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Aerospace and defense operator The Boeing Co. (BA - Analyst Report) received an order to supply 16’ 737 MAX airplanes to IcelandAir. The initial order for 12 aircrafts was received in Dec 2012, which has been increased to 16 now. The agreement also includes purchase rights for another eight 737 MAXs.
The total value of the 16 airplanes will be $1.6 billion at list prices. We expect IcelandAir to get a discount on list prices as Boeing has historically offered discounts on bulk orders.
The bulging 737 MAX order book, which presently stands at 1,180 airplanes, will definitely offer a breather for this airplane manufacturer given the continued uncertainty over its Dreamliner 787 model. To cope with piling order, Boeing decided to increase its production rate of 737 MAX from the current 38 airplanes a month to 42 airplanes a month in 2014.
Boeing 737 MAX is a premier aircraft from Boeing’s stable and sees brisk demand in the single-aisle market for its fuel efficiency and low carbon dioxide emissions. Powered by the Commercial Fan Motor (“CFM”) International LEAP-1B engines, the Advanced Technology winglet of this airplane also enhances performance.
Additionally, the pivoting overhead stowage bins add to the spaciousness of the cabin. The bins give passengers more room to keep a carry-on roll-aboard near their own seat besides providing extra leg space. This aircraft is 13% more fuel efficient than its closest peer in the single-aisle aircraft market.
Despite a strong showing from 737 MAX, Boeing’s commercial aircraft division continues to face problems with its 787 Dreamliner. To begin with there were delays with the first 787 aircraft delivery. On Jan 16 this year all 787 Dreamliners were grounded worldwide after battery-related incidents. A parked 787 at the Logan International Airport in Boston caught fire while there was an in-flight incident on another 787 in Japan forcing an emergency landing. Boeing is investigating the cause of battery malfunction.
Boeing is yet to resolve its Dreamliner 787 battery problem though it continues to manufacture the model. However, supply of the same to its customers has been halted. We believe unless the company succeeds to solve the battery issue margins would come under pressure and eventually the company might find it difficult to meet its 2013 delivery target of 60’ 787 airplanes.
Boeing completed 2012 with a strong backlog of 4,400 airplanes valued at $319 billion. 737 MAX and the jinxed 787 model will play a pivotal role for the company in achieving its 2013 commercial revenue target which is in the range of $51 billion to $53 billion.
Boeing currently retains a Zacks Rank #3 (Hold). We presently prefer other operators in the aerospace and defense sector, like Huntington Ingalls Industries (HII - Snapshot Report), Lockheed Martin Corporation (LMT - Analyst Report), and Rockwell Collins Inc. (COL - Analyst Report), all carrying a Zacks Rank #2 (Buy).