journal. The longer the delivery pause lasts, the greater the risk of triggering contract provisions that would allow customers to cancel orders penalty-free. Given how slowly long-haul demand is recovering, many would jump at that chance.

Image source: Boeing.

Boeing's progress at clearing out its 737 MAX inventory has been disappointing, too. It entered the year with about 425 737 MAX jets in its inventory and only reduced that number by about 35 in the first half of 2021. With 22 additional 737 MAX deliveries in July and just 14 in August, Boeing has made little progress reducing its 737 MAX inventory this quarter.

Short-term and long-term problems

In the near term, Boeing's slow pace of aircraft deliveries will weigh on cash flow. (Airlines typically pay the bulk of an aircraft's purchase price upon delivery.) Last quarter, Boeing delivered 79 commercial jets and burned $705 million of cash. With Q3 aircraft deliveries on track to reach a similar level -- and with a weaker mix of products -- Boeing is bound to burn cash again.

Additionally, the excruciatingly slow pace of 737 MAX deliveries calls the underlying demand for that model into question. Airbus has had no trouble handing over significantly greater numbers of A320neo-family jets to customers this year, notwithstanding the pandemic.

Looking further ahead, Boeing's 787 production snafus will complicate its recovery. Entering 2020, Boeing had already begun to cut 787 family output from 14 per month to 10 per month. With just 428 firm orders for Dreamliners remaining -- of which over 100 have already been built -- even a 10-per-month production rate would be hard to sustain anytime soon (barring a huge rebound in orders).

If customers start to exercise cancellation rights, Boeing could be forced to hold production well below 10 per month for the foreseeable future. That would keep a lid on future profits and cash flow.

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Adam Levine-Weinberg owns shares of Alaska Air Group and is short January 2022 $80 calls on Alaska Air Group. The Motley Fool recommends Alaska Air Group. The Motley Fool has a disclosure policy.


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