Boeing (BA +1.04%) is one of the more fascinating stocks on the market for investors who prefer a long-term buy-and-hold approach. If you are one of them, it's important to understand that the key determinant of the company's future is its next-generation narrow-body aircraft, which is likely to launch in about a decade. There's a lot to unpack here, and much of it might surprise you.
Boeing's next aircraft
In a sense, the next narrow-body is always the key event in the company's future. Widebodies are obviously hugely important (not least because they tend to generate higher-margin aftermarket/service revenue). Still, the cash flow cycle of narrowbodies typically funds the next generation of aircraft.
Unfortunately, the 737 MAX (first delivered in 2017) hasn't delivered the kind of cash flow Boeing's management and investors had hoped for. A combination of high-profile crashes, COVID-19 lockdowns, and quality control issues sent its free cash flow (FCF) in one direction and its debt in the other. Indeed, according to the Wall Street consensus, the company will only start generating more than $10 billion in annual FCF in 2028.
Data source: S&P Global Market Intelligence. Chart by the author.
This takes us back to the first long-term consideration -- namely, former Boeing CEO Dave Calhoun's assertion that a new narrow-body will cost $50 billion to develop. How will Boeing fund it?
What engine will the next narrow-body use?
GE Aerospace (GE +0.82%) and its joint venture with Safran, CFM International, dominate the aircraft engine market. CFM engines power the 737 MAX, and they're one of two options on the Airbus (EADSY +0.29%) A320neo family. As such, GE and Boeing enjoy a close relationship, but the former's engine development could force Boeing into a momentous and pivotal decision in the next decade.
As previously discussed, CFM's Revolutionary Innovation for Sustainable Engines (RISE) includes an unducted open fan engine (an example of which is shown below), which CFM believes could result in a 20% reduction in fuel burn compared to today's engines.
Image source: CFM International.
Airbus is actively testing open-fan engines as part of the RISE program, and the European Union recently launched an initiative to support open-fan engines (Safran is leading the initiative, with Airbus as one of many partners). Boeing is believed to prefer a ducted engine for its next narrow-body.
A Reuters report claims that CFM is also studying a ducted-engine design, but this would run counter to GE Aerospace CEO Larry Culp's determination to be "all in" on open fan.
NYSE: BA
Key Data Points
Where will Boeing be in a decade?
The key question is whether Boeing will need to issue debt or raise additional equity to finance a new narrow-body aircraft. The next question is, what type of engine will it have? If it aims for a ducted engine, will it fall behind Airbus in terms of efficiency if its European rival opts for an open fan engine?
These questions may seem esoteric, but they will determine Boeing's long-term future, and there is no clear answers yet. However, we can say that Boeing will almost certainly launch a new narrow-body in a decade, and it's up to investors to decide whether they are willing to carry the risks discussed above.
