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Boeing May Boost 737 Production

Ted Reed

Boeing (BA Quote) believes some major U.S. carriers are close to placing orders for new 737s, and it's considering a production increase to meet the anticipated demand.

At an investor conference this week, Scott Carson, CEO of Boeing's commercial airplanes division, said the company has been trying to determine whether it should raise output. "It feels like there might be enough solid demand to do it, but we're watching very carefully," he said.

Before it can commit to building more planes, Boeing has to determine if the move could be supported by its supply chain, by its factory and by market demand, Carson said. He noted that the increase could be justified by the large number of MD80 airplanes still flying, which "are not very efficient with this fuel price" and will need to be replaced.

Two U.S. airlines, AMR's (AMR Quote) American Airlines unit and Delta Air Lines (DAL Quote), continue to operate a substantial number of MD80s. American's fleet of 655 planes includes 300 MD-80s, with an average age of about 18 years.

American has said repeatedly it wants to replace them, and it has gradually been increasing its 737-800 deliveries, with 23 scheduled through 2009.

Delta has 120 MD80s that average about 17.5 years old, but it doesn't have plans for "a significant fleet replacement order anytime soon," according to spokeswoman Betsy Talton.

"The strategy is to improve the fleet we have," she said. "Acquisitions [of jets] will be limited and strategic in nature."

On last month's earnings conference call, Boeing CEO Jim McNerney said his company has "been in extended discussions with a couple of the major carriers who have not participated in this order cycle. It wouldn't surprise me if a couple of deals with these folks came to fruition in '08." He didn't specify the airlines.

While Boeing doesn't disclose production rates, aviation consultant Scott Hamilton says the company makes 31 of its 737s a month and could go up to 40. "They've been looking at it for quite some time," he said. "The question has been whether the supply chain can do that."

Boeing has a five-year backlog of narrowbody orders, Hamilton said. Should American decide to replace its MD80 fleet with new 737s, it would require 30 deliveries a year for 10 years. That would seem to demand additional production from Boeing, absent a worldwide slowdown in demand that led to order cancellations by other carriers.

Hamilton pointed out that Carson previously criticized Airbus for ramping up its A320 production to 40 planes a month. In a late 2006 speech, Carson stated: "In a superheated market like we have, it would be very easy for manufacturers to produce more than the industry can absorb and for operators to buy more than they need," according to an article in the Seattle Post-Intelligencer.

"Boeing dismissed [the Airbus increase] as being foolish," Hamilton said. But to consider a 737 production build "is a very different stance."