UBS Securities issued this note today:
Boeing is accounting for its 737 NG (Next Generation) program over a large number of aircraft with roughly 2,200 remaining in its block as of Q1, reflecting production into 2016 at planned rates. Across its block, we estimate Boeing is booking margins on 737 NG around 20% on a pre-R&D basis. With the launch of its re-engined model, the 737 MAX, Boeing will need to either account for MAX as part of its existing 737 accounting block or create a separate block. We think Boeing is most likely to add 737 MAX to its existing 737 NG block given fairly limited design changes on the MAX relative to the NG that wouldn’t appear tojustify a separate accounting block.
We expect initial MAX production to come through at lower margins than Boeing is currently booking on NG, diluting BCA (Commercial Airplanes) margins. The inclusion of lower margin initial MAX production in the 737 block will also negatively impact EPS relative to expectations as Boeing will need to book a lower average (program) margin on its current 737 deliveries. We expect MAX costs to improve at a fairly rapid pace with our assumed breakeven program quantity at 200 implying that unit margins approach 737 NG type levels near the end of our assumed 1,000 unit accounting quantity (two years of production).