Boeing Co

NYSE:BA

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by. Good day everyone and welcome to the Boeing Company's Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over the Internet.

[Operator Instructions]. At this time, for opening remarks and introductions. I'll turn the call over to Mr. Matt Welch, Vice President of Investor Relations for the Boeing Company. Mr. Welch, please go ahead.

[Matthew Wlech, Vice President of Investor Relations]

Thank you, and good morning. Welcome to Boeing's Third Quarter 2021 earnings call. I am Matt Welch and with me today are David Calhoun, Boeing 's President and Chief Executive Officer, and Brian West, Boeing's Executive Vice President and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com.

As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates, and goals we include in our discussions this morning involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

[David Calhoun, President and Chief Executive Officer]

Thanks, Matt. And good morning, everyone. I hope you're staying well as we navigate to the other side of this crazy global pandemic. We continue to work with our customers, our suppliers, and our partners to stabilize our industry and chart the path to recovery. While this summer brought us new challenges with the variant, we have seen encouraging signs of increased vaccination rates, further progress on coordinated international travel policies and protocols, and ongoing discussions with customers on their fleet planning.

As expected, the recovery has been uneven. However, it continues to gain broader momentum, giving us confidence in the resilience of our market. Vaccines have proven safe and effective and their key to personal health and to reopening the global economy. Reopening travel routes and businesses. Our customers, both commercial and defense, have implemented vaccine mandates for their employee populations.

After careful review and consideration and to ensure compliance with President Biden's executive order. We are implementing a requirement for U.S. based employees to show proof of being fully vaccinated from COVID-19, or have an approved reasonable accommodation. As we have done since the beginning of the pandemic, we will continue to prioritize the health, and the safety of our employees.

We're making important progress in transforming our business, driving stability and quality in our operations, and investing for the future. I'm proud of our team's continued resiliency and unwavering focus on our mission. Before I go through our business update, I'd like to formally welcome Brian West, our new CFO, who is with us here today. And the 2 months since Brian started, he has spent countless hours at our operational sites with the finance and the broader teams, digging into issues, gaining an in-depth understanding of our business.

Brian is an exceptional leader and we're grateful to have him on board. With that, let's start with an update on the business in the next chart. Beginning with a 737 program, we continue delivering to our customers and supporting their efforts to return their fleets to service. In the third quarter, we delivered 62 737 MAX airplanes, the most we've delivered since the first quarter of 2019. We have made noteworthy progress since receiving approval from the FAA.

And today, over 175 countries have approved the resumption of 737 MAX operations. We delivered more than 195 airplanes, including about 1/3 of the 450 airplanes originally in inventory. We have largely placed the airplanes that required remarketing. Our airline customers have returned more than 200 previously grounded airplanes to revenue service. 31 airlines have returned their fleets to service.

And those airlines have safely flown over 206,000 commercial flight flights totaling more than 500,000 flight hours. Importantly, the fleet has an impressive schedule reliability rate of more than 99 %. And as domestic and regional traffic recovers, for example, Intra-Europe, demand for the 737 MAX continues to improve. In September, we saw the 8 straight month of positive net commercial airplane orders, primarily due to the 737-Max. At the end of the quarter, we had over 3300 aircrafts in our 737 backlog, highlighting the airplane's families value proposition.

Given this demand during the Third Quarter, we increased our production rate to 19 airplanes per month and continue to progress toward a production rate of 31 per month in early 2022. While we continue to deliver from inventory, we're balancing the need to increase the production rate to position us to support increasing demand longer-term. We're actively working to ensure that production system, including the supply chain is stable prior to making decisions to further increase the production rate.

Raw materials, logistics, and labor availability will also be key watch items for future rate increases. As we previously communicated, the timing of remaining regulatory approvals will shape our near-term delivery plans and our production rate ramp beyond 31 per month. Following the completion of the 737 MAX flight test in China during the third quarter, we continue to work toward approval by the end of the year with a resumption of deliveries to follow in the first quarter of next year.

We also continue to make progress on the certification of the 737 MAX 7 and the MAX 10. We currently anticipate the first delivery of the MAX 7 in early 2022 and the first delivery of the MAX 10 in 2023. As always, we will follow global regulators lead in the steps ahead on all certification matters. On a 787 program, we remain fully committed to our methodical approach to driving first-time quality and stability in our operations.

The issues that our engineering teams and/or our suppliers have identified and are addressing, are part of this purposeful process, and we have transparently communicated with our regulators, our customers, and our suppliers every step of the way. As recently shared, we've also identified quality issues with a sub-tier parts supplier.

And while our review is ongoing, there are no immediate safety of flight concerns. We're in regular communication with the FAA on these issues and are committed to taking any action required to address them. As to the 787 generally, we're conducting inspections and we work and we continue to engage in detailed discussions with the FAA regarding the required actions for resuming deliveries.

As we mentioned last quarter, we continue to re-prioritize production resources to support the inspection and the rework, and are currently producing at a rate of approximately two airplanes per month. Once deliveries resume, we expect to return to five per month over time. Keep in mind exact timing of deliveries and future production rates will depend upon inspections and rework. Ongoing customer and supplier conversations, production stability, and our activities with the FAA.

Again, our regulators will make the ultimate determination, but we believe we have a clear line of sight to the steps ahead. And we are continuing to make steady progress to begin delivering airplanes to our customers. Moving to the 777, the 777X program. The combined production rate is 2 per month. Given continued strength in freighter demand, we have coordinated with our supply chain and our increasing 777 freighter production capacity, in the near term, we now expect 2022 777 deliveries to be relatively in line with 2021. On the 777X program, we continue to subject the airplane to a comprehensive test program to demonstrated safety, it's performance and reliability while working through our rigorous development process to ensure we meet all applicable requirements.

We continue to engage with the FAA and global regulators throughout this process, and like any development program, we are learning along the way and incorporating those learnings into our plans. As we progress in our certification work, we continue to conduct Boeing flight tests and began engine performance flight testing earlier this month. The airplane is performing well and in-line with our customer commitments.

Based on the data that we've collected to date. We will validate these results and we will continue to work with the FAA to ensure we meet their requirements prior to beginning the certification flight tests. We still expect that we will deliver the first 777X in late 2023. Given the continued robust freighter demand and the compelling economics of the 777X. We're currently evaluating the timing of launching a freighter version of our 777X airplane. We will keep you updated as we progress in this evaluation. In addition, to the trip -- the 737 MAX 7, the MAX 10, and the 777X, we are investing our future laying the foundation for our next commercial airplane development program.

This quarter, we stood up an integrated product team to bring together a digital environment where the next commercial new airplane and production system can be designed together. While we have not launched a new airplane. This is an important step in our digitization journey and our development journey.

To evaluate how we holistically design, build, test, certify, and support the airplane and production system. It will build on the invaluable experience of our recent defense programs. Meanwhile, we continue to execute for our customers across our business. Let me highlight a few key milestones. Our Defense, Space and Security team made progress on key programs. For example, our MQ-25 unmanned test asset, completed aerial refueling of a F-35C fighter jet and an E2D command and control aircraft. We also delivered 37 aircraft in the quarter, including the first CH-47 F Chinook to the Royal Australian Army.

As was recently shared, the NASA and Boeing teams have identified the most probable cause of the valve malfunction on our commercial cruise Starliner, and we are working through corrective and preventative actions. We're currently working toward opportunities for the second orbital flight test launch in 2022, pending hardware readiness, the rocket manifest in space station availability.

As we have demonstrated, we will continue to prioritize the safety of our employees, crew members, and spacecraft as we progress. In our global services business, our team continue to perform and demonstrate sustained recovery from the impacts of COVID-19. As cargo demand increases, we announced plans to create additional capacity for the 767300 Boeing converted freighter. In addition to these program accomplishments, we continue to make progress on our commitment to drive the future of sustainable aviation.

Boeing recently joined a virtual White House event on sustainable aviation, reiterating our commitment to have our commercial airplanes capable of running on a 100 % sustainable aviation fuels by 2030. And our partnership with SkyNRG to expand the global supply of sustainable aviation fuel. We also hosted a 2 day Boeing innovation for them in Glasgow, bringing together partners in the region, customers, aviation experts, and stem students to accelerate efforts to ensure a safe and sustainable aerospace future.

We were also excited to participate in the Ayada annual general meeting to discuss our path toward a more sustainable future. and how we can support the aviation sectors commitment to achieve net 0 carbon emissions by 2050. In fact, just yesterday, our Chief Executive Officer, along with the CTOs from 6 other leading aerospace manufacturing companies, reaffirmed our commitment to reaching this industry-wide target.

Now, let's turn to the next slide to discuss the industry environment. Last month we released our 2021 Boeing market outlook, which forecasts a total market value of 9 trillion over the next decade. This is up from 8.5 trillion a year ago and from 8.7 trillion in the pre -pandemic 2019 forecast, reflecting the markets continued recovery.

The forecast closely aligns to what we laid out last year. Our government services, defense, and space markets remain significant and relatively stable. While increased government spending on COVID-19 response is adding pressure to defense budgets in some countries, others are increasing spending on their security. Overall, the global defense market remains strong and enduring with all of our major programs. We remain focused on delivering the highest quality, innovative, capable, and affordable platforms to the war fighter and maintaining the health of our supplier base.

The diversity of our portfolio creates new opportunities and continues to help provide critical stability for us, as we move forward. We continue to focus on our customers needs, expanding capabilities on our trusted platforms, investing in next-generation technologies, like autonomy and building on our foundation and model based engineering to deliver and intelligently support key franchise programs like the T-7A and the MQ-25.

We see strong continued bipartisan support for U.S. national security, including strategic investments in Boeing products and services, as congress works through its annual budget and authorization process for fiscal year 2022. The F/A-18 and the Chinook Block II remain critical capabilities for the war fighter, both domestically and for non-U.S. customers. We will continue to work with the administration and with congress to ensure the necessary support for these key program is in place. The commercial market is shaping up largely as we expected, while near-term pressure due to COVID-19 continues, the recovery is broadening and the key long-term fundamentals remain strong. We've seen positive momentum in some markets.

However, the recovery continues to be uneven. In the Third Quarter, we saw a global departures increase slightly to an average of 67 % of 2019 levels, up from 59 % the previous quarter. Similar to what we saw in the first half of the year, domestic traffic is leading the recovery. However, traffic took a slight step back in the late summer due to the Delta variant, an increased travel restrictions resulting in global August domestic traffic of approximately 30 % below 2019 levels. Since then, it has shown signs of improvement, most notably in the domestic China market.

The U.S. domestic market continues to be a bright spot in our recovery with PSA screenings, resuming an upward weekly trends since mid September and peak travel days are reaching 80 % to 85 % of 2019 volumes. We're also seeing the recovery accelerate in more parts of the world, with reduced travel restrictions and coordinated protocols. Japan's domestic traffic is accelerating after the country recently dropped its COVID state of emergency.

And European airlines have seen large bookings spikes following the U.S. decision to open the vaccinated foreign travelers in November. Passenger traffic in other parts of the world, particularly Southeast Asia, remains significantly lower due to continued travel restriction, uncertainty, and case rates. Even there, however, there is increasing momentum for air travel as vaccination rates climb operations are starting to see incremental improvement with August traffic 69 % below 2019, which was an improvement from June and July.

And we're seeing promising signs of entry protocols loosening across the trans-Atlantic quarter. Despite this progress, international traffic is still a long way from full recovery. Limited coordination on travel protocols are still significantly hindering traffic in the international segment. Yet the active fleet is now approximately 85 % of its previous size, with single aisle activity levels slightly above twin-aisle. With utilization rates and load factors still below historic levels.

Airlines are flying around 60 % of their normal global capacity. Recent changes, the government policies could accelerate this to 70 % by year-end. However, we have seen continued variability in capacity due to supply chain and logistics challenges our customers are facing. As the recovery continues to expand, airlines are shifting their focus to medium-term fleet planning.

As part of this assessment, airlines have retired or announced plans to retire around 1500 airplanes since the onset of the pandemic, we anticipate this trend will continue as our customers modernize their fleets to reduce carbon emissions and increase operational efficiency. With oil prices today approximately 30 % higher than at the end of 2019, operating efficiency is top of mind for most of our customers.

The new airplanes we deliver will be as much as 25%-40 % more fuel efficient with commensurate reductions in emissions compared to the airplanes they replace. The freighter market remains robust with cargo traffic 8 % higher year-to-date through August, compared to 2019 With limited belly cargo capacity on passenger airlines, more dedicated freighters are being utilized to transport cargo.

This is resulting in healthy demand for our freighter offerings with 24 additional freighter airplanes ordered in the quarter and strong demand for Boeing converted freighters. In fact, our converted and new freighter orders through the first 9 months of this year have already surpassed our highest annual freighter tally in history. As we looked at medium and long-term, we see our original forecast still holds. We continue to expect passenger traffic to return to 2019 levels in '23 to '24, and then a few years beyond that to return to long-term growth trends We still see recovery in 3 phases.

First, domestic, then regional markets, such as Intra-Asia, Intra-Europe and Intra Americas flights. And finally, long-haul international routes. We've seen this phase recovery translate into demand with strong 737 Max orders this year, which mainly support domestic markets. We anticipate demand for wide-body aircraft to take longer, inline with the international traffic recovery. Our 10-year commercial airplane market outlook is largely unchanged from what we assumed a year ago, reflecting the impacts of the global pandemic, as well as the ongoing market recovery.

From now until 2030, we forecast demand for over 14,000 single aisle airplanes, such as the 737 MAX, which equates to roughly 115 to 130 airplanes per month. From a 20-year perspective, we still see the impact COVID, but to a lesser extent, as traffic reverts to long-term trends. Through 2040, we project demand for about 43,500 new airplanes, an increase of about 500 planes over last year's forecast. And as air travel grows, we're committed to reaching sustainability, goals and future guidelines through government and industry partnerships. And a combination of technology, policy and operational advances.

In a significant area of growth, projected demand has increased for dedicated freighters, including new and converted models. With sustained demand for air cargo tied to expanding e-commerce and airfreights, speed and reliability. We project the global freighter fleet in 2040, will be 70 % larger than the pre -pandemic fleet.

On the global trade front, we continue to support monitor U.S. China trade relations.Given the importance of the Chinese market to our economy and our industry's recovery, as well as our near-term delivery profile and future orders, all of which influence future production rates. We remain in active discussions with our Chinese customers on their fleet planning needs and continued words leaders in both countries to resolve trade differences by reiterating the mutual economic benefits of a strong and prosperous aerospace industry.

Ultimately, America's leadership in aerospace, as well as the health and stability of millions of commercial aerospace jobs, rely on free and fair trade, and we're confident our leaders understand the importance of this area, not just for our business, but for the overall health of our economy and competitiveness. Turning to the commercial services market, we saw a demand improve again in the third quarter as we supported airlines during their peak summer season.

We expect this trend to continue near-term, slightly ahead of our expectations. At said, we still anticipate a multiyear recovery that may be uneven. Liquidity is improving across the industry and managing liquidity remains critical for the aerospace industries bridge to full recovery we highlighted previously, product differentiation and versatility will be a key as airlines adapt to evolving market realities.

In fact, the 787 has been the most utilized wide-body airplane during the pandemic and demand for the MAX continues to grow. So far this year, we have sold more than 557 37s across each of the models from Dash-7 to Dash-10, reflecting the value of versatility and commonality. I'm confident our product line is well positioned and we're focused on executing to meet that customer demand.

Despite the continued challenges our industry is facing due to COVID-19, passenger traffic is increasing and more broadly, we're seeing incrementally positive indicators for economic growth. With economic activity picking up, labor availability within our supply chain will be the critical watch item. As we position for a robust recovery, we're focused on delivering for our customers and capturing the opportunities ahead.

We're maintaining and, in some cases, expanding key investments in strategic processes, technologies, and capabilities that will define our future. And whether we're investing in manufacturing technology, digital engineering, technology advances, autonomous solutions, supply chain capability, or platform designs, sustainability will be a key factor in every decision.

We're continuing our transformational efforts to create long lasting value, which will improve our performance, help us generate positive cash flow and create a foundation to enable us to return to healthy margins. While we do this, we remain committed to safety, quality, and transparency, and I'm confident in our future. With that, let me turn it over to Brian.

[Brian West, Vice President and Chief Financial Officer]

Thanks, Dave, and good morning, everyone. In the short time I've been here, the priorities couldn't be more clear, delivered for our customers, drive the highest levels of safety, quality, instability in all we do, innovate for the future and generate positive, sustainable free cash flow. While we have our share of challenges, I'm impressed the team and confident in our path forward. Let's turn to Slide 4, please.

Third quarter revenue increased to $15.3 billion primarily due to higher commercial deliveries and commercial services volume. We recorded a $0.60 loss per share in the quarter, primarily driven by higher commercial volume, partially offset by lower tax benefits. Third quarter 2021, was also impacted by 77 abnormal costs and the Commercial Crew Starliner charge. Now let's move to Commercial Airplanes on slide 5. Revenue was $4.5 billion reflecting higher 737 deliveries, partially offset by lower 77 deliveries.

Although commercial airplanes operating margin continued to be under pressure and improved in the quarter to the higher commercial airplane deliveries. And the BCA backlog is currently valued at $290 billion. Moving to the 737 MAX, we delivered 62 airplanes in the quarter. We currently have approximately 370 MAX airplanes built in store and inventory, including those that we have successfully remarketed. We know where the vast majority of the airplanes are going, given the demand and we anticipate delivering most of these airplanes by the end of 2023.

This assumes we resumed delivery to our customers in China during the first quarter of 2022. This delivery timing and the production rate ramp profile remains dynamic given the market environment, customer discussions, regulatory approvals, and supply chain stability. There is no material change to our assumptions for the 737 abnormal costs or our assessment of the liability for estimates 737 MAX potential concessions and other considerations to customers.

Turning to the 787, we did not deliver any 787 s in the Third Quarter while we continue our reviews and work with the FAA as Dave mentioned. In line with our accounting practices, we recorded $183 million of abnormal costs in the Third Quarter due to the low rate of 77 production, as well as inspection and rework costs. These costs will continue in future periods while we complete the rework, and we remain at an abnormally low production rate. We currently anticipate total 787 abnormal costs to be approximately $1 billion. Our latest assessment of the financial impact of these abnormal costs and the estimated impacts of delayed deliveries to customers has been included in our third quarter closing position. The 787 program margin remains near breakeven.

We still expect overall unit margins to hold up relatively well. And we're confident in the demand and the health of the 787 program over the long term. At the end of the third quarter, we have approximately 105 787s in inventory. Timing deliveries will be dependent upon completing necessary inspections in rework, ongoing fleet planning conversations with our customers, and closing out our activities with the FAA.

While the commercial recovery will take time, we remain focused on driving stability on the 787 program and across the business. As we bridge to the recovery, we expect improvements in commercial airplanes, financial performance due to increasing deliveries and continued efforts by the BCA team to transform for the future. Let's now move to Defense Space and Security on Slide 6.

Third quarter revenue decreased slightly to $6.6 billion and operating margin was 6.6% primarily due to $185 million earnings charge on our commercial crew Starline program, driven by the second on crude orbital flight test, now anticipated in 2022 and the latest assessment of remaining work. We received $6 billion in orders during the quarter, including an award for 4 Chinook Block 2 helicopters to the U.S. Army, and a JDM contract tor the U.S. Air Force. We also received the award from Germany for 5 T80 aircraft.

The BDS backlog is currently valued at $58 billion. Let's now turn to global services on Slide 7. In the third quarter, Global Services revenue increased to $4.2 billion and operating margin grew to 15.3% driven by higher commercial services as the market recovers for the impacts of COVID-19. Operating margin was also favorably impacted by lower severance costs and mix of products and services. During the quarter, BGS1 key contracts worth approximately $4 billion, including 12 additional 737 MAX-800 Boeing converted freighters for BBAM and an award for performance base logistic support of the global C17 fleet.

Total backlog remains at $19 billion. We continue to see incremental improvement in commercial services during the third quarter and we expect the quarterly revenue trend to improve as we support increasing airline flight operations. Looking ahead, we expect the continued commercial market recovery to drive commercial services to increase as a percentage of total BGS revenue.

Let's now turn to cash flow on Slide 8. Operating cashflow for the quarter was negative $0.3 billion, reflecting higher commercial deliveries, higher order receipts, reduced expenditures and lower wide-body production rates, and importantly, benefits from our business transformation efforts. Operating cash flow was favorably impacted by a $1.3 billion income tax refund. While we continue to see a cash flow benefit from order activity and we saw some advanced payment to benefit in the third quarter.

We still expect advanced payment burned down to be headwind through next year. Let's move to Slide 9 and discuss our liquidity position. We ended the third quarter with solid liquidity, including $20 billion of cash and marketable securities on our Balance Sheet. We have access to a total of $14.7 billion across our bank credit facilities, which remain undrawn. Our debt balance decreased by $1.2 billion from last quarter to $62.4 billion, driven by the paydown of bond maturities.

As we mentioned last quarter, we expect to have lower total debt at the end of the year due to the paydown, a maturing bonds, and early pay-down of the remaining $4 billion delayed draw term loan. Given continued uncertainties in our environment, we are vigilantly managing our cash. We've seen our cash balance begin to stabilize due to prudent actions taken across the business and increasing commercial deliveries. Therefore, we believe we currently have sufficient liquidity.

We remain committed to reducing debt levels and actively managing the balance sheet. Our investment-grade credit rating is very important to us and we will consider all aspects of our capital structure, to strengthen our Balance Sheet. Cash flow expectations are largely unchanged from what we shared last quarter. We still expect full-year 2021 to be a use of cash and turn cash flow positive in 2022.

As always, cash flow may vary quarter-over-quarter due to timing of deliveries as well as receipts and expenditures, including the potential of further cash tax benefits and MAX customer settlement payments. The key driver of cash flow in 2022 compared to 2021 is higher 737 and 787 delivery volume. The significant working capital benefit of delivering airplanes from inventory will have some offset for the reduction to the advances in progress payments balance.

As we previously shared, our advances balance largely reflects delivery plans from before the pandemic at MAX production pause. While we anticipate a meaningful burn down next year, we expect the balance will normalize by the end of 2022. Also keep in mind, there will be an impact to cash flow in 2022 for compensation to customers for deliver delays, and some headwind from the strong 2021 order book, which helped fill the near-term skyline and improved cash flow, in this calendar year.

As we bridge to sustainable free cash flow generation, we continue to proactively manage our liquidity and look to strengthen our balance sheet. In closing, while our business environment is dynamic, we're confident in the future. The key enablers for our business in our financial performance for the remainder of this year and into 2022 include vaccine distribution and travel protocols, which will ultimately facilitate the commercial market recovery.

Remaining 737 MAX regulatory approvals, U.S. trying trade relations, and resumption of 787 deliveries. Our team continues to closely examine all aspects of our business, simplify and streamline our work, and make long lasting change. Above all else, we'll stay focused on safety, quality, stability, innovation while generating sustainable free cash flow. With that, I'll turn it back to Dave for closing comments.

[David Calhoun, President and Chief Executive Officer]

Thanks, Brian. We're making important progress. We're taking the right actions to drive stability, to drive safety and quality in everything that we do. But while the past can be dynamic, I'm confident in our recovery and in our long-term growth. I'll close by thanking our teammates, your resilience, your passion, your commitment, continues to impress.

These are challenging times and you've continued to bring your best to Boeing each and every day. As we look to the future, we're investing in our people, in our teams, to be sure Boeing remains a unique place to build your career and contribute to our important mission. Thank you for all that you do to support our customers, our Company, and each other. And with that, Brian and I will be happy to take questions.

[Operator]

Ladies and gentlemen, in order that your question be clearly heard. We ask that you not use a speakerphone, cell phone, or phone headset. Please use your handset to ask a question. If you're on a speakerphone, please be sure your mute function is switched off, so your signal can reach our equipment. As a reminder, in the interest of time, we are asking that you limit yourself to 1 single part question. Our first question from Doug Harned with Bernstein, please go ahead.

[Doug Harned, Bernstein]

Good morning. Thank you.

[David Calhoun, President and Chief Executive Officer]

Hi, Doug.

[Doug Harned, Bernstein]

So you -- you have taken customer compensation related to the max down from 9.8. billion to 3.4, and this is understandably helped with getting deliveries out and the tough demand environment.I think of it as many of your customers are effectively seeing a discount through compensation. But two issues around that first, how complete are your compensation negotiations at this point?

In other words is the remaining 3.4 billion largely spoken for and it's just a matter of paying an out over time. And then second, how do you work with new customers? To see if I'm an airline, I look at others benefiting from these effective discounts and discounts that would not be available to me potentially. Is this an issue that can hold back new max orders or put added pressure on pricing?

[David Calhoun, President and Chief Executive Officer]

So Doug, I think as you know, we have done everything in our power to separate the settlement of the contract misses that we've experienced from new airplane orders and discounts. So we we've done everything in our power to keep them separate and we've been very successful in that process. No negotiation is complete until it's complete, so I can't be perfectly accurate on this front. But the lion share are, in fact in the

[David Calhoun, President and Chief Executive Officer]

rear-view mirror. And we know where the wiggle room is with respect to them. We think the final ones. On the other hand, I never say we're done until we're done. I am quite confident that pricing discipline going forward has been and will continue to be sustained and maintained. And I think as we shift from what used to be a demand problem to more of a supply problem in the course of next calendar year, that, in fact, all of the trends are in our favor on that front. I really -- I think this has been managed well in the separation of those issues, and I think we're in a pretty good and disciplined place with respect to pricing.

[Doug Harned, Bernstein]

Your sense is that when you are talking with new customers around us, you're essentially back to the kind of pricing you would normally be at on the MAX, in other words, nothing that in a sense is handicapped by the deals you've made over the last two years essentially?

[David Calhoun, President and Chief Executive Officer]

Yes. Doug, I feel very strongly that that is, in fact, the case and I've been involved in them and we have proof points so, yes.

[Doug Harned, Bernstein]

Okay, great. Thank you.

[Operator]

Next, we have the line of a Myles Walton with UBS, please go ahead.

[Myles Walton, UBS]

Thanks. I was wondering you'd comment on the timeline for exhausting or liquidating the max inventory. I don't think you made a similar comment on the 787 of those 105 aircrafts. Could you lay out the timeline you think you can get those out-the-door?

[David Calhoun, President and Chief Executive Officer]

Yes, I think it's too early for me to even suggest that one. We'll be as aggressive as we can in moving them out. But as you know, it all depends ultimately on the fleet. Planning changes that our customers employ. We've cause them harm to date, as they rethink their free planning. They're going to take them, when they want to take them, I can't jam them down anybody's throat. So, as soon as we have real clarity with respect to the timing of all that, we will give you a good firm guidance on it.

[Myles Walton, UBS]

And a follow-up to that is there big things into the program concessionary damages that have been included or would those still being calculated and given that the year ongoing and imagine you're starting to mount those if that's correct.

[Brian West, Vice President and Chief Financial Officer]

We are actively talk with customers and as we closed the quarter, there are provisions for what we believe those concessions to be as we stand here today.

[Myles Walton, UBS]

Okay. All right. I'll leave it to you. thanks.

[Brian West, Vice President and Chief Financial Officer]

Thank you.

[Operator]

Our next question is from Sheila Kahyaoglu with Jefferies, please go ahead.

[Sheila Kahyaoglu, Jefferies]

Good morning, Dave and Brian. Thank you for the time. You're actually a month -- your 2 month on production on the 787, what are the gating factors to restarting -- you gave a better color on that if you could give a little bit more, and how do we think about underlying demand for the 787.

[David Calhoun, President and Chief Executive Officer]

Yeah. I wish I could give you a little more clarity. It's going to be when it's going to be with respect to increasing the rates and also beginning deliveries, because we really do have to get through these issues that prevent us from getting ticketed. While I believe we have clear line of sight on the issues, we've got to give our own teams and then the FAA time to get through all their analytics and agree with everything that we we're doing with respect to the rework plans, etc.

[David Calhoun, President and Chief Executive Officer]

We are well through it, but we're not through it. So until that happens, until we can announce deliveries commencing. It could be hard for me to give you guidance. With respect to demand, look if I thought we were going to be at something below five a month anytime soon, I would make bigger adjustments and we'd have less of an abnormal cost scenario. Abnormal costs for me

[David Calhoun, President and Chief Executive Officer]

are important costs to keep this line up running fresh and ready when 5 comes back. And so that's where we are. And I also just happen to believe on the basis of the testimony from customers and their experience with the airplane. As I said, and I reiterate the irony of the whole story as it's the most utilized wide-body out there.

It's delivering on efficiency, it's delivering on everything we promised. It's got cargo capability which has been an important factor in the role that its played. I think the demand is going to be quite robust and I think as we get to the second half of next year, that will begin to play out for all of us. But at this moment in time, I just can't be real definitive until we commenced deliveries.

[Sheila Kahyaoglu, Jefferies]

Okay, thank you.

[Operator]

Next, we go to the line of a Ron Epstein with Bank of America. Please go ahead.

[Ron Epstein, Bank of America]

Hey, good morning, guys.

[David Calhoun, President and Chief Executive Officer]

Hi Ron.

[Ron Epstein, Bank of America]

Dave, just on the 777X, you guys are saying you're reasonably confident that's going to be completed in late 2023. Maybe you can give us some color around why you would think that would be the case? Most airplane developments, not just you guys, to be fair, have had this effective slipping into the next year at the end of the year. What gives you the confidence there?

[David Calhoun, President and Chief Executive Officer]

Well, the time we gave ourselves just for starters, we put a lot of time into this that prior to the 37 MAX research, we would never have included. It would've been the total opposite. We would've been doing sort of straight lines from here to the chart. So we have put time in based on everything we've learned from the MAX.

So far, our experience is that there have been pauses that the FAA has taken. Maintaining the same posture that they did with the max. Boeing get your house in order before we run this test, Boeing do this before we do that. And we have stuck to that discipline and that was all part of the original plan and the timing for Fourth Quarter of 23.

So we're still on that plan, nothing at this moment in time has sort of -- or posture taken has suggested that the plan isn't still workable. So that's why it really was that first moment when we surprised everybody with the delay and the time that it was going to take. It was all the planning involved in that, that I think still gives us confidence.

[Ron Epstein, Bank of America]

And I have a follow on to that same question. What are the technical milestones that were sitting outside the Company, right? That we can keep an eye on, just as followers to understand that you are indeed not you, but the Company is indeed on-track.

[David Calhoun, President and Chief Executive Officer]

Well, on technical milestones, meaning commitments to our customers efficiency, this, that and the other thing. I think we've done all of our own flight tests. That's one another reason why we're so confident. We've been flying, well and so we are in a pretty good place on all that front and we believe we can meet those expectations if not surpassed them.

No shortfalls on that front technically. As we work through all the safety protocols and all the documentation required on that front, I can't really guide you to any one thing, and I don't believe there is any one thing that gets in the way, but if there was ever going to be a got you, that's where it would be.

[Ron Epstein, Bank of America]

Okay.

[Operator]

Our next question is from Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Goldman Sachs]

Hi. Good morning, everybody.

[David Calhoun, President and Chief Executive Officer]

Morning.

[Noah Poponak, Goldman Sachs]

Dave, you mentioned you were -- on the 787, you were in discussion with the FAA about the required actions to resume deliveries. Can you tell us what the FAA's required actions are at this point? You mentioned conducting inspections. Are you still -- are there still inspections for potential new issues or have you found everything you're going to find and the inspections are now just looking for those to then do the rework?

I know there's uncertainty here and it's up to the regulator but you mentioned having some line of sight sight. I think, for the investment community, this timeline feels very uncertain. If you could just tell us everything you know here even if there is some uncertainty just to help us some -- have some degree of visibility.

[David Calhoun, President and Chief Executive Officer]

On the subject certainty. I can't give you a certainty until I'm certain. I wouldn't use the word very. I would characterize it as something quite a bit less than that. Our tip detail inspection, I think I had mentioned this the last time we're all together is complete, so we're not out there hunting for anything.

We did have a sort of a late breaking from a parts supplier that unfortunately is sub-tier supplier to other suppliers where we have to track a particular material substitution question that was brought to us by their regulators and track it through every part and then every supplier to us. So that process just takes time. We have, of course, segmented those parts. We believe we're in a good place. We don't believe there's safety ramifications.

On the other hand, on the subject of compliance, we have to make sure we're compliant with the material specs that are included in our design. That just takes some time. We're working our way through it, we're well past halfway. We're working our way down to the finish line, but that was the one that added some time to this. And then with respect to the workload, it's 90 % Boeing.

We're the ones that have to satisfy ourselves that we're compliant. And then the FAA has to agree with those set of analytics and they have to agree with all of our -- ultimately the judgments we make. And that's reasonably well in and we've been transparent from the word go.

So there won't be any surprises with respect on what the issues are and or the data that we're collecting to support our ultimate conclusions. So I think we're in an okay place. I wouldn't say very uncertain but I don't use that term, but we are uncertain, and we've got to get to that moment where we can start delivering.

[Noah Poponak, Goldman Sachs]

You're done a tip detail inspection, is the FAA done or is the FAA still searching for additional possible issues?

[David Calhoun, President and Chief Executive Officer]

Yeah, no, they -- I wouldn't suggest they've been hunting for in any profound way. This is from the very beginning, this has been mostly Boeing on Boeing. So, but anything and everything that we ultimately find and or a supplier volunteers to us, we take it straight to the FAA and then we begin to work our way through it. So again, I want to be careful, this is not a problem with the FAA. They are doing their work. We just have to solve these things by ourselves and bring it to them and make sure that they agree with our judgments.

[Noah Poponak, Goldman Sachs]

So it sounds like it's now just down to this titanium component input issue. Is that correct?

[David Calhoun, President and Chief Executive Officer]

That's correct. That's a long pole in the tent.

[Noah Poponak, Goldman Sachs]

Okay. Alright, thanks a lot.

[David Calhoun, President and Chief Executive Officer]

Yeah.

[Operator]

Our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

[Kristine Liwag, Morgan Stanley]

Hey, good morning, guys.

[David Calhoun, President and Chief Executive Officer]

Good morning.

[Kristine Liwag, Morgan Stanley]

Dave, on the 737 MAX inventory -- aircraft and inventory. Some of these airplanes had different customers than the initial customers, can you provide more color in terms of the additional work and testing that needs to be done on these airplanes before they're delivered and how long that process takes?

[David Calhoun, President and Chief Executive Officer]

Well, that's a little bit of why some drift into '23, it's like everything, we don't get the unilaterally decide, who gets them and how fast they get them. They got to incorporate them into their fleet plans and there has been some repositioning of airplanes that require work. And you're right about that. That's all included in our forward estimates with respect to the program performance.

It's very manageable and I think well within our means to do it all, I wouldn't consider it significant relative to the number of airplanes that we're going to move. Most of them are going to move under previously determined plans. So that's probably the best color I can give it to you. But that is why there is some drift into '23 with respect to deliveries.

[Kristine Liwag, Morgan Stanley]

I see.And I guess on production right? The supply chain has been a low production for the 737 max for some time now, and there's a lot of inventory also in the supplier system. Considering the constraints that other industries are seeing with regards to supply chain, raw materials, and labor what gives you the confidence that you can get to 31 per month and sustain that next year?

[David Calhoun, President and Chief Executive Officer]

Well, because 31 was the number we we used to evaluate the supply chain. I continue to believe in the evidence is beginning to support that by the second half of next year, our industry will be supply constrained. So in trying to determine what the right rate would be for us at 31, we believe we have a supply chain that can handle that, and you're right. With the amount of inventory build that we have asked for during these current months, we have low production rates.

We think we're in a pretty good place to be able to do that. With respect to increasing from 31, as we go through the second half of the year and forward, I think that will be an assessment of the supply chain, not an assessment of demand, that gets us to whatever number we get to. I think we're going to be in a supply constrained world, probably from second half through all of '23 with respect to narrow-bodies. And that's true, I believe for the industry.

[Kristine Liwag, Morgan Stanley]

Thank you.

[David Calhoun, President and Chief Executive Officer]

Yes.

[Operator]

Next we'll move to David Strauss with Barclays. Please go ahead.

[David Strauss, Barclays]

Good morning. Thanks for taking my question. A follow-up there on MAX. Dave, what is the reason you're not delivering more MAX aircraft? If I look at market share of narrow-body deliveries, year-to-date, even adjusting out that you can't deliver into China, market share is -- for the MAX is something like 35 %, 40 %.

So is it an issue with rework, is it an FAA issue, or is it a market share issue? When would you expect to see -- you talked about MAX getting back to 50 % market share, when would -- when should we see that in terms of delivery levels? Thanks.

[David Calhoun, President and Chief Executive Officer]

Good question David. The bigger source of variability with respect to completions and deliveries is on the inventory airplanes that we are back -- we are bringing into service, as opposed to ones coming fresh off the production line. So there's -- of course, as you know is a lot of warming up, there's a lot of things that you have to do. Depending on what you find, you got to do the work to make sure the readiness is what it needs to be.

And we've said to the team, take all the time you need to get that exactly right. We're going to do this one airplane at a time. So we still have more variability in that then I would like to have. We are getting a little more stable. I think as we move into next year, we were going to be quite stable on that front. But at any rate, that has been the source of most of our delivery variation on the MAX. And we got to keep -- we do have to keep that discipline. That is why we're at the reliability rates we're at, which is extremely high.

[David Strauss, Barclays]

And a follow-up on that, Dave, can you be any more specific at all, the 370 MAX that are in inventory, is it kind of we do a little bit more -- liquidate a little bit more through the end of the year and then it's half of whatever is remains '22, and half is '23 or is it still going to be more skewed towards '22?

[David Calhoun, President and Chief Executive Officer]

Ought to be more skewed to '22, yes. It will be more skewed to '22.

[David Strauss, Barclays]

All right.

[David Calhoun, President and Chief Executive Officer]

Remember, like I said, we don't -- all these airplanes have homes. And so fleet -- our customers fleet plans and all the turmoil that we've created for them, we got to incorporate every one of these deliveries into their fleet plans, and so it's a -- the counter party has a lot of sway with respect to when we deliver and how we deliver and like I said, that has a lot to do with the tail moving into '23.

[David Strauss, Barclays]

Thanks very much.

[David Calhoun, President and Chief Executive Officer]

Yup.

[Operator]

Our next question is from Cai von Rumohr with Cowen. Please go ahead.

[Cai von Rumohr, Cowen]

Yes. Thanks so much. So Dave, what percent of the 370 approximately are planes in inventory are for China?

[David Calhoun, President and Chief Executive Officer]

I don't have that number -- I don't have the percentage on the tip of my tongue Brian (ph ), if you might. But what I will say this is the risk, if the question is related to risk, the risk related to that number continues to go down as we continue to move out delivery rates.

And then secondly, with the robustness of the market the willingness and the number of people interested in potentially taking some big portion of that. That's also at the door. So it's It's not as big a risk to our Company as it once felt. On the other hand, I don't have the number on the tip of my tongue.

[Brian West, Vice President and Chief Financial Officer]

Cai, it's roughly a third.

[Cai von Rumohr, Cowen]

That's very helpful. So the one problem I have is, if you're really going to take down more than 1/2 of the inventory and storage, and you're going to have -- you're going to raise the production rate at 31. By my math, you have to deliver over 5 -- about 500 planes next year maxes or more.

And you really only didn't an average of 20 per month in the third quarter, I guess, 26 in September, October doesn't look a little -- so much stronger. So how do we get there? I mean, that just seems like a huge increase in deliveries. Is there a problem there? What am I missing?

[David Calhoun, President and Chief Executive Officer]

Yeah, I know I -- we have to get better at delivering out of the completion center or inventory airplanes, which I think we will, as I mentioned to you before, we've had a lot of variability on that front and we got to be better at that and that is the kind of work that we're doing. So I'm reasonably confident. I'm not sure I've got the same math you've got. But nonetheless, you're in the ballpark. And that's when we have to commit to do.

[Cai von Rumohr, Cowen]

Excellent, thank you very much.

[David Calhoun, President and Chief Executive Officer]

Yup.

[Operator]

Next, we'll go to Peter Arment with Baird, please go ahead.

[Peter Arment, Baird]

Good morning, Dave, Brian.

[David Calhoun, President and Chief Executive Officer]

Good morning.

[Peter Arment, Baird]

And maybe one for Brian, he seem maybe he's getting lonely over there. Just maybe how you're thinking about kind of the drivers, the bigger buckets, as we think about comparing 2022 versus '21. And obviously a lot determined on some of these liquidations of what's parked. Thanks.

[Brian West, Vice President and Chief Financial Officer]

So a big piece of it is going to be, as I mentioned, the deliveries and the subsequent inventory unwind. We've talked a lot about how the 737 is going to unwind. Looks the same thing with the 787. We continue -- that would be a huge benefit going from negative to positive. We always want to temper folks to make sure they appreciate that the advanced burn down will happen by the end of 2022 and it's going to naturally occur as those deliveries take place. So really it's deliveries, it's vast majority of that swing in the cash flow, as well as continuing to drive the operations to hire stability and continuing to work our business transformation efforts.

[Peter Arment, Baird]

Is there any -- and just a follow-up on that. Is there any color on what the burn down looks like on the advanced line?

[Brian West, Vice President and Chief Financial Officer]

We don't have that specifically, but we do know that based on the some of the order activity from this year and the delivery timing between the 2 years, it's naturally going to have to burn down and we're preparing for that. It's a headwind, but not so much so that we can't accomplish that free cash flow generation large because we're going to deliver a lot more airplanes.

[Peter Arment, Baird]

Appreciate the calling. Thanks, Brian.

[Operator]

And our next question from Hunter Keay with Wolfe Research. Please go ahead.

[Hunter Keay, Wolfe Research]

Thank you for getting me on, good morning. I have 2 quick ones. What are you penciling in for tax refunds for the '22 free cash flow guide? And then, of the 105 787s that you have in the inventory right now, assuming the FAA gave the green light to start delivering again, how many of those 105 require additional rework and how many could be delivered pretty quickly? Thank you.

[David Calhoun, President and Chief Executive Officer]

Let me answer the second question. First, I'll let Brian discuss taxes all the way down hill. One of forecasted. Most of the rework with respect to the issues that have come up on the 787 is in the rear view mirror for us. So this will be a little less about that, you know whatever we find in these last set of parts in anything that we may have to do on that front, as I said, is ahead of us. But we've been doing rework nonstop for the last 7 months.

So it's not a giant mountain ahead of us. Then it just becomes a question of customer -- when do they want it? Now remember, international ops grew, almost all of our customers are still significantly below where they used to be. So when do they want them? How does it melt into their fleet plan? Because we're going to be incredibly accommodative to that. And then second, just how we orchestrate the movement through our completion center alongside the FAA. So those will be the determinants, but it will not be a giant rework backlog that is going to prevent us from delivering airplanes.

[Brian West, Vice President and Chief Financial Officer]

On the taxes. We could expect something, but when we execute our suite from negative to positive, it's not a factor in underwriting that case, so not a lot.

[Hunter Keay, Wolfe Research]

Got it. Thank you both.

[Brian West, Vice President and Chief Financial Officer]

Yes.

[Matthew Wlech, Vice President of Investor Relations]

That concludes the Boeing Company's Third Quarter 2021 Earnings Conference Call. Thank you for joining.