By Alwyn Scott
(Reuters) - Boeing Co (N:BA) on Thursday announced plans to raise output of 737 jetliners beyond its already blistering production pace, saying global demand for new aircraft justifies it.
The move to build a record 52 737s a month in 2018, from 42 currently, while widely expected, shows Boeing's confidence that its factory and its network of suppliers can step up to the fastest-ever rate for Boeing's single-aisle jet.
The increase will push production of 737 aircraft to 624 a year in 2018, almost matching the 648 jetliners the company delivered last year across all four of its main models.
While many suppliers will be able to meet the higher rate, they fear the increase won't last more than a couple of years, not long enough to justify the costs of increasing their capacity, said Ken Herbert, an analyst at Canaccord Genuity who recently surveyed about 45 companies that supply Boeing.
"It is not ideal from a supplier standpoint because of the capital investment required and the negative financial implications of then taking rates down," he said. "This significantly increases the risk, in the eyes of the suppliers."
But the largest suppliers and Boeing are being far more careful about over-straining suppliers than in prior business cycles, "so this provides some level of assurance," RBC Capital Markets analyst Robert Stallard said in a note.
The announcement comes just days after executives from Boeing and Airbus Group NV (PA:AIR) clashed over jet production strategy at an aviation gathering in Istanbul.
The European planemaker questioned the viability of its rival's plans to raise output, while Boeing insisted it will only build enough jets its buyers and suppliers can handle.
Airbus says it is considering increasing production of its narrow body A320 family to 46 a month in 2016 from 42. It plans to increase monthly production to 50 A320 planes later.
Boeing had already announced plans to raise monthly production of 737 jets to 47 in 2017, and had signaled for weeks that it was studying a further step-up, citing "incredible pressure" from airlines, especially low-cost carriers, that are eager to refresh their fleets and expand amid rising air travel.
Boeing said on Monday it would move about 2,000 jobs out of Washington state as it reorganizes its defense business in light of dwindling U.S. defense spending and other cost pressures, a move seen as a blow to the state's economy.
Boeing's study of the market convinced the Chicago-based company that demand is strong enough to justify the rate increase. Boeing has 4,008 orders for 737 models, including its new fuel-saving 737 MAX series, due to enter service in 2017.
That represents nearly eight years of production at the current rate of 42 a month. At the rate of 52 a month, the backlog would fall to 6.4 years, allowing Boeing to cut the amount of time airlines must wait for new planes.
The decision to increase production "reflects the appetite for airplanes like the 737 MAX and (current production) Next Generation 737," said Randy Tinseth, Boeing vice president of marketing. "Our thorough analysis tells us the single-aisle market continues to expand."
Boeing's shares, which have fallen nearly 9 percent this year, were down 0.4 percent at $124.11 on the New York Stock Exchange on Thursday.
However, shares of a key supplier were lower. Spirit Aerosystems Holdings Inc (N:SPR), which makes the 737 fuselage, was trading at $37.29 on the New York Stock Exchange, down 1.6 percent.
(Reporting by Ashutosh Pandey in Bangalore and Alwyn Scott in New York; Editing by Nick Zieminski and Don Sebastian)