Boeing cautious on new 737 output rise

Reuters: Boeing has warned about the risk of flooding the market with too many passenger jets as planemakers rush to meet demand in Asia, but wants to reduce the seven-year waiting list facing airlines shopping for its 737s.

Jim Albaugh, the head of Boeing’s flagship commercial subsidiary, said the company would not follow Airbus any time soon into a further increase in production beyond the target of 42 planes a month already established by both jetmakers.

Like Airbus, which has said it is testing the supply chain to see whether it can cope with as many as 50 planes a month, Boeing is reported to be studying an interim goal of 44 a month.

But while Airbus has said it is close to deciding whether to commit to a new increase, Boeing seems nowhere close to asking more of its factory and suppliers than already announced.

“We are studying whether Renton can go higher than 42 (a month),” Albaugh said, referring to the 737 production plant which rolls out a plane a day just outside Seattle.

Asked whether Boeing had decided where to put the production needle next, he said, “No, it depends on what they can handle, but we are a long way away from making an announcement that we are going to go higher than that (42).”

Albaugh presides over $34 billion in revenues as chief executive of Boeing Commercial Airplanes, half the group total.

Production rates for the most-sold models not only feed into aerospace share prices and determine the supply available to meet new demand, they have a wide impact on second-hand values that are just as important for airlines and leasing companies.

The resale value is especially important for leasing firms which control about 40 percent of the world’s airliner fleet. Some have accused planemakers of overproduction, complaining it erodes monthly lease rates and the value of their assets.

Narrowbody jets like the 737NG occupy the biggest slice of the global market, worth an estimated $2 trillion in 20 years.

Boeing has committed to raising output by a third from 31.5 a month now, up to 42 a month in 2014. The next step of 35 a month could come as early as late 2011, Albaugh said. Separately from the current 737 model known as the 737NG, Boeing is embroiled in a dispute with unions over where to build a future variant known as the 737 MAX and how to decide that.

Airbus produces 38 A320-family jets a month and plans to raise this to 42 by the end of next year by speeding up assembly lines. They are based in Toulouse, France, and Hamburg, Germany.

“There is no decision yet, but it is being considered,” an Airbus spokesman said. Suppliers say an Airbus decision on whether to go to a new record of 44 planes is due within weeks.

Boeing’s conservatism puts it at odds with some officials inside Airbus as the industry debates the right rate of production to cope with conflicting economic signals.

“We have been very careful not to flood the market with 737s and when you talk to the leasing community the leasing costs of 737s have held up very well compared to the A320,” Albaugh said.

According to Airline Fleet Management magazine, it costs $30,000 more a month to lease a modern 737 than a 150-seat A320. At the same time, Boeing wants to reduce the length of time it would take to produce all 2,000 737 planes in its backlog, a move it sees as good for sales. Analysts say it also makes sense to cut the backlog before the arrival of a new version, the 737 MAX.

“What I want to do is burn the backlog down because when you tell a customer you can’t deliver an airplane for another 5,6 or 7 years you drive the customer to go and buy someone else’s airplane. So it’s not just about having the best airplane, you have got to have the best airplane available,” Albaugh said.

Boeing has enough business on its books to keep some plants running for seven years. “I think somewhere in the neighbourhood of 3.5 to 5 years is where I want to be,” Albaugh said.

Relentless demand in Asia and the Middle East is driving aircaft production despite the West’s growing economic problems. Albaugh sees any slowdown as a chance to reduce the delivery waiting times.

While the soft-spoken engineer is conservative about raising output, he is equally shy about cutting it too fast. “Even if there is a slump (in Asia), with over seven years of backlog we need to burn that down. And if there is a slowdown in orders I want to take the opportunity to do burn that down, not take that opportunity to slow down production.”

Albaugh was talking in a room high up over the world’s largest factory floor after celebrating delivery of the first lightweight composite 787 Dreamliner to Japan’s ANA.

While the smaller 737 is a mainstay of revenues, one of Albaugh’s toughest tasks now is to ensure the 787 starts bringing in cash by getting it out on time after many delays. Both Albaugh and Boeing Chief Executive Jim McNerney said the supply chain blamed for earlier problems was now performing well. Sensitive areas such as mid- and rear-fuselage are now owned by Boeing after it bought out two of its major suppliers. Boeing will raise output from two to 2.5 Dreamliners a month in November and aims to lift this to 3.5 a month by the spring. Its ultimate target is 10 of the planes a month by end-2013.

Albaugh did not rule out pausing to avoid any new problems.

“I would much rather stay at the rate where we are for a longer period of time than get ourselves in a situation where we have to shut the factory down because we are trying to push more work in than (the factory) can consume,” Albaugh said.