Boeing's book-to-build ratio of orders and production rates this year is likely to be higher than 1:1, largely because of the MAX, but “next year it may come down.” He predicts the 2013 order/production ratio should be about 1:1 overall, “but it will still be a strong [order] year.” Next year's order rates are unlikely to match some that Boeing has recorded since it launched MAX last year, including 150 from launch customer Southwest Airlines, 100 from Norwegian Air Shuttle, 201 from Lion Air and 75 from Air Lease Corp. But the company's expectation of 5% average annual passenger growth over the next 20 years keeps McNerney's outlook bullish.
If the company's Renton factory near Seattle could produce an unlimited supply of the MAX, airlines would discontinue ordering the now-obsolete 737 Next Generation series in favor of the reengined aircraft, he says. But MAX production will be limited as the company transitions from the NG to the MAX, which is to enter service in 2017. Boeing is both increasing production in Renton—to 42 aircraft per month in 2014—and factoring in the MAX, which has new engines and some changes to its wing, fuselage and landing gear. It is to open a third final assembly line for MAX but expects to work through a transition phase. NG orders are unlikely to fall off significantly until MAX deliveries begin.
The commercial aircraft industry continues to outpace many others, despite economic gloom in Europe and softness in airline markets elsewhere. McNerney acknowledges a “fragile” world economy. Yet airlines' drive to improve their operating efficiencies is keeping cancellation rates low, although some customers are asking for later delivery dates.
Slightly more than half of the orders Boeing is seeing are for replacement aircraft, an unusually high ratio for an industry accustomed to fleet expansions. McNerney says airlines are generally eager to replace their older equipment with more aerodynamically efficient models whose engines require less fuel. “People view them as a quick-payback investment,” he says of the replacements.
In that regard, McNerney maintains that the NG series is not as disadvantaged as might be thought compared to the MAX. The older airplane still offers “dramatic improvements” in fuel burn over the 1980s and early 1990s-era jets it replaces. Against those, an NG offers a 15% fuel-burn advantage, just as the MAX does over the NG.
But there is price pressure on the NG now that the MAX is available. Chief Financial Officer Greg Smith acknowledges that Boeing has a “learning curve” underway on how to price its 737 lineup. He says some “introductory pricing” offers are being made, without being specific.
“I think we've got it well understood and we're going after it,” he says of customers' push for discounts. “I'm not as concerned about it as some of the folks I've seen published so far,” he adds, in a reference to Wall Street.
McNerney says the NG discounts are similar to what he's observed previously when obsolete models are replaced. “We're not going to change that,” he says. “So our issue is driving productivity to offset it.”
The company expects to meet its 2012 delivery target of 585-600 aircraft, although it was slightly below the halfway point at the end of June.