Launch of 737RE lifts Narrowbody Overhang

Posted by: Neelam Mathews
July 21, 2011

Boeing bowed to market pressure and has announced it will re-engine its 737 as part  of the American Airlines order, instead of launching a new clear sheet aircraft, says Wedbush Securities. 

“While surprised by  the  timing  of  this  announcement, and with longer  term           

concerns about  the narrowbody  strategy, we  believe  it  is  the  best  decision

Boeing could make considering the current market dynamics,” add the analysts.

Boeing confirmed that American Airlines has selected Boeing to provide 200 narrowbodies, with options for 100 more, to accelerate its single-aisle fleet replacement. The agreement includes 100 Next-Generation 737s, with options for an additional 40 airplanes.

In addition, American Airlines has committed to order a variant of the 737 featuring new more fuel-efficient engines, pending final airplane configuration and launch approval of the program by the Boeing board of directors. This commitment for 100 airplanes, with options for 60 more, is the first of many anticipated for this variant. The airplane would be powered by CFM International's LEAP-X engine, says a statement.

Based on a total investment of $2.0-$2.5 billion and on a 2016 entry into service,”we believe the 737RE will drive an incremental $0.70 R&D hit to EPS over the 2012-2015 time frame relative to our prior R&D forecast which assumed a 2020 EIS for the new narrowbody.,” says Wedbush..

Other observations by Wedbush:

• The impact on EPS from higher R&D will be partially offset by the better order outlook as a result of the 737RE.
• The challenge for Boeing will be to limit the potential for scope creep. We believe the pressure to have a plane certified by mid-decade will force Boeing to scale down what it will do to the airplane, and focus largely on the engine and nacelles.
•  With the focus now back on the new aircraft platforms, we believe Boeing stock will react positively to the upcoming catalysts associated with the entry into service for the 787 and the 747-8.