Boeing Mulls Price Cuts, to a Point, in Quest for 737 Share Gainby
Planemaker bid used jets against C Series in Delta contest
Redesigns of largest, smallest 737 Max are on drawing board
Boeing Co. is studying redesigned versions of the 737 Max jetliner, cutting costs and rolling out more robotics in factories to keep pace with relentless competition in the global aerospace market.
But there are limits to what the U.S. planemaker will do in its battles with old foe Airbus Group SE and newer rival Bombardier Inc., executives said Wednesday. During Boeing’s annual investor conference webcast from Seattle, Chief Executive Officer Dennis Muilenburg sketched out a vision of the company as a “global industrial champion” with profit margins reaching the mid-teens by the end of the decade while cash still flows freely to shareholders.
“We won’t chase market share for market share’s sake,” Muilenburg said during the proceedings, the first since he took over the top job in July.
Muilenburg, who earned his reputation stripping billions of dollars in costs from Boeing’s defense business amid declining government spending, is “leaning hard into margins as key success driver going forward,” Carter Copeland, an aerospace analyst at Barclays Plc, wrote in a May 9 report. While Boeing’s commercial airplane unit can’t lower expenses as freely as its defense counterpart, “there’s a lot of fat to be cut out of this organization.”
Boeing has stepped up cost-savings efforts at the commercial division to minimize the pricing advantage Airbus, its European rival, enjoys because of the strong U.S. dollar. While the planemakers now split annual deliveries evenly, Airbus holds a far larger backlog of unfilled orders that could give it a commanding lead in the next decade. Airbus has logged 5,479 sales of its A320 family jets to 4,380 for Boeing’s 737 models, according to data compiled by Bloomberg Intelligence.
Boeing will price its jets competitively and take narrow-body market share where “reasonable,” said Ray Conner, CEO of Boeing’s commercial airplane unit. That doesn’t mean every airline customer will get the same bargains as United Continental Holdings Inc., which ordered 737s twice from Boeing earlier this year.
In fact, Boeing didn’t even bid its best-selling single-aisle jetliner in a highly publicized contest for a Delta Air Lines Inc. order that was ultimately won by Bombardier’s C Series. “We competed for Delta with used 717s, used Embraers,” Conner told investors, referring to an out-of-production Boeing model and Embraer SA jets that compete directly with the smallest C Series plane.
Boeing’s 737 Max family doesn’t have any offerings competing in the 100-seat category targeted by the CS100, the aircraft selected by Delta in an order with a $5.6 billion value based on list prices, Conner said. Bombardier warned of a $500 million “onerous contract” charge for that order and a separate sale, implying a below-cost sales price of about $20 million, according to a May 4 Bloomberg Intelligence report.
Michael Thomas, a spokesman for Delta, declined to comment on negotiations with aircraft manufacturers.
Boeing is considering a redesign of its smallest and largest 737 Max models in response to customer feedback, and to the rivalry with Airbus at the top of the market and Embraer at the bottom, Conner said. No decisions have been made yet on possible derivatives of the Max, an upgraded version of the workhorse 737. The Max is is on track to enter the market in the first half of 2017, Conner said. That’s earlier than the plane’s scheduled August debut.
The manufacturer has been vetting plans for a larger, longer range version of the Max 7 that would seat about 150 people rather than the 126-passenger capacity of the current version. Also on the drawing board: the so-called Max 10, a stretch of the largest of the models, the Max 9, that would include new engines and landing gear.
While the proposals don’t have “super-attractive business cases,” they aren’t budget-busters, either, Copeland said. Boeing could “appease customer demands” at a cost of about $1 billion to $1.5 billion for each of the models.
Redesigning the smallest Max would be “relatively easy,” Conner said. “We still believe the heart of the market sits with the Max 8 size,” Conner said, referring to the top-selling 737 model, which seats 162 people in a two-cabin configuration.