Boeing 3Q 2026 Earnings Call - AVIALL INC

Financial Performance:

• Consolidated revenue reached $24.2 billion (up 4% YoY), driven by higher defense and services volume, partially offset by an unfavorable commercial delivery mix.
• Operating margin improved to 1.5%, with core EPS at a loss of $0.34.
• Boeing Commercial Airplanes (BCA) revenue was $10.7 billion (-3% YoY); operating margin was -6.5%, improving significantly from the prior year despite supply chain headwinds.
• Defense, Space & Security (BDS) revenue rose 15% to $7.9 billion, with an operating margin of 6.2% (includes $252 million gain from HRL sale); backlog hit a record $101.1 billion.
• Global Services (BGS) revenue grew 4% to $5.6 billion (11% excluding divestiture) with an operating margin of 18.3%.
• Free cash flow was positive $464 million for the quarter; debt remained flat at $45.9 billion, with $20.7 billion in cash and marketable securities.
• BCA backlog increased to a record $612 billion (over 6,300 aircraft); total company backlog stands at $745 billion.

Guidance and Future Outlook:

• Provided a multi-year free cash flow trajectory: ~$2 billion in 2026, rising to ~$3 billion in 2027, ~$6 billion in 2028, and ~$10 billion in 2029, with potential for growth beyond $10 billion thereafter.
• BCA production is targeted to stabilize at 47 units/month in late 2026, with a ramp to 52 units/month expected in the back half of 2027.
• 787 production is stable at 8/month with a transition to 10/month expected later this year; delivery volumes for the year are projected at 90-100 units.
• 777X remains on track for first delivery in 2027, assuming certification by mid-2027; current production rate is ~1 aircraft/month, rising to 10-15 deliveries in 2027.
• Capital expenditures expected to be ~$5 billion in 2027 and ~$4 billion in 2028-2029, settling at 3-4% of revenue on a normalized basis.
• BCA program margins are forecast to reach break-even in early 2028, with long-term targets exceeding 2018 levels by 2029.

Business Segments and Product Lines:

• Delivered 161 commercial aircraft in Q3 (124 737s, 22 787s, 15 freighters/tankers), the highest volume since 2018.
• Achieved FAA certification for the 737-7 (July) and 737-10 (August); pre-built inventory of 30 units from these models will begin deliveries in early 2027.
• Secured the U.S. Navy's F/AXX contract to design and build the sixth-generation fighter jet, making Boeing the exclusive supplier for both Air Force and Navy 6th-gen fighters.
• Awarded a 7-year contract to triple PAC-3 MIM production and a contract for 22 additional F-15EX aircraft (total under contract: 120).
• Secured approval for incremental production of up to 35 777 metal wing freighters; 767 tanker production faces temporary disruption due to a wing component supplier issue.
• Charleston factory expansion underway to add a third 787 final assembly line, with capability expected late 2027.
• Starliner program risks reduced with $359 million in additional NASA funding and a revised path forward with NASA.

Market and Competitive Landscape:

• Backlog quality has improved with better pricing dynamics and robust demand; order growth remains strong despite higher fuel prices.
• Defense portfolio seeing accelerated growth momentum with fixed-price underwriting and successful contract structures (e.g., MQ-25, T-7).
• No specific competitor threats mentioned, but emphasis placed on exclusive position in the 6th-gen fighter market.
• Airline customers are shifting orders toward fuel-efficient replacement aircraft rather than cutting growth plans due to high fuel prices.

Risks and Challenges:

• Production stability at the 47 units/month rate is taking longer than expected; challenges identified primarily in wing back shops and Wichita fuselage supply chain synchronization.
• Abnormal costs related to supply chain disruptions (wing components) will be expensed over the next few quarters.
• 777X certification timeline remains a key risk; any significant delay beyond mid-2027 could impact 2027 free cash flow, though the plan includes a management reserve.
• Legacy cash drags and negative working capital contributions from 777X are expected to persist through 2028.
• Potential softening in airline growth orders if fuel prices remain high, though replacement demand is currently insulating the business.

Management Commentary and Tone:

• Tone is confident and disciplined, emphasizing a shift from risk mitigation to execution of a "durable" business model.
• Management expressed confidence in the $10 billion FCF 2029 target, noting the range of outcomes has narrowed compared to two years ago.
• Kelly Ortberg highlighted that while progress is not linear, the team is prioritizing safety, quality, and stability over speed, accepting a slower ramp to higher production rates.
• Jay Malave and Ortberg emphasized that the FCF guidance assumes a disciplined approach to rate increases to avoid the volatility of previous years.

Analyst Questions and Answers:

• FCF Trajectory: Confirmed that 2027 FCF benefits from the one-time absence of the $700 million DOJ settlement payment; growth drivers include higher volumes, improving BCA margins, and BDS/BGS expansion.
• Supply Chain: Wing back shop yields were the primary bottleneck for stability at 47 units/month; resolution requires testing new flow enablers before moving to 52 units/month.
• 777X Risk: A delay to mid-2027 is financially provisioned within the current plan; management expects to absorb a few months of delay within the $3 billion 2027 FCF guide.
• Oil Prices: Airlines are passing higher fuel costs to consumers; demand for fuel-efficient replacements remains strong, limiting negative impact on order books.
• New Aircraft: No change in outlook for a potential new single-aisle; R&D for this is included in current investment plans and does not alter the 2029 FCF target.
• Defense Margins: BDS targets high single-digit operating margins by the end of the decade, supported by favorable contract structures on new awards.

Other Key Points:

• Reached a new four-year labor agreement with the engineering workforce in the Pacific Northwest, avoiding work stoppages.
• 737 rework in final assembly improved by 40% compared to the previous year.
• BGS backlog stands at $33 billion with $5 billion in orders for the quarter.
• 777X cash flow is expected to be a significant use of cash in 2027, turning positive in 2029.
• Deferred production balances for 737 and 787 are expected to flatten next year and become net cash sources in 2028-2029.