Key Points
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Certification is expected to boost earnings, backlog execution, cash flow, and competitiveness.
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Operational improvements and backlog details suggest opportunities for margin expansion.
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The Federal Aviation Administration (FAA) just certified the Boeing (NYSE: BA) 737 MAX 10, a big development for the company on many fronts. Not only does it de-risk the company, but it also significantly and immediately boosts its earnings and cash flow prospects, enhances its operations, and allows it to compete with Airbus‘ (OTC: EADSY) highly successful A321neo.
The certification is excellent news for Boeing investors
The news shouldn’t come as a surprise; after all, management repeatedly told investors it expected it in 2027. That said, given recent history of groundings, certification delays, intense regulatory scrutiny, and production caps imposed by the FAA, it’s understandable that investors might have been apprehensive about the eventuality.
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Still, with Boeing’s last 737 MAX now certified, investors can start penciling in a host of improvements. First, there’s a near-term earnings and cash flow benefit because Boeing was already building 737 MAX 10s in anticipation of certification and then first deliveries in 2027. Those deliveries will boost revenue, earnings, and cash flow because, until they are delivered, Boeing will have tied up cash in undelivered airplanes.
Margin, operational, and competitive improvements
Boeing has about 30% of its 737 backlog in 737 MAX 10s, and deliveries of them are likely to improve profit margins, not least as it will spread Boeing’s fixed costs around more units produced. In addition, larger aircraft tend to have higher profit margins, so it’s likely that the 737 MAX 10s in its backlog carry higher profit margins than the smaller variants.
There’s also an operational benefit as Boeing has opened a production line in its larger Everett facility (which typically builds widebodies) which is used to build 737 MAX 10s — Boeing’s Renton facility (narrowbodies) “can’t go nose to tail in the factory in Renton with all -10s,” according to CEO Kelly Ortberg at a recent Morgan Stanley conference.
Boeing 737 MAX 10 vs. Airbus A321neo
It will also increase Boeing’s competitiveness with the Airbus A321neo. To be clear, it’s far from an apples-to-apples comparison, because the A321neo variants range from 3,400 nautical miles to 4,700 nautical miles (A321XLR) with a maximum capacity of 244 passengers. This compares with the 737 MAX 10, which has a range of just 3,100 nautical miles and a maximum capacity of 230 passengers.
As such, the key benefit of the 737 MAX 10 is its ability to add capacity on short-haul routes, which airlines will appreciate, as well as avoiding the need to switch to Airbus planes to expand capacity.
Where next for Boeing
All told, the company’s slow recovery, aided and abated by its high-caliber board and Ortberg’s leadership, is underway, and tangible benefits are likely to become highly visible in 2027, not least from growing deliveries of the newly certified aircraft.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing. The Motley Fool has a disclosure policy.
