Boeing 2011 Annual Report Download - page 19

Our Commercial Airplanes business depends heavily on commercial airlines, and is subject to
unique risks.
Market conditions have a significant impact on demand for our commercial aircraft. The commercial
aircraft market is predominantly driven by long-term trends in airline passenger and cargo traffic. The
principal factors underlying long-term traffic growth are sustained economic growth and political
stability both in developed and emerging markets. Demand for our commercial aircraft is further
influenced by airline profitability, availability of aircraft financing (including the industry’s ability to
withstand the European sovereign debt crisis and other market developments), world trade policies,
government-to-government relations, technological changes, price and other competitive factors,
terrorism, epidemics and environmental regulations. Traditionally, the airline industry has been cyclical
and very competitive and has experienced significant profit swings and constant challenges to be more
cost competitive. Significant deterioration of the global economic environment or the financial health of
the airline industry generally or of one or more of our major customers could result in fewer new orders
for aircraft or could cause customers to seek to postpone or cancel contractual orders and/or payments
to us, which could result in lower revenues, profitability and cash flows and a reduction in our
contractual backlog. In addition, because our commercial aircraft backlog consists of aircraft scheduled
for delivery over a period of several years, any of these industry or customer impacts could
unexpectedly affect deliveries over a long period.
We enter into firm fixed-price aircraft sales contracts with indexed price escalation clauses which could
subject us to losses if we have cost overruns or if increases in our costs exceed the applicable
escalation rate. Commercial aircraft sales contracts are often entered into years before the aircraft are
delivered. In order to account for economic fluctuations between the contract date and delivery date,
aircraft pricing generally consists of a fixed amount as modified by an indexed price escalation formula.
Our revenue estimates are based on current expectations with respect to these escalation formulas,
but the actual escalation amounts are outside of our control. Escalation factors can fluctuate
significantly from period to period. Changes in escalation amounts can significantly impact revenues
and operating margins in our Commercial Airplanes business.
We derive a significant portion of our revenues from a limited number of commercial airlines. We can
make no assurance that any customer will exercise purchase options, fulfill existing purchase
commitments or purchase additional products or services from us after our contract with the customer
ends. In addition, fleet decisions, airline consolidations or financial challenges involving any of our
major commercial airline customers could significantly reduce our revenues and limit our opportunity to
generate profits from those customers.
Our Commercial Airplanes business depends on our ability to develop new aircraft, achieve
planned production rate increases across multiple programs and maintain a healthy production
system.
The design and production of airplanes is complex and requires exotic materials, highly skilled
employees and extensive coordination and integration with suppliers. As a result, our ability to deliver
aircraft on time, satisfy contractual performance requirements and achieve or maintain, as applicable,
program profitability is subject to significant risks. In addition, we are continuing to increase production
rates for the 737, 747, 777 and 787 programs. These risks are increased by our simultaneous
development of derivative aircraft, such as the 787-9 and the 737 MAX, the completion of design
changes identified during flight testing into already-manufactured 747 and 787 aircraft, and our recent
incorporation of a second 787 final assembly line into our production system.
If assembly line ramp-up efforts at any of our commercial aircraft assembly facilities are delayed or if
our suppliers cannot timely deliver components to us at the rates necessary to achieve our planned
rate increases, we may be unable to meet delivery schedules and the financial performance of one or
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