Is Boeing’s Best-Selling 737 Max a Money-Maker?

The Boeing 737 MAX is not just Boeing’s highest-volume aircraft; it’s arguably its most crucial. However, currently, it isn’t a money-maker. In the coming years, Boeing aims to change that, and according to J.P. Morgan, it’s entirely feasible.

For analyst Seth Seifman, MAX profitability remains a few years away. In a recent research report, he stated, ‘One critical component of Boeing’s anticipated $6 billion-plus free cash flow growth between 2023 and 2025-2026 is the 737 program.’

Despite nearly 400 deliveries expected in 2023, the 737’s contribution to cash flow remains modest due to program cash costs exceeding what is recognized on the profit and loss statement.

Several factors, including product mix, volume, and quality control, contribute to the 737 MAX’s cash flow challenges. Boeing has had to address issues even after planes left the assembly line.

Nonetheless, there’s optimism for a turnaround. Investors can monitor Boeing’s ‘deferred production balance,’ disclosed quarterly, for progress tracking.

Aircraft accounting differs significantly from standard bookkeeping practices. It takes billions and several years to bring a new plane to market, but the aircraft’s revenue spans roughly 20 years, making revenue and expense matching a complex task.

Boeing books revenue when a plane is sold, assuming an average cost. However, actual costs can differ. When they exceed estimates, the deferred production balance for the 737 MAX program increases.

A shrinking deferred production balance indicates cost reduction and smoother operations, but it hasn’t occurred yet. Currently, the balance for the 737 MAX program stands at $5.4 billion, up from $3 billion at the end of 2022. Seifman anticipates stabilization in the balance next year, with a decline expected in 2025-2026.

Product mix improvements will play a role. Boeing has been delivering many MAX jets to customers with the best pricing, such as Southwest Airlines and Ryanair, a trend that’s expected to moderate in the coming years.

In addition to adjusting the customer mix, Boeing must enhance quality, ramp up production, and address the MAX inventory accumulated during the global grounding lasting nearly two years, following two deadly crashes from March 2019 to November 2020.

All these factors affect Boeing’s cash flow statement, and the deferred production balance offers a clear indicator of its progress.

Wall Street anticipates Boeing generating approximately $3.2 billion in free cash flow in 2023, marking the second consecutive year of positive free cash flow after the pandemic and worldwide grounding challenges.

Between 2019 and 2021, Boeing posted a cumulative negative free cash flow of $28.4 billion, according to FactSet. Analysts project a 2025 free cash flow of $11.3 billion, a significant increase over this year’s figures.

Investors share the optimism regarding Boeing’s improvement goals. Seth Seifman rates the stock as a Buy and has raised his price target to $270 from $245.

Over the past 12 months, Boeing’s shares have gained about 34%, outperforming the S&P 500 by approximately 18 percentage points. Investors are enthusiastic about the recovery in global air travel post-pandemic.

Through October, Boeing successfully delivered 298 MAX jets out of a total of 405, as reported on its commercial website. Single-aisle aircraft, similar in size to the 737, remain the workhorses of the commercial aerospace industry.

Sources: AirGuide Business airguide.info, bing.com, J.P. Morgan