Summary
- Boeing’s duopoly with Airbus allows it to sustain losses of billions without facing bankruptcy.
- The manufacturer’s major challenge lies in production issues causing quality and safety concerns
- Despite a massive order backlog, Boeing’s financial woes persist due to high costs and slow production.
In most competitive industries, a company is not capable of consistently losing millions of dollars and avoiding bankruptcy. Other industry players would quickly gain an advantage in the market, and the struggling firm would lose its reputation and standing. Under these circumstances, it would likely eventually be acquired or forced into liquidation.
Thankfully for US-based aviation manufacturing giant Boeing, the commercial aircraft manufacturing industry does not abide by these traditional rules of competitive markets. When looking to purchase large commercial aircraft, there are only really two options: European consortium Airbus and American manufacturer Boeing, both of which have had their fair share of challenges over the years.
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Currently, these two companies maintain a classic duopoly, with nearly complete control of the market and the ability to leverage their massive market power to keep airlines coming back. As a result, Boeing has lost $32 billion in the last five years and nonetheless maintains an extensive backlog. The company is here to stay, so in this article, we will take a deeper look at the following question: When will Boeing stop losing money?
The nature of the market
Boeing has extensive and well-documented problems, some of which have turned into high-profile incidents like a door plug blowing off of an Alaska Airlines flight earlier this year. Nonetheless, the company has not struggled to continue selling and delivering its jets, something that speaks to the nature of the aviation industry.
Aerospace manufacturing is expensive, and the barriers to entry are incredibly high. Over the decades, companies have failed time and time again, and mergers have led to the massive duopoly that exists in the market today. The manufacturing of full-size commercial aircraft is so economically challenging that even large-scale industrial nations like China and Russia have failed to leverage their engineering capabilities to develop a true competitor to the duopoly.
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Therefore, it is easy to conclude that one of the reasons that manufacturers of large commercial jets are so few and far between is due to the extensively challenging nature of breaking into the market. Some manufacturers, like Embraer and Bombardier, have been able to make an impact on the regional jet market, but when it comes to large narrowbody airliners and widebody jets, there are now just two options.
Another factor contributing to Boeing’s strong position within the market is the constantly rising demand for commercial jets amid the rapid rise in post-pandemic travel. According to the International Civil Aviation Organization (ICAO), the demand for passenger airliners continues to rise by a projected 4% each year for the next 20 years, placing Boeing in a strong position to continue seeing large-scale orders.
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Furthermore, there are almost no close substitutes in the market for most of Boeing’s aircraft. For example, a legacy operator of the 737 family has few choices to modernize their fleet other than ordering the problem-ridden 737 MAX, as switching to a competing jet like the A320 would require the extensive process of retraining pilots, incorporating a new maintenance network and a number of other expensive logistical challenges.
So why the financial difficulties?
Boeing’s strong position in the market has allowed it to amass an impressively large backlog of orders for more than 5,600 commercial aircraft, which have a collected market value of over $450 billion, far more than enough for the company to turn sustained profits. Nonetheless, the company is operating year after year in the red, with no end to these current woes in sight. The challenge emerges, at the end of the day, when the manufacturer is incapable of delivering enough aircraft per year to overcome its incredibly high costs and turn a profit.
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Over the past two years, the gap between Boeing and Airbus’ delivery targets has begun to grow, and not in the US-based planemaker’s favor. According to Reuters, Boeing managed to deliver 528 aircraft in 2023, which demonstrated improvements in performance in 2022 but still lagged far behind Airbus’ 735 deliveries, a number that broke the civilian aerospace industry’s one-year record.
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The reasons for Boeing’s production slowdown are rather obvious. They all relate to quality and safety issues that have arisen in recent years, not only for the 737 MAX family but also for other popular airliners. Across the board, Airbus has been able to capitalize on a strong safety network and fewer quality control issues to ramp up production and deliver far more aircraft on average than its rival.
The issues caused by Boeing’s production difficulties have also significantly hurt the manufacturer’s sales. Despite maintaining a backlog of more than 5,600 commercial jets, the company is still in a tricky position, lagging far behind Airbus sales even in 2023, prior to the Alaska Airlines 737 MAX 9 incident. According to CNN, no other company on the S&P 500 stock index has managed to lose nearly as much money as Boeing, with only a few others coming even remotely close during the period in which the manufacturer has reported losses of over $30 billion.
The company’s plan
Boeing has been quick to acknowledge all the issues previously mentioned, and insists that it has attempted to resolve all applicable safety issues as effectively as possible. The key problem that the company must address is the short-term safety issues surrounding the 737 MAX program, something Boeing claims it is working diligently to do.
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As a result of attempting to fix production challenges, the company has been quick to slash its production pace. In its first-quarter earnings call, Brian J West, Boeing’s Chief Financial Officer, had the following words to share:
“On the 737, we delivered 67 airplanes in the first quarter, as we deliberately slowed production below 38 per month to incorporate improvements to our quality and safety management systems, including reducing traveled work and addressing supplier non-conformances.”
The executive would go on to add that the slower production rate would remain in effect throughout the first half of the calendar year, but that production would undoubtedly ramp up going into the back half of the year. Hopefully, having resolved its production challenges, the company will be able to improve its delivery timeline and get back on the road to profitability.
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