SEATTLE ( TheStreet) -- The fortunes of Boeing ( BA) turned fast.

Not long ago, Boeing was said to be eyeing cutbacks in 737 production. Now, it is eyeing production increases, as well as the potential to add newer, more efficient engines. The aircraft maker may restore 777 production, following a scheduled cutback from seven to five planes a month in June: A decision will be made as soon as next month.

Additionally, the pace of 787 testing is increasing, with Boeing still intent on first delivery late this year or early next. Three test aircraft are flying, with a fourth scheduled to fly on Sunday.

"We're starting to see (airline) traffic come back," said Jim Albaugh, president of Boeing Commercial Airplanes, at a JPMorgan investor conference Tuesday. Albaugh said traffic should be at 2008 levels this year and "continue to climb in 2011 -- we think we'll see airlines come back to the market in 2012."
Jim Albaugh
Jim Albaugh, president of Boeing Commercial Airplanes.

Boeing declined some potential 747-800 sales in 2009, said Albaugh, because "we did not feel we would get the value for those planes that we deserved." Now, with the cargo markets recovering strongly, "we'll be able to sell this airplane for what it's worth."

The performance of Boeing stock reflects the positive outlook. Shares were up 80 cents to $68.04 in early afternoon trading. Shares have risen about 22% this year, compared with a 3% increase in the S&P 500, and Boeing is the best performer among the Dow stocks. In March, Boeing shares have risen about 8%, compared with a 4% increase in the S&P.

On the defense side, which accounts for about half of annual revenue, Boeing had some apparent good news Monday when Northrop Grumman ( NOC) dropped out of the race to win a $40 billion contract to build the Air Force's next generation of aerial-refueling planes, leaving Boeing as the sole competitor.

Said Albaugh: "I've been working this for nine years. It's the longest running soap opera since 'Days of Our Lives.' And I don't think we've seen the last episode." In a report Tuesday, Broadpoint AmTech analyst Peter Arment noted that "while the competition is no longer, a sole-source win is not free of tons of scrutiny from the Pentagon and Congress.

"The upside for BA is big," Arment, said, but it is early to declare victory in the long-running saga. Arment also cited "further upside to go despite the stock's recent move," and set a target price of $76 a share, which is 18 times projected 2011 earnings.

Albaugh also said he encourages Boeing aircraft program managers to be paranoid --"I like them to see the glass as half-empty," he said. Threats to the current duopoly in aircraft manufacturing are literally everywhere, as other countries seek to build their large-aircraft manufacturing businesses. Albaugh cited Canada, Brazil, Japan, China and Russia. "The Chinese will invest $30 billion in commercial airplane development in the next decade," he said. "They have put a man in space. They will eventually get there." He said Boeing must decide whether to cooperate with the Chinese or to compete against them.

In the meantime, the company must decide whether to put a new engine on the 737, still its bestselling product by far, or to design an entirely new next generation aircraft. At the next presentation, analysts sought the opinion of Tom Horton, CFO of American ( AMR), a major Boeing customer. Horton noted that although it has 45 new 737s arriving this year, American "has a lot of flexibility beyond that. If there is news on a product that would be attractive to use, we would be able to move forward on that." At the end of 2010, Horton noted, American will still have more than 200 MD-80 aircraft, which it wants to replace, in its fleet.

-- Written by Ted Reed in Charlotte, N.C. .