Boeing Company (BA) — Q2 2022 Earnings Call Transcript

Thank you, John, and good morning, everyone. Welcome to Boeing's second quarter 2022 earnings call. I am Matt Welch and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates, and goals we include in our discussions this morning involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation.

Start over? Okay. Sorry, we were muted. It's good to be with all of you. Thanks, Matt, for the introduction. I want to begin my brief comments by mentioning the Farnborough Air Show a little over a week ago. It was significant for us and an emotional outcome for our company and our people. We always appear better when we are next to our products and the teams operating them. It was fantastic to see the 777X in flight, which was magnificent, along with the -10 also in flight and our investment in Wisk and its product in the important eVTOL market. We had meetings with our customers, suppliers, and partners. It felt refreshing since it had been a while. We're proud of the more than 200 orders and commitments collected during that week, covering the entire product line, including the 737 MAX, our 87, and the 777X. This reflects how our airline customers anticipate fleet renewal projects and their willingness to invest in the future. They are all working hard to get their fleets operational while addressing supply constraints. Over the previous quarter, many positive developments took place. We are close to resuming the 87 delivery process, but I won't provide a specific date as that is determined by the FAA. We’ve been collaborating with our customers and regulators on the final steps, and we're proud of our team for their disciplined efforts on this long journey. It will be worthwhile, resulting in a reliable high-quality production line that our customers will appreciate. It’s important to note that the existing 87 fleet has been working harder than ever and performing exceptionally well. Regarding the MAX, we see one airplane at a time performing excellently, often exceeding the specifications and expectations from our customers upon placing their orders. We continue to focus on ensuring predictability in our delivery chain, particularly concerning engine supply and secondary constraints faced by engine suppliers. We’ve made significant progress in this area. Brian will provide guidance on how we expect this year's deliveries to turn out based on improved knowledge of supply constraints and commitments from engine suppliers. I would also like to mention Starliner, which was vital and emotional for all of us at Boeing to get back on track. We had a wet dress rehearsal for the space launch system rocket, the largest rocket to date, and we are eager for that launch. Good engineering results emerged from these achievements. We continue to navigate challenges in the macro environment, especially with our fixed-price development contracts, which Brian will address. On the services side, similar to most reports, we are experiencing rapid recovery, with our commercial service business up by 30%. This segment contributes significantly to our overall cash flow story. Consequently, we have seen a step forward in stability, achieving operating cash flow positivity, which puts us ahead of our internal plan. We remain committed to being cash flow positive for the calendar year 2022, supported by a robust commercial market. There are supply constraints that operators of our airplanes, the airlines, must contend with while efficiently running their fleets and building capacity. However, they are actively working to rebuild their fleets for the future to meet substantial demand. So far, we have not observed any decrease in that demand, despite growing recession fears; it has not affected the aviation industry or our customers. Our main focus is stabilizing the supply chain to make it predictable and consistent, particularly regarding engine production and availability, which are crucial for delivering airplanes reliably. We believe we have progressed significantly in this area. We've received feedback directly from engine suppliers indicating their advancement. We have adjusted our near-term delivery rate expectations accordingly to address these constraints. Regarding regulatory and geopolitical factors, I'll start with the situation in China. The good news is that due to strong demand, we have managed our risks effectively concerning the airplanes built and awaiting delivery. We are committed to supporting our Chinese airlines and the CAAC to ensure those airplanes are delivered, although timing has been pushed back due to COVID management issues and geopolitical factors. We can manage this without impacting our cash flow positive expectations for the year. It remains crucial for us, and we will continue to urge our administration to cooperate with China to reopen the aviation trade corridor, a relationship we have valued for over 50 years. In the medium to long term, this relationship is pivotal for maintaining leadership in commercial aerospace given China’s market size. On the regulatory side, we are collaborating constructively with the FAA, focusing on certification for the -7 and -10 by year-end. We believe we are working on the safest options in the narrow-body segment. We'll keep pushing forward. Stability is essential in this environment, and we aim to be predictable, which will set us apart. Thus, we are increasing investments in research programs, including readiness for the next major commercial airplane and the digital modeling tools necessary for that. We continue to enhance the underlying digital technologies to be utilized in our services market. Safety, quality, and transparency are our core values, and we are committed to them. Before I turn the floor over to Brian, the MAX is on track and performing well for customers, often exceeding expectations. We believe we have overcome the most challenging moments of COVID-19. The Starliner test was a pivotal and emotional milestone for Boeing, and we are prepared for the crewed flight. Global Services is making a strong comeback, and we are excited about their progress. We are now in the final stages of preparation for 787 deliveries, which we have been eagerly awaiting. We are optimistic and believe we are in the middle of a turnaround that is becoming apparent. With that, I’ll conclude my opening remarks and hand it over to Brian.

Thank you, Dave, and good morning, everyone. This was an important quarter. We made good progress on key programs and a pretty dynamic macro environment affected by inflation, labor availability and supply chain constraints, all of which impacted both us and the industry. Despite these challenges, we improved our quarter-over-quarter cash performance and importantly, generated positive operating cash flow. Cash was driven by higher commercial delivery volume as well as order activity and advance payment timing. This keeps us on track to generate positive free cash flow for the year and higher cash flows in 2023. We still think about our performance in 3 parts and remain confident about the trajectory. First, as Dave mentioned, we made progress on key milestones. We're nearing a return for the 87 and are preparing airplanes for delivery. We continue to focus on 37 production stability of 31 MAXes per month. And we've derisked China from our near-term delivery profile. Next, as we see continued progress on these programs, we anticipate improvement in our performance metrics, including deliveries, revenue, margin and cash flow in the back half of the year. We also expect cash flow benefits from order activity and favorable receipt timing over the next 2 quarters. Finally, our financial performance should start to accelerate into 2023. Going forward, there is a significant opportunity for our company to return to sustainable growth. And we look forward to sharing our plans at our Investor Day on November 1 and 2. Before getting into the financials, I want to make a few points on the current business environment. Demand for commercial airplanes is strong, especially in the freighter market. We've seen cargo traffic increase from 2019 levels largely driven by e-commerce and the efficiency of air freight. With more than 90% share of the freighter market, our lineup is well positioned to capture continued growth. On the passenger side, traffic has recovered significantly but is still well below where it's been historically relative to global GDP. As airlines are currently in the middle of the summer high season, operational and supply constraints are becoming the pacing item for air traffic growth in the markets leading the recovery. That said, the commercial traffic recovery is accelerating. And passenger traffic has reached its highest point since 2019 in both North America and Europe. Domestic traffic remained relatively stable at 77% of 2019 levels as of May. While China still lags significantly, we saw some improvements in flight operations in June as travel restrictions lifted. Excluding China, domestic traffic was over 90% of 2019 levels. International traffic is gaining momentum at 64% of 2019, up from just 48% in March, especially in regional markets such as intra-Europe, Transatlantic and U.S.-Mexico as well as notable improvements via the Middle East and in some parts of Asia. Overall, our commercial passenger market recovery expectations are in line with what we've shared previously. We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 time frame. Taking all of this into consideration, we recently released our 2022 commercial market outlook, which forecasts a total addressable market valued at more than $3.3 trillion over the next decade and demand for nearly 20,000 airplanes. The forecast closely aligns with what we laid out last year and reflects the market's continued recovery. More specifically, we anticipate demand for more than 14,000 narrow-bodies or over 120 per month on average over the next 10 years. From a 20-year perspective, we project demand for more than 41,000 new airplanes, including 940 dedicated freighters. We are very confident in our product lineup, which is well suited to capture this long-term demand. And we feel very good about last week with over 200 orders and commitments at Farnborough. We appreciate the trust and confidence our customers are placing in us. Our services business also continues to benefit from growing commercial fleet and strong cargo markets with several Boeing converted freighter and materials management agreements recently announced. Over the next 10 years, we see a $3.3 trillion service market that aligns well with our broad customer-focused portfolio of offerings. In Defense and Space, we see solid long-term markets, both domestically and internationally. In the United States, there is support for increased defense spending in Congress to meet the challenges of today. Internationally, many of our fellow NATO members, partners, and allies have announced plans for increased spending on national defense, and we look forward to more specifics around these priorities. Turning to the supply chain. We continue to experience real constraints. We're taking action to mitigate risk in a number of areas, including engines, raw materials, and semiconductors. To stabilize production and support our supply chain, we're increasing our on-site presence at suppliers, creating teams of experts to address industry-wide shortages, utilizing internal fabrication for search capacity and managing inventory safety stock levels and growing where needed. With that backdrop, let's turn to financials. Second quarter revenue of $16.7 billion declined 2%, and we generated $0.5 billion of core operating earnings. After accounting for interest expense and taxes, we had a core loss per share of $0.37. Operating cash flow was positive $0.1 billion, in line with our expectations and an improvement from the same period last year. Let's move to Commercial Airplanes. Second quarter revenue was $6.2 billion, up 3% primarily driven by higher 37 deliveries, partially offset by lower 87 deliveries. Operating losses of $0.2 billion and the resulting negative margin rate reflect abnormal costs and period expenses, including higher R&D expense as we continue to invest in the business. On the 87 program, we're very close to resuming deliveries. We're readying airplanes together with our customers and have completed flight checks on the initial airplanes. As always, we will follow the lead of the FAA on the specific timing. We have 120 airplanes in inventory and are making progress completing the necessary rework to prepare them for delivery. As stated last quarter, we're producing at very low rates, and we'll continue to do so until deliveries resume, gradually returning to 5 airplanes per month over time. Similar to the 37 program, the supply chain remains a key watch item for 87 production and deliveries. We recorded $283 million of 87 abnormal costs in line with expectations, and we still anticipate a total of about $2 billion with most being incurred by the end of 2023. These costs are driven by rework and production rates below 5 per month. It is important to keep in mind that cash margins on the 87 remain positive and are expected to improve significantly over time. However, as we deliver the first few 87 airplanes, you may see some variability in cash payments as we compensate customers for delays. The 87 continues to be the most utilized wide-body airplane due to its operational efficiency and flexibility. With over 400 airplanes in backlog, recent orders and commitments announced at Farnborough and additional demand as the commercial market recovers, we see a strong future for the 87 program. Moving on to the 37 program. We've delivered 189 airplanes year-to-date, below our original expectations due to 3 things: supply chain disruptions, the flow time of taking airplanes out of storage and the timing of deliveries to Chinese customers. We don't anticipate making up those deliveries in the back half of the year, and we'll continue to experience monthly variability, including a light month in July. We now expect delivery to be closer to the low 400s for 2022, short of what we discussed earlier this year as we drive stability and predictability. We ended the quarter with 290 MAX airplanes in inventory, of which roughly half are designated for customers in China. Given this uncertainty with our customers in China, we now expect more deliveries of airplanes from inventory to shift into 2024. Due to overall progress on MAX production, we did not book abnormal costs in the quarter. Additionally, we've reached an agreement on over 95% of our MAX customer consideration liability. Shifting to the 777-9 program, our status is largely unchanged from what we shared last quarter. We still anticipate delivery of the first 777-9 airplane in 2025 and continue to coordinate with the FAA to prioritize resources across our development programs. We booked $102 million of 777 abnormal costs in the second quarter, in line with our expectations. And we still expect to record $1.5 billion of these costs through 2023 while 777-9 production remains paused. Turning to overall demand at BCA. During the quarter, we booked 184 commercial airplane orders, including 169 orders for the 737 MAX. At the end of the second quarter, we had over 4,200 airplanes in backlog valued at $297 billion. Let's now move on to Defense, Space & Security. Second quarter revenue was $6.2 billion, down 10% driven by lower volume and operational performance. Operating margin was 1.1%, driven by approximately $400 million of charges on fixed-price development programs, most notably $147 million on MQ-25 and $93 million on commercial crew. This total also includes relatively small cost growth on the T-7A tanker and VC-25B, with no one program impacted by more than about $50 million. And the drivers were largely supply chain impact and inflation. All of this will be outlined in the Q. We also saw these same pressures across a few mature programs. While this performance was disappointing, we're making progress narrowing our development risk profile and remain confident over the long term. We received $2 billion in orders during the quarter, and the BDS backlog was $55 billion. Additionally, the Chinook helicopter has been selected to bring heavy lift capability to the German military. We also achieved important milestones across the portfolio. NASA's space launch system completed a wet dress rehearsal, and the KC-46A tanker is now certified to refuel 97% of the military's air refuelable fleet. Let's now turn to Global Services results. The Global Services team celebrated its fifth anniversary this month and continues to perform well, especially in our parts and commercial training businesses. We're encouraged by the overall momentum. Second quarter revenue was $4.3 billion, up 6%, and operating margin was 16.9%. Results were driven by higher commercial services volume now nearly back to pre-pandemic levels and a favorable mix. We also discontinued an engine distribution agreement in the quarter, which will impact our government service revenue profile going forward. We received $4 billion in orders during the quarter, including a contract for airlift flight dispatch services for the U.S. Air Force and a contract for avionics upgrades and cybersecurity support for the U.S. Navy. The BGS backlog is $19 billion. With strong support for our defense business and our highly valued commercial capabilities, our services business is poised for growth as the commercial market continues to recover. Now let's cover cash and debt. We ended the second quarter with strong liquidity comprised of $11.4 billion of cash and marketable securities on the balance sheet and access to $14.7 billion across our bank credit facilities, which remain undrawn. Our debt balance decreased slightly from the end of last quarter to $57.2 billion driven by repayment of maturing debt. Our investment-grade credit rating is a priority. And we remain committed to reducing debt levels through strong cash flow generation over time. As far as the rest of the year is concerned, we still anticipate 2022 total company revenue to be higher than last year primarily driven by higher commercial airplane deliveries on the 37 and 87 programs and growth in our services business, partially offset by lower defense revenue. Looking into 2023, we expect total company revenue growth from this year. BCA revenue is planned to be higher again on 37 and 87 deliveries. The demand outlook for the defense business remains steady, and we expect 2023 revenue to be better than 2022 as the business stabilizes. While we forecast BGS revenue to continue to grow next year, the growth rate will be tempered as we are nearly back to pre-pandemic levels. Turning to cash. We still expect to generate positive free cash flow this year. And the key drivers of second-half improvement are higher 37 and 87 delivery volume, orders of advance payments, BDS receipts as well as favorable expenditure timing. As we look to 2023, we still expect cash flow will be higher than 2022, and we plan to share more details in November. Overall, our performance is tied to several key items: supply chain, production system and delivery stability, 37 and 87 delivery ramp, successful execution and certification of development programs, the commercial market recovery, and the macroeconomic environment. While our progress depends on some factors beyond our control, we'll remain focused on our own performance and taking the right actions to drive stability, predictability, and growth in the future. Taking a step back, this business and our team have come a long way over the last few years. We've seen our fair share of challenges and more hurdles still remain, but we're making progress. Demand for our product is strong. We're investing in our future, and our people are demonstrating exceptional commitment. With that, over to Dave for closing comments.

Yes, I'll keep them brief. We do believe we're in the middle of a momentum shift. We're all anxious and looking forward to delivery of our important airplane, the 787. Again, a reminder of how well it is performing in the field, and therefore, this delivery stream is critically important to our customers. So I'll leave it with that and turn it over to Q&A.

Yes. Thanks, Dave. Before we start the Q&A, as I noted at the beginning of this call, we have provided detailed financial information in our press release issued earlier today. Projections, estimates, and goals we include in our discussions this morning involve risks, including those described in our SEC filings and in the disclaimer at the end of this web presentation. Please also refer to those materials for a reconciliation of certain non-GAAP measures. With that, as Dave said, we are now prepared to take your questions.

As we look at this year and anticipate positive free cash flow, it seems to rely significantly on two factors: the resumption of 787 deliveries and the increase in MAX deliveries, which you mentioned would reach the low 400s. Regarding the 787, can you explain what gives you confidence that we are close to restarting deliveries? We've heard optimistic updates in the past, but this seems more imminent, even though I understand you're not in a position to predict the FAA's timing. On the MAX, you've adjusted the delivery number down to the low 400s. Can you clarify what you require from that MAX delivery profile to achieve positive cash flow? Additionally, what is the distribution between stored and new production? There are many elements to consider, all contributing to the positive free cash flow goal.

Yes, Doug. So why don't I start with 87 predictability? So like we said and like you acknowledged, we can't give you a date. But what we do track is all the work, any issues that both teams have wrestled with over this time. And we are approaching closure on all of that. The number of documents, the number of analyses, the number of sign-offs has progressed at a fairly rapid rate here toward the close. So we see that documentation phase, which has been the lion's share of the phase, as closing relatively soon and then, therefore, the readiness of airplanes, which we have been working on at exactly the same moments simultaneously, has also been in shape to the point where customers are climbing around the airplanes and making certain that they are also ready for delivery and acceptance. So all that's coming together. And yes, the FAA remains in control, but there's just enough workload on sort of both fronts, readiness of the airplane and the documentation and certification requirement that we just feel like we're on the verge and are reasonably confident in that front. So that's why I feel different this time. And I will acknowledge, Doug, that we have felt like it was at near term in previous periods, but not with the same level of due diligence that I feel now. On the MAX delivery front, let me turn it over to Brian. He's got all the numbers.

Yes. So thanks, Doug. So the low 400s, we think the balance of the year, we'll satisfy the cash flow requirements to do their fair share of that total picture. So we think that's pretty well aligned. In terms of what's coming out of inventory versus the production line, our biggest objective on both fronts is to do both in a stable manner. And as you can see from our numbers, we've been doing about 10-ish out of storage this last quarter. We continue to get a little bit better on that front. So that's something that we're going to work hard on as we turn the corner in the second half of the year. So both are very important and doing both in a stable, predictable manner gets to that low 400 for the year. I will also indicate there's 3 really other important levers of the cash flows in the back half as a bridge from the first half. You mentioned the big 2, the 37 and the 87 deliveries. But there's also going to be favorability, timing from BDS receipts that will work to our favor. There'll be favorability of expense timing that will accrue to us. And there will be higher order activity in advance payments, particularly driven by the 777 adjustments that we made last quarter. Remember, we added metal wing capacity and the launch of the 777X freighter version. And all of those benefits are going to manifest themselves in helping the cash trajectory in the second half versus the first half. So those are the big pieces that we think about.

Dave, you opened with the supply chain and the troubles there. And I have a specific supply chain question and something more general on rates. Given your engine background from GE, how do we solve this casting shortfall that's now plagued the industry twice in recent years, both now and I want to say around 2018? Is this a short-term cyclical issue? Or is there a greater structural problem? So that's the first question. The second question, Brian touched on '23 and the significance of the MAX and the 87 ramp. I wanted to see if you could boundary the MAX production rate on the low and high end perhaps with the trajectory perhaps with and without China.

Let me discuss the engine-related issues. This is a significant problem that remains unresolved, specifically the structural casting aspect. You may remember that a few meetings ago, I acknowledged it would eventually become an issue, and indeed it has. Our capacity is limited. It's not solely about funding; it also involves qualification. It's one of the most challenging components in the supply chain to achieve a qualified status, along with the actual physical capacity required. Therefore, I believe we need to adjust our rates to ensure we stay ahead of this challenge. Our decision to not increase to 38 as initially predicted is based on this limitation. However, I believe we are currently at a rate of 31, and I feel confident that the industry can achieve this and may have already done so. We will monitor the qualification of additional capacity going forward before making any adjustments to the rates. In the medium to long term, I believe that this constraint must be addressed within the next 3 to 5 years through necessary investments to expand capacity for engine suppliers to meet what I anticipate will be continued strong demand. It may not be the ideal answer, but that is the reality I have experienced for the past 20 years. Now, regarding the other parts of your question, I will turn it back to Brian.

Yes. Regarding production rates, I wouldn't be concerned about China. As we've consistently mentioned, we have a strong demand market. The timing of deliveries to China is separate from our ability to adjust production rates based on other demand in the marketplace. So, I view those two factors as distinct. It's not a pacing issue.

What does the trajectory look like?

For?

For MAX production. So Dave just talked about 38. Do we know when that's going to happen?

No, I'll answer that. The answer is, I don't know when that will happen. Stability at 31 and then confidence that engine suppliers will have their castings in order and can predict a steady delivery at 38, that will then initiate us to say now it's 38. I don't want to get ahead of ourselves. Stability for me is still job 1, and that's what we'll stay focused on. Do I think it will be better next year? Yes, but I don't know exactly when, and I don't want to get ahead of myself.

Maybe if we could talk about commercial profitability. If we strip out the abnormal cost on the 87 as well as the 777, you're at 2.3% operating margins in the quarter with an average of 33 MAXs produced or delivered. So how do we think about how margins come back as maybe the 787 comes in, the supply chain pressures alleviate? How should we look at the step-up of commercial operating margins?

Yes. So in the short term, it will be a little bumpy as we start to roll out the 87s and continue to get confidence in our stability in 37s. But over time, when we get to a point where both are stable and operating where we expect them to, the margin rate is going to go up. I can't predict the number. I won't predict the number, but they are going to get better and better because we are going to be more predictably in a stable fashion to be able to deliver on both fronts, anyway.

I'm going to revisit the MAX delivery topic because it's somewhat unclear. Depending on how you define low 400, if I take the first half off that and divide by 6, it implies a slower delivery pace compared to what was done in June, even with a higher production rate. This indicates that the inventory unwind is decelerating. So why is that the case? Additionally, every supplier we've spoken to indicates they are ready to proceed but are awaiting direction from you, which they aren't receiving. The leasing companies are stating there is a shortage of narrow-body aircraft. You have a competitor offering at a significantly higher rate. Is your answer to Rob's question simply about forgings and castings, and otherwise, would you be able to produce more? It's challenging to reconcile all these factors.

Before Brian speaks, it's important to note that it's not about any one supplier. It really comes down to one or two that catch you off guard in one way or another. Regarding medium or long-term rate increases or changes, it ultimately relates to that engine supplier and the castings. We need to ensure that they are prepared and that we can rely on their deliveries. That's the reality we are facing now.

June, we're proud of the 43 that we're able to deliver. I want to caution everyone, as you remember, April was 28. May was 29. I just indicated that July is going to be a little light. So I don't want us to get ahead of ourselves in terms of taking the June rate and extrapolating it. That would be a mistake. Month in and month out, we're aiming at stability around 31. Some months might be a little lower, some months might be a little higher. When we look at the whole balance to go and the things we're watching, we feel comfortable in that low 400 number. And hopefully, it will be better, but that's right now we're squaring to.

How much lead time do you feel like you need to give the broader supply chain to break to that next higher rate whenever that is?

We're doing our best to be transparent, and we always keep them informed about when we finalize things. The lead time is around 3 or 4 months if it's a formal designation. Many are prepared to move to those higher rates, but we need a few specific ones to be ready first. I apologize for repeating myself, but that's the crux of the matter. Our focus is on the most critical constraint. As things progress, you'll be updated just as quickly as I am, and then we'll share that with the rest of the market. I believe the market will respond rapidly.

Dave, Brian, could you let us know how many 787 deliveries you expect for the remainder of the year? It's quite difficult to project positive free cash flow for the year without anticipating a significant number of 787 deliveries in the last five months. That's my first question. For my second question, you mentioned a notable improvement in free cash flow in 2023. Could you provide some estimates for that? Are we discussing a couple billion dollars, or is the current consensus of a $7 billion improvement in free cash flow next year reasonable?

Yes, sure. So your last question, can't wait for November to be able to give you more detail around that, and we'll wait until November. And then on your question on the 87 number, we're not going to give a number on that front. We want to get to one. And we're really excited to get to one as fast as we can. And once that plays out, we'll get more visibility. But it's a little too early to quantify that. Clearly, we've got an expectation that we're going to liquidate some 87s over the course of the second half, but I'm just a little cautious to stick a number out there.

All right. A quick follow-up. Dave, the IG audit that's going on with the FAA and the change in leadership there, you don't think that potentially holds up the 87 at all?

I do not. I do not. And I've also asked that question many times. So I think we're in a good place. Again, I'm going to follow up just quickly with Brian's comment. We're not playing a game. We are working as hard as we can to get to stability in a tough environment. We chose that November meeting as a moment to sort of say, okay, where are we on stability, what is the framework for cash flow over the course of the next year. We're looking forward to that day and that meeting. And I think at that moment in time, a lot of these variables will have resolved themselves, and we can give you a much clearer view of what the future looks like.

I guess, Brian, when we look at the advance balance of $52 billion, I think it's higher than it was at the end of 2018 when rates were significantly higher. And it sounds like you're telling us that, that balance is going to be even higher still but perhaps significantly by December 31. Does that ever come down at some point? How do we kind of think about where that goes from here? And Dave, when you say having some visibility on some of these big questions at the November meeting, does that include potentially MAX deliveries into China?

So that balance did decrease this quarter, and we anticipate it will continue to decrease. It will be the excess PDP burn down that will come down. However, this will be countered by the benefits of incoming PDPs and order receipts, which we appreciate. This is a lever of our business that works in our favor. The more we engage in this, the more we have airplanes in motion and commitments and orders from our customers. Overall, the trajectory will continue to decline each quarter. It's challenging to predict precisely due to that counterbalancing effect.

And then with respect to China in November, I will give you the update. You will probably be as up to speed every week between now and then as I am because it does require a bit of a thawing and geopolitical break between China and the U.S., so at any rate. In the meantime, we do deliver airplanes occasionally to China based on pure need. And those are mostly widebodies and mostly cargo.

Yes. So it looks like you produced on average 24 737s in the second quarter. How comfortable are you that you can kind of sustain an average of 31 per month? Because I know that you pause when you have to even though the indicated line rate is 31. And secondly, if you can, should we estimate your production plus taking 10 or 12 out of inventory to kind of get to what we assume for the production rate in the second half?

So I'll take the second part of that. I think that reliably month in, month out, we'll aim at 31. Anywhere from 8, 10, 12 is the range on liquidity from inventory. It could be in that kind of mix. And that gets you to the low 400s for the total year is the way I would think about it. I don't think the pieces go much below 8 coming from inventory, and I probably don't think we'd do better than 12 in any given month. But we will modulate between that and the production rates as we go into the back half of the year.

And again, the average of 31 with respect to production is a clear objective of ours. Anything short of that will be disappointing. Our real objective though is to make that a stable rate in each of the months, and we're not there yet. So be careful to extrapolate any 1 month.

Dave, I'm trying to figure out where all the strong demand is coming from because the way I look at it, air show orders were the weakest since 2009 for both you and Airbus. You were better, obviously, but still weaker since 2016. If domestic traffic returns to 2019 in 2023, then the same number of planes should be needed yet unless retirements really pick up to a level never before we've seen at 5% of the fleet versus the current 1.3, there's going to be 2,000 more planes than needed out there. So if you can kind of just reconcile where all the demand is coming from.

There are many ongoing projects to consider. I often find myself comparing the current situation to previous periods. During the COVID era, the activity was much more intense, but even in 2019, there were plenty of projects, and now there are also concerns about supply limitations. The combination of various factors needs to be understood. Additionally, sustainability challenges are also at play. While there may be doubts about the replacement of older aircraft, I believe that moment is approaching and will become significant in the coming years. Many orders, especially in mature markets like Europe, center on improving the sustainability of their fleets, or else we risk falling behind. I want to highlight a new tool we introduced called Cascade, which tracks emissions for every aircraft daily and is intended for industry-wide use to consider policy changes aimed at fleet renewal and sustainability improvements. We'll present this tool in our November meeting, and I encourage its use, as it will significantly influence the pace of fleet retirements.

All right. Thank you, everyone, for joining us this morning. This completes our second quarter 2022 earnings call.