Good morning and welcome to Boeing's 2016 Investor Conference. I'm Troy Larr and it's our pleasure to be with you in Seattle this year. As you can see from the agenda on the next slide, Dennis Muilenburg will kick off our session today, then you'll hear from Greg Smith, Ray Connor and Leanne Caret. Please hold your questions until we are finished with the presentation, then we'll bring everybody back up on stage after the break for Q and A. Also need to remind you that throughout the presentation today there may be information that is forward looking.
This is subject to risk and uncertainty as detailed in our SEC filings. Now it's my pleasure to welcome Boeing's Chairman, President and Chief Executive Officer, Dennis Muilenburg.
All right. Good morning. And it's good to see all of you here. And thanks for joining us today. And I hope you enjoyed that lead in video, a bit of the inspiration behind what we do as a company.
And as we approach our Centennial, I think a good reminder of the importance of what we do and the importance of doing it with excellence. What I'd like to do today is give you a few lead in perspectives building on the conversations we've already had. I know many of you had the chance to visit our Everett factory yesterday and saw some of the progress that we're making there, some exciting advancements as we continue to move forward. Good conversations last night as well at the reception and at breakfast this morning. So we want to build on those and I want to thank you for your engagement and taking time to dig into our business and understand where we're headed.
What I hope to do is outline for you at the strategic level where we're at today, where we're headed and most importantly, how we plan to get there. And then that will be followed by Greg. He'll come up and talk a little bit about our financial plan and commitments and targets that we've set out and some of the actions we're going to take to make that real. And then Ray and Leanne are going to come up and talk about their businesses and what we're doing to drive that strategy forward. And then as Troy mentioned, all 4 of us will come back together at the end to answer questions and do that in a panel format.
So looking forward to that. With that, let me jump into my material. I wanted to start just with a little bit of perspective on the company because I think the strategic context is important to what we do as a company. And we recognize here as we're into our 100th year that we have an important legacy as a company, an important role in global advancement, and that legacy is not to be taken lightly. It's one that we as a team put a lot of stock in and one that drives our sense of excellence and higher expectations for the future.
And we like to think about that mission in the context of connect, protect, explore and inspire. And recognizing that every day, we have about 14,000 commercial airplanes in the air with millions of passengers depending on safe, efficient travel and people that are connected by satellites for navigation and communication purposes. The PROTECT mission around the services that we support for uniform men and women around the world, and their lives depend on it. Astronauts out at the edge of space exploring, their lives depend on what we do. And we see a role in inspiring the next generation of talent in this great industry.
And that's an important inspirational element of what we do too. And I wanted to provide this just as context leading in because I think it's fundamentally important to our expectations for our business and the results we want to produce for you and our shareholders, we have an important mission. Lives depend on it. That demands a sense of integrity, a sense of excellence in how we do our work, and it sets a standard for us to continue to raise the bar on how we do our work. And you'll see that raise the bar headset in our plans going forward.
If we take a look at Boeing today at roughly our 100 year point, and I'll say that the decade of restoration and renewal that we've experienced over the last 10 years under Jim McNearney's leadership, the company has come a long ways. And many of you have been with us and seen that progress over the last 10 years, arguably a stronger, healthier company today than we've ever been. And some of the numbers on the right hand side of the chart, if you want to measure it in top line and bottom line growth, cash flow generation, a financially healthy, strong company today. That said, we cannot stand still. And what you'll see is our competitive headset around expectations continuing to grow, a tough competitive marketplace, customers who want more capability for less money across every sector that we're working in.
And so while we're in a strong position today, you will not ever see us standing still. We're going to continue to lean forward to drive competitiveness, drive productivity with the idea that it's going to return value to shareholders and create our capacity to invest in the future. And I want you to understand that headset that our team has around our future. Our strategy is a 2 part strategy that I'll roughly outline in subsequent charts, 1 around building strength on strength. This is building on the foundation that we already have today, the backlog that we have in place, the product family that we're developing, but then an additional element of what I call sharpen and accelerate.
And these are some of the investments we're making for the 2nd century that we will drive to the next level of performance. And I'll walk you through those. And then underpinning all of that with the expectation that we will win and win with integrity. And that is a part of the culture of Boeing that's important today and will continue to be very important for us. So if we look now forward to where we're headed as a company, our goal is to set a higher bar for ourselves.
Our goal, as shown at the top there, is still to be the best in aerospace. Global industrial global industrial champion, and that's measured in all of the dimensions that you see here on this chart. And the reason for that is in our future, we will be competing not only in the aerospace sector, but we'll be competing for capital, we'll be competing for influence, we'll be competing for talent with sectors outside of aerospace. And so the bar we need to set for ourselves is a higher bar. You'll see us emphasizing more and more this idea of 1 Boeing, the idea of integrating across this enterprise where we can play a critical mass in commercial defense and space like no other company, how we engage with our supply chain with a one Boeing headset how we can produce superior value for our customers in this more for less world with that approach Higher expectations for financial performance and consistent top quartile return for all of you.
This gets into our expectations around margin, getting to double digit margins across the business next year with that aspirational target that we've talked about towards the end of the decade of getting to mid teen margins. Year over year cash growth expectations, and Greg will walk you through the details of that. A higher bar on financial performance expectations because it's the right thing for our shareholders and it fuels our future. That allows us to continue to lead with innovation. And we have won for 100 years because we've led with innovation.
We will continue to lead with innovation, not only in our product lines, but also in how we do our business. And I think you saw some of that in our Everett factory yesterday on how we're investing in innovation in terms of how we do our advanced manufacturing. Global scale and depth is another place we'll be emphasizing, growing our global footprint, our partnerships around the world, leveraging our talent and capital investments globally. That also advances our services and support business. And I see services growth as a big opportunity for this company going forward.
All of that, again, underpinned with our team and the investment we're making in our people. You had a chance to see a lot of our people yesterday. We've got a good cross section of our team here today, and our future is dependent on having the best team as well. So we're going to continue to invest in talent. Now more specifically, if you take that long term strategic view and our expectation to be this global industrial champion, over the next 5 years, we have an opportunity to turn that into reality.
And if you take a look at the fundamentals of the marketplace, the aerospace market is a fundamentally strong global market. It continues to outpace global GDP growth consistently. Commercial airplane passenger growth is very strong around the world, and we continue to see that growing at 6% to 7% a year. And a lot of that is built by the fact that we have an incredible number of new passengers entering the traveling public. Every year, 100,000,000 new passengers in Asia alone.
So the fundamentals of the marketplace are very strong. Combine that with the backlog that we have in place, about $500,000,000,000 of backlog, really unprecedented levels of backlog. That combination of strong market, strong backlog with the right product line can allow us to grow top line significantly over the next 5 years. Going from mid-seven 100s commercial airplane production this year to well north of 900 over the 5 year time period, as an example. That combination will allow us to not only generate top line growth, but also position our product lines for the future and then augmenting that, complementing that with our productivity that I'll walk through in a little more detail, the opportunity to generate earnings growth and year over year cash growth is very significant.
And our focus on breaking through on double digit margins and our focus on being the industry leader in cash generation is very clear. And all the fundamentals are in place to do that and this is about execution over the next 5 years. So you'll see more about this from Greg and from Ray and Leanne, but this is the strategic context and the opportunity that is very real, very tangible right in front of us over the next 5 years. Now how are we going to do that? The 2 part strategy.
1st, building strength on strength. We've shared these strategic imperatives with you before. So this is the foundation that we've built over the last 10 years and we're executing. This includes the fundamentals about growing and scaling up the commercial airplane business and Ray is going to walk you through the details on that. It includes how we're going to position our defense and space business for the future and have that business on a growth trajectory.
Leanne is going to walk you through that. That will be complemented by our international growth and services strategies and then continuing to invest in R and D for the future. So those strategic imperatives that we've talked about before remain in place, are foundational to our execution. That's complemented with our emphasis and investment on functional excellence, things like development program excellence, disciplined innovation. We're going to continue to invest our R and D wisely, but do it a more stable and feathered approach in terms of our R and D profile and how we invest in new programs in a complementary fashion with time sequencing.
So disciplined innovation, beating the strategic imperatives. This is about executing the plans we already have in place and meeting the commitments that we've shared with you. Now in addition to this, while this is good and this will drive us to be the aerospace leader, there's more that we need to do to be this global industrial champion. That's where the second part of the strategy comes in on sharpen and accelerate. And it comes in 3 categories that I'll cover at this level, then you'll see some more specific examples coming up as well in innovation and growth.
This is an investment we're going to continue to make to create value, winning value for our customers. Think about design and manufacturing advantage, advanced manufacturing. You saw elements of this in the Everett factory yesterday. This has taken advantage of the manufacturing transformation that's happening around us. Automation, robotics, 3 d printing, additive manufacturing, all things that we're bringing into our production lines that are going to add value, but it's a lot more than that.
And we've launched the 2nd century manufacturing design and manufacturing effort that's not only going to look at applying advanced manufacturing, but if we assume that's the case, go all the way back to how we design and how we design for manufacturing and supportability, this will give us another fundamental productivity advantage. That is a big investment area for us for the future, advanced manufacturing, but designing for advanced manufacturing. Expanding globally and taking a look at where we want to strategically invest for the future in growth markets like China, where we've announced the new finishing center that we're going to stand up in places like India, where we're growing an engineering workforce in the Middle East, where we are partnering with customers, where we're building out global supply chains. And then the last two items in that category go hand in hand, scaling our business and applying data analytics. Today, we're about 6% to 7% market share in services with about half of the installed base in terms of airplanes out in the world.
Our opportunity, just the sheer market space and services, is enormous. Now we're going to be very focused on driving services growth, working that across BCA and BDS, and Ray and Leanne will talk to you about that. Some of this is leveraging the OEM knowledge that we have, and I'll say traditional parts business and mods and upgrades businesses. There's also an opportunity here in information based services that will leverage data analytics. And we're investing heavily there in data analytics to both grow services and to help us optimize our internal performance.
So these are a few areas where we're going to invest in innovation to scale up to that global industrial champion. In the middle column on performance and productivity, this is where we're driving higher a higher bar for our financial performance. We talked about margins and cash. You'll see the details from Greg. This requires a step function change in productivity and quality, first time quality in everything we do, not just in the manufacturing spaces, but also in the office spaces, disciplined cash management.
And this is the balance of investing in the future, future innovation, returning value to shareholders, both in terms of dividends and in the terms of share repurchase. You've seen how we've been aggressive on that, 125% dividend increase over the last 3 years, 150,000,000 shares repurchased. We're going to continue to lean forward on that front. And then build an enterprise architecture, Ted Colbert and John Tracy leading this effort that's going to interconnect our systems so that we can unlock value internally and use data analytics to optimize inventory, to optimize supply chain engagement. These are investments that will create the next wave of productivity and performance for us.
And then lastly, on the right hand side, best team and talent. It's about investing in our people, unleashing their full potential, simplifying, rationalizing our organization. You've seen some of the tough steps that we've taken in terms of organization reductions in cost savings and cost reduction, but it's more than that. It's about simplifying the organization, streamlining, increasing our speed to market, helping our people be successful inside the organization and investing in safety in a way that creates an environment where our people can be at maximum productivity. So overall employee engagement, what I like to call our people first strategy is a very important investment for us and Ray and Leanne are doing the same thing down in their And this is part And this is part of how we're going to scale up from not only the aerospace leader, but also be this global industrial champion for the long run.
Some specific examples, and you'll hear more from our team, but just a couple that I wanted to pick up this chart. In the upper left corner, 1 Boeing. I mentioned it upfront. You continue to hear me stressing it. I think it is a unique competitive advantage for our company, being able to work across commercial defense and space sectors, how we engage our supply chain.
It's our partnering for success model. It's our expectation on how we do things like inventory management and cash management. It's how we serve our customers around the world, leveraging our engagement globally and our capacity globally. That is a differentiator for us and a place where we can win. Product lines in that area include commercial derivatives as a strong example.
In the middle of that top row, the intersection between innovation and 2nd century design and manufacturing. And you'll hear some of the innovation work we're doing on new product lines for the future, but also advanced manufacturing and how those 2 go hand in hand. And again, I want to stress this idea of designing for advanced manufacturing, designing for producibility is going to fundamentally advantage us in the marketplace. And then on the bottom row, those middle three boxes, I think about our productivity framework and our 2nd wave of implementation on lean plus capturing the value of quality. It's really about first time quality everywhere.
Partnering for success, I want to stress that this is not a temporary program. This is a new way of doing business that we will continue for as long as we can see. This is a different way of engaging with our supply chain. This is finding win win solutions. This is singular negotiations with our supply chain instead of 100 different negotiations across programs.
These are finding new ways to add value in how we engage and integrate our supply chain. And then development excellence, and we know we still have work to do there to be able to deliver development programs and the way it's coming out into the field right now in flight test, and the way it's coming out into the field right now in flight test is a good example showing that we're making progress on development program excellence. So these are some specific examples augmenting that strategy that I walked through. All of that, again, will be underpinned with investing in our team. And I want to thank our assembled team that's here today too.
And I can tell you as I stepped into this role, it's been a privilege. I haven't worked for this company for about 30 years and understanding the legacy and the importance of what we do, it's been both humbling and energizing to take on this assignment. But I cannot be more proud of this team. Incredible leaders, you'll hear from Ray, Leanne and Greg, they've been great partners and great business leaders. And then our functional team, best of class across the board.
We have recently made a few changes, so introductions that hopefully you've been making here over the last couple of days. But Heidi Capozzi on the top line there, our new HR leader, a world class leader taking on this talent investment task. Diana Sands, that you see on the lower row there, has picked up some of the administrative responsibilities for the company, including our shared services group, where we see a big affordability opportunity. And Tim Keating has picked up some additional responsibilities around our global corporate citizen ship, how we invest in the communities where we operate. And then most recently, you saw our announcement that the good Doctor.
Tracy, John, sitting over here on the edge, John, wave your hand, will be retiring this fall. And behind him, we're elevating several roles that are now direct reports to me. Scott Fancher on Development Programs and Program Management Ted Colbert, CIO in Data Analytics Greg Hysliff in the Engineering, Test and Technology area and Pat Shanahan running Supply Chain and Operations. What that should convey to you is our investment in functional excellence, our intent to be very direct and very, I'll say, accelerated on our expectations going forward. This will allow us to further our 1 Boeing fabric and allow us to accelerate both innovation and competitiveness.
This is a great team and a team that I'm proud to work with. And then lastly, you put all of these ingredients together, this is our expectation for the future. And we expect to be a leader across the sectors that we work in. We have the opportunity here over the next decade for sustained top and bottom line growth and to be that leader in particular in cash delivery of anybody in the industry. The opportunity is very clearly there, and we are very focused on delivering.
Globally differentiated in terms of depth and scale is clearly an advantage that we want to accelerate the investment in the future innovation, as I mentioned, and the investment in our team. That is our expectation for the future, and we're setting a higher bar for where we're headed. We'll be accelerating our pace. We've got a great foundation to build on, but you're going to see us moving aggressively to deliver returns to you and to position Boeing for our 2nd century. Okay?
So with that, I'm going to wrap up, and I'm going to hand off to Greg. He's going to walk you through some of the financial plans. And Greg, come on up. Great partner, and good to tag team with you today. All right.
Thank you. Good morning, everybody. How's everybody doing? Quiet crowd, concerning. I hope you had a chance to just maybe to reiterate some of Dennis' points through the tours yesterday.
I know we got some for this afternoon. But what we're hoping you'd take away from that is a couple of things. 1, focus on productivity. Seem very focused on productivity, quality, flow time, working capital and last but not least, risk mitigation. How these things are being implemented into the production system with a keen eye on how to do that in a very methodical way to ensure we keep the engine running.
And I think you're going to be equally excited by what you see today in Renton. That team has done a fantastic job for us. And you're going to talk to the folks that are living it, implementing it every single day. So ask them questions and don't be shy because they've done a great job and they know that operation better than anybody. So what I thought I would do today, just briefly touch on some recent accomplishments and then jump right into our financial objectives and really kind of play off of what Dennis said.
How do you take this unprecedented backlog and ultimately deliver value, continue to invest in the company going forward. So let's just jump right in. Next slide. So, look I won't go through every bullet on here, but I will reiterate what Dennis said, significant progress I think on the strategic initiatives that were discussed, execution, productivity, striving now to be this global industrial champion. This has gone beyond trying to compare ourselves against the peer group, which is important, But how do we go beyond that?
We're going to talk more about that. I think it goes without saying the backlog is strong. It's very solid and it really provides some long term growth opportunities for us here and we'll talk more about that and specifically Ray and Leanne will talk about it in their businesses. When you look at some of this new product introduction 787-ten tracking to the planned schedule beginning major assembly this year. And as you know, we successfully broke 12 per month production rate on the 787.
Some of you had the opportunity to see that yesterday. And that is a new record. Highest wide body rate in aviation history. You've seen it. It's going very well.
That is again a very methodical way of how to introduce a rate increase on a production system that is already at a record level. So more of that to come, more of that approach as we think about production rates going forward. 7 37 MAX, as you know, we took first flight. What you may not know, it took first flight on the exact day that we established 4 years prior. So I think that goes to what Dennis talked about on the development program efforts, Early stages, but you're seeing some benefit of that and we've got all 4 test aircraft now in the air on track.
On the defense side, as we've talked about, we are trying to leverage the 1 Boeing, tanker being a great example of that. And as Dennis indicated, all 4 airplanes in flight making refueling connections regularly. Lianne will give you more insight into that very important One Boeing program. Obviously, the last number of years very diligently focused on delivering solid financial results at the same time investing in the right products and services to ensure that we have that long term growth trajectory and then ultimately delivering cash back to shareholders. And I know you all know that, but repurchasing 150,000,000 shares, increasing the dividend, I think that clearly illustrates the continued commitment on returning cash to shareholders.
And I think the confidence that we have in the long term outlook for the business and for the company and I'll talk more about capital deployment on the slides to follow. Let's go next slide please. When you step back and look at the backlog of nearly $500,000,000 dollars 500,000,000,000 pardon me, That is really the result of a strong marketplace, but I think it also goes to the strength of the products and services. They're bringing value to the customer. So it's about picking the right product, getting it into the marketplace in the right time and ultimately delivering value for the customer.
I think this backlog represents that. It is clearly significantly more than what we've seen in the past or think about prior cycles. But there's some fundamentals that are also different in this cycle that a number of us have talked about from time to time. Not only is it larger, it's more balanced in our business and more geographical a diverse. On the commercial side, you've seen more replacement of used aircraft and balanced with growth.
Again, that goes to the economics that these airplanes are bringing to the marketplace. That is driving the higher replacement from what we've prior. You're also seeing more balance in the defense business between military aircraft, network, space and services. And while we expect for planned growth, we're also mindful of what's going on in the external environment and stay very close to that. Continuously monitoring market conditions, maintaining consistent and constant dialogue with our customers to make sure we're optimizing skyline to understand risk and understand opportunities as we deliver on this backlog.
I think again the backlog certainly provides a great foundation for us, gives us some long term view on what we can do on revenue, earnings and cash. And again, Ray and Leanne will get into more of that on their business. But let me move to the next slide and talk about executing on that backlog. So as we continue to see growing production rates through the remainder of the decade, we've successfully achieved 17 rate increases in the last 6 years. And I think if you reflect back on this last 6 years, those have gone extremely well.
That's lessons learned from the past. That is again very disciplined methodical approach to how to increase these production rates and keep the system in a productive environment, while we go through these significant increase. Team has done a great job. Expect the same kind of discipline as we go forward and we'll talk more about that. I think as we look at the future market opportunities and with that backlog, we do see growing revenues through 2020 beyond.
We expect growth in commercial airplanes driven by 5 more production rate increases that we've talked about. Ray will get into those in more detail around 787, in particular in 737. In the defense business, we expect modest long term growth at BDS. It continues to expand and evolves the core portfolio in both products and services and wins future franchise programs and further expands internationally. And as many of you know, just as little as 6 years ago, this was a fraction of our revenue and now it's about 37% of our revenue and we see more opportunities in that going forward.
Again, Leanne will talk more about that. Dennis talked about services. We do expect services to grow over this time period. We are trying to leverage a one Boeing advantage when it comes to services through GS and S and through our CAS business. Again, we have a very large installed base.
How do we continue to take advantage of that base? How do we grow our opportunities in that part of the business? That is a priority for all of us. We see the opportunity and we've got plans in place to capture that. I think as we look strategically at how we invest in our intellectual property, we are making more investments in key verticals and expanding our aftermarket content, all part of our broader services strategy.
And as we look at revenue growth over the next 5 years, we'll continue to have areas that need focus, additional attention and are going to require disciplined management just as they have in the past. I'd say 1st and foremost remain focused on profitably filling the 777 production bridge. As you know we need 40 to 50 airplanes a year to fill that bridge. We've got 12 so far. We got more work to do in that bridge and we're staying diligently focused on that and continuing at the 7 per month rate, but at the same time closely monitoring industry trends, customer demands and we'll continue to keep you up to date on that important endeavor.
7 37 and 777MAX or 777X development programs, again on track and in some instances ahead of plan. We got to continue to execute on these programs along with completing the KC-forty six development. Those will remain again key focus areas for us as we move forward here. And it's imperative obviously that we successfully complete that development and that is the plan as well as smooth introduction into the production system. So I'll continue to reiterate what we've done in the past, continue to see that approach going forward.
So as we look at revenue growth for the remainder of the decade, it really is about delivering on this backlog. So let's turn to the next slide and we'll talk about margins. Excuse me, we're clearly focused on objective of increase in productivity through the enterprise, setting forward leaning targets, holding everybody the enterprise personally accountable. And it's been, I think, clear to all of you, we're not satisfied with our current segment margins. And we're focused on achieving the double digit in the near term and then increasing the mid teen over the long term.
And we have a path to expand margins, but we will there will be risks and along the way and we'll need to mitigate those and capture opportunities as we move forward. I'd say to achieve the near term objectives, we must obviously deliver on the backlog as we've described, which will have some favorable mix on pricing and in particular, again, execute near term on the development programs that we've discussed and continue to capture efficiencies in the supply chain under the umbrella of partnering for success. And as Dennis said, this is not an initiative. This is the way we're going to run the company. And at the same time, continue to look for opportunities inside our own structure near term and longer term.
Everything from travel expenses to facility costs, all aspects of costs are under review and we are constantly retargeting ourselves to achieve a higher level of productivity and profitability. And as Dennis said over the long term, we do have an aspirational goal of the mid teen margin. And when you step back and assess the segment margins, we do see an imbalance between risk and reward and we want to fix that. This is about having the right objective in place which I believe we do to challenge ourselves to deliver on this aspirational goal and have leaning forward goals.
We certainly have a lot
of work to do, many hard decisions in front of us and we don't have the answers to everything yet. However, I think we got a great foundation to build on these key efforts that Dennis discussed earlier on the roadmap to our future and just to reiterate a few of them. Again, executing on the backlog will be fundamental in this and achieving these rate 87 87 deliveries, increasing our production rate, at the same time increasing productivity on that program internally, externally. You saw some of that yesterday. The journey has just begun.
Fundamentally, changing our cost structure again. This is now more of the long term. How do we optimize our business as Dennis discussed?
And how do we
think differently? And how do we our business as Dennis discussed? And how do we think differently about benchmarking ourselves, not just again against peers, but against world class industrials, global industrial champions and challenging ourselves about where we are in a cost structure versus them and what would be the path to get there. I would tell you the entire team is focused on this endeavor. These are efforts that are understood and the urgency behind them to drive continuous improvement is unwavering.
Everyone knows that. Again, Ray and Lianne will get into a little bit more in their business. But the objective of these productivity efforts is to allow us to enhance the competitive position at the same time expand margins. There's areas of focus again, they're going to need additional attention and disciplined management as we expand these margins. In fact, in our business, there always has been and there always will be impacts that we must be prepared to work through such as evolving competitive landscape, changing market conditions.
But with that said, I think we're in a far better position to address those than we've ever been. And as I look forward to expanding margins, again, there's no question we've got work to do. We don't have all the answers, but we are on the right path and I believe we have the right goal in mind. Let's go next please. As you go back since 2003, you certainly see a healthy earnings growth, but there was various elements through that time period that caused fluctuation, added volatility to our business.
Things like macro events, labor disruptions, increased pension costs, development program execution. And a couple of years ago, it became very clear that we need to take a different look and a different intensity around how do we derisk the business. And we took that on and we've taken many steps in attempt to do that and we have reduced risk and volatility and we'll continue this journey going forward. 1st and foremost was a discipline and conservative approach to production rate increases. And again, that's what's taken place.
Expect more of
that going forward.
To further reduce risk on the development programs, coring those up in BCA and BDS and implementing a disciplined gated process, again early, but I think you're seeing early a good signs of that on the 737 MAX. And that first airplane rolling out to the factory again on schedule, but in the air within a month of rolling out of that factory. And again work ahead of us, but I think it really is a testament to some of this stuff really taking hold on the development effort. And as Dennis said, under this now new umbrella in leadership, Scott Fanchard leading it for the enterprise. A one Boeing advantage collectively leveraging the development expertise, best practices, lessons learned across the company.
That is the task of Scott. Over the past several years, we've taken some tough actions on labor and establishing long term labor agreements that's good for our employee base, good for all of our stakeholders and we have stability now through 2022 and at the same time converting nearly all of our employees to a defined contribution plan. That makes us more competitive and more agile in the marketplace and more affordable and provides a better path to our ability to win. And at the same time, there is going to be challenges going forward from time to time as I discussed, but I think you'll find those more infrequent. But at the same time as we look forward, we're continuously going to go through this mindset of finding ways to derisk the business.
And at the same time, as I said, grow earnings over this period. But as you've heard me talk before, I think at the end of the day, the underlying performance of the company is really best reflected in the overall cash flows. Let's go next slide please. So while we expect earnings to grow over the remainder of the decade, we expect cash flow to grow even at a faster pace, largely driven by the improvements and the production increases 787 cash and just overall disciplined cash management efforts. Recovering 787 deferred production over the remainder of the decade will be a driver of cash flows going forward and our confidence in that recovery really comes from 4 major areas.
So first, the largest benefit comes from shifting the delivery mix from more -9s and -10s. And remember, we designed these airplanes to be more producible and there's significant commonality between these models. Our overall expectations around mix in the cost base going forward is already sold. And second point is improving pricing on the remaining 900 aircraft in the accounting block which is another key driver. We've previously had, again, think about early on in the program, early pricing disruption, customer settlements clearly impacting on profitability and cash all in that deferred production.
That will not be the case going forward. And again, our expectations around pricing are essentially already sold within that cost base. These two elements of mix and pricing will account for approximately 70% of the 787 deferred production recovery. The third point, we've also benefited from supply chain step down, the remaining 900 airplanes compared to the initial 400 delivered. Once again, this is largely based on existing firm supplier contracts and this will account for approximately 25% of the recovery of the initial $29,000,000,000 of deferred.
And last but not least, internal productivity is expected based on similar learning curves we've captured on other programs as well as projects in work that you've seen some of them yesterday for step down function and efficiencies. But with that said, this is the smallest piece of the equation around deferred. So the path to recover 787 deferred production balance of the $29,000,000,000 is clearly grounded on existing contracts with customers and suppliers. Another driver of cash flow is the higher production rates I discussed. We do plan to increase rate on 87, 37 and 67 and have modest growth in the defense business.
Specifically for 2016, we continue to expect operating cash flow to be approximately $10,000,000,000 With the continued expected further growth in operating cash flow in 2017, we expect backlog growing deliveries and capture additional productivity as well as the 787 cash improvements I talked about all helping us in 2017. There will be some headwinds in 2017 despite the growth that is taken into account. Obviously, we'll have lower 777 production rate getting down to the 7 per month. And at the same time, we'll begin the transition to 787-ten. And again in order to have smooth transition that -ten in the production system, think of that implementation very similar to how we introduced the -nine or the 7 37 MAX.
Longer initial flow times on those airplanes, building test airplanes in 2017, delivering those in 2018 and as a result our delivery expectations for 787 in 2017 will be about similar to 2016. And with all that said, again, we continue to expect cash flow to increase in 2017. As we look forward over the remainder of the decade wide body sales campaigns will be the focus. Again selling 777s and maintaining the 7 per debt per rate production. Selling the remaining 36 unsold 747s in the accounting block and recovering the $880,000,000 of deferred production.
And then lastly, selling the additional 787s which will solidify the 14 per month production rate. So we believe the wide body market demand is sufficient to support our plant production rates. However, we will continue to maintain our intensity around ongoing future campaigns, while aggressively driving productivity and further enhancing our competitive position. These production plan these production rate increases are currently key elements in our cash flow growth going forward. We believe the strong cash flow that we anticipate over the remainder decade does uniquely position us and allows us to return cash to shareholders and at the same time invest in future products and services.
Let's go next please. If you look at between 2013 2016, we've invested about $22,000,000,000 excuse me, in research and development and capital. This spending supports the next generation products we've talked about, expands our position in verticals and control points, allows for those higher production rates at the same time driving utilization in automation and lean manufacturing. These investments help shape our future, key enablers again to driving future revenue earnings and cash. And our investments in the 787, 737 MAX, 777X will provide significant returns in the years to come.
Also our ongoing investments in the defense business, leveraging technology across the company, providing a competitive advantage that will support our efforts to win key future franchise programs. We've got prudent capital investments to support 17 commercial airplane rate increases we've completed over the past 6 years and the 5 that we have in the years to come. We will continue to make investments in automation and lean as you saw yesterday and you'll see today, including the 7 77 fuselage you saw, 787 Aft Automation in Charleston and again the wing panel assembly you saw today. Again, all of these efforts improving product quality support, allowing to go to higher production rates, working capital and lower costs. And lastly, as I mentioned, we continue to invest in the services segment, again executing that strategy, expanding our vertical content, creating new opportunities, growing our aftermarket revenues.
Move to capital deployment on next slide please.
So I
believe our actions over the last couple of years clearly demonstrate our intent to not only invest in growth, but also return cash to shareholders. We are and have been uniquely positioned to do both. And I think over the next 3 years based on our expected cash flows and confidence in the long term outlook of the business, we're committed to continued share repurchase at similar levels going forward. Given our unprecedented growth in cash flow dividend expectations around steady share repurchase, we now expect to return approximately 100% of our free cash to shareholders. Again, we're committed to investing in the business while also returning cash to shareholders.
Go next slide please. So I just wrap it up to say I think we're well positioned. The markets we serve are strong and growing. I think we got the right performance. Dennis said it earlier, you're going to hear it from Ray and Leanne, driving growth and productivity, investing in the right products and services and capturing new business profitably and driving working capital ultimately again driving cash flow to the bottom line, investing in the future.
So we're established going forward beyond the 100 years and returning cash back to shareholders. At the same time, resetting the bar around global industrial champion and how do we develop a path to get there. I believe that's the right objective. That's the right focus for us and stretching ourselves and determining the art of the possible and how do we get there and how do we again ultimately drive value back to all of our stakeholders. So with that, I'll introduce Ray Connor and talk about commercial airplanes.
Well, Greg gave my presentation. So I'm just going to stand up here and wing it with this arm. Anybody had shoulder surgery? You don't realize how debilitating if you're a right handed person it is to lose your right hand. I mean, the smallest things become very difficult, if you know what I mean.
And but I just want to echo first what Greg and Dennis said about the responsibility that we've been given. It's tremendous in terms of having this national legacy left to us by the Boeing founders. I'm confident that the decisions that we're making today, sometimes they're very difficult, they're hard, but they're the right ones. They're the ones that are going to really put us in a position for our next 100 years. And they're really they're not always easy and sometimes they affect people, but they really are the right ones and we've got to do that if we're going to be around for the next 100 years.
From where we sit today with the 20 year commercial airplane forecast, double the amount of today's airplanes in conjunction with an equally valued services market, there is a tremendous opportunity here for BCA to capture not only narrow body, wide body, but also services share while increasing our profitability in the long term. Commercial airplanes, their priorities have remained very similar to what we've said last year with a concentrated plan around delivering on our backlog, executing and growing our position in the airplane services and support sector. These objectives are supported by really aggressive drives in terms of quality, safety and productivity throughout the external and internal value stream. We compete every day with aggressive competitors and we want to meet those expectations of our customers now and in the future. And so that's what we're focused on.
That's what we're going to do. That's what's going to allow us to go compete and win. I'm going to provide a little bit of more color about what we're doing and the progress that we're making in those areas. But I think the business in general remains very healthy. Now having said that, we're going to watch the marketplace very closely to ensure that we've got the right products and services to match the requirements and that the production is balanced with demand and that we capitalize on any of these new opportunities to provide value to our customers as we look down the road.
Now looking at the marketplace, if we go to the next chart, I can't really do the clicker here. So I'll have to ask somebody to do that. I would say that customers are operating in an incredibly dynamic and sometimes challenging global environment, mainly driven by lately the drop in the global commodities trade and in some cases these lower oil prices and in turn then what's happening with exchange rate. Clearly, this has contributed to cargo demand not yet recovering to what would typically be historical levels, which is impacting programs like 747. But in contrast to that though, we've been experiencing incredible passenger traffic growth this year 7%.
And this has been a pretty strong sustained uptick in demand, driven a little bit by lower fuel prices that's stimulating some more travel. But the operators themselves have been very disciplined about managing capacity. And those two things combined have really led to, I think, increased profitability across the board on a global basis. And all the indicators that we see is that although moderate growth, it's going to be overall, it's going to be healthy demand in both narrow body, wide body aircraft as well as the services opportunities that we see that go with that. Obviously, we constantly monitor the market and if necessary, we're going to make the appropriate adjustments.
In the meantime, as Dennis says, we're proactively shaping how our company responds and operates in an increasingly competitive and dynamic marketplace and with a focus on efficiently delivering on that current backlog. So let's look at the backlog real quick. Continues to grow. And from and Greg showed this chart as well, but more than 5,700 airplanes, 7 years basically of production you go back in time prior to 9eleven, that Americas so you can see it here, the Americas piece was so heavily that's why we were so impacted after 9eleven, was because we were so heavy into the Americas here. Now we're much more geographically diverse.
And I would also say that the airline customers that we have in there are really of high quality with great financial strength and great operating strength. I think that's one thing when you take the time and really analyze our backlog, that's one of the things you've got to look at and that's the strength of that backlog. When we look at deferrals, cancellations, rescheduling of any kind, we're way, way below our historical averages, which is I think another reflection of the quality of our backlog. Over the past year, we're down to about 1% level of our backlog in terms of these deferrals and cancellations. Typically, we run around 6%.
So I think it's another indication of the quality that we have there. We've been very good about our rate increases over the last several years, and we feel really confident that we're going to be able to deliver on this backlog, which is a significant part of our basic overall BCA strategy. Now if you move to the strategy, thank you. It's been pretty consistent over the last few years, delivering the most efficient and comprehensive set of world class products and services to our customers, while maintaining our pursuit of narrow and wide body market share. Over the last 3 years, I think we've taken a very purposeful approach to improving how we manage our development programs.
We've made significant headway driving efficiencies through commonality, disciplined resource management, while incorporating the lessons learned. And these were hard lessons learned in replicating those best practices across not only within our own camp, but looking at what other people are doing as well and putting those best practices into what we're doing too. And I think we've reached a nice equilibrium here between innovation for innovation sake and then innovation that's really customer driven. And that's a big change here. I think we've developed a production system.
I think you saw a little bit of that yesterday and you'll certainly see that again today. That's very flexible. It's responsive to customer configuration and customer driven changes, automation, the lean activities that we're doing, the work we're doing on modularization, the supply chain optimization through partnering for success. These are all part of transforming our production system in order to increase first time quality, enhance safety and accelerate our productivity, really about accelerating our productivity. The services business, that completes the life cycle opportunity not only for our customers, but for Boeing as well.
It creates another avenue essentially to capture more revenue and recoup that R and D investment that we make in these development programs. Ultimately though, I think you've got the right business strategy. We've got the right product lineup to win in the marketplace and really grow profitably. If you look at our product lineup, again, I've said this many times, I do believe we have the most comprehensive and the most efficient product portfolio in the marketplace. Each product complements one another, 15% increments, high degree of commonality across each family.
In the wide body market, I think we've maintained our lead and we're well positioned with the 787 and the 777X. And each airplane provides significant value in terms of technology and operational efficiency, route options and overall return to our customer. In terms of freighters, we anticipate a pretty large replacement market in the 2019 starting in the 2019 timeframe. And these that demand is going to be pretty easily met by both the 777F freighter and the 740seven-eight. And clearly, the 740seven-eight is the most efficient freighter in the world today.
So that's a very important piece of our product lineup. And while the wide body strategy is largely set, we continue to listen to our customers to ensure that we've got the right products to continue to meet their expectations. So there's some things that we could possibly do in some of those areas as well. Now when it comes to the narrow body market, I know there's been a lot of talk and we've had a lot of talk about that over the course of last night and then today, particularly around the middle of the market and the MAX. Naturally, we're in continuous discussions with our customers about the market, where do they see their future requirements.
Our priority right now is really on the MAX completing the development on the MAX, completing the development and production of the 787-ten and then development of the 777. We are looking at a number of options on each of these, but no decisions have been made at this particular point in time. We're gathering a lot of data. We're talking with a lot of customers and we're going to make the right decision at the right time, but we're very mindful of providing the right kind of value to our shareholders as well. Now I think it's important that we look we take a look at the narrow body market since we launched the MAX.
If we could go to that chart, please. You can see that we since we launched, we're roughly fifty-fifty with Airbus on this. And we look at every opportunity to take as much market share as is reasonable, and I stress reasonable. Today, we have more than 250, 737 customers, kind of the majority of the installed fleet. About 200 of those customers have yet to make a decision about what they're going to do long term.
And I think that provides us a very unique opportunity to compete for the follow on business and to grow our long term MAX customer base. Now I stress that we're going to have to compete and we're going to have to win that business, but certainly a big opportunity for us. Now when you take that even a step further down and you do the analysis of the top 5737 customers, now these are the biggest narrow body customers in the world. You're talking about Southwest 700 airplanes, Ryanair 500 airplanes, just flip them off, top 5. Those guys have been pretty conservative about what they've done with respect to their MAX orders in relationship to their installed fleet.
They make up about less than 50% of our backlog. So obviously, when you go forward, if we can win that follow on business, that's another great opportunity for us to grow as we move forward. And again, I stress that we're going to have to go out and win the business and we're going to have to do that in terms of how we perform, how we compete, how we deliver on the commitments that we've made already, but it is a great opportunity for us as we move forward. Now when you do a similar analysis of our competitor in terms of orders to install fleet, it's they've taken a much different approach in terms of being more aggressive with respect to growth than with growth and replacement. So I think that's something that would do everything everybody a good service to go out and really analyze those backlogs.
But at the end of the day though you guys it's all about deliveries. It's about delivering on the backlog and generating that revenue. And we feel very good about the quality of our backlog and are very focused on meeting our current production commitments. Now when you look at productions, the production side, we've made incredible Greg talked about 17 rate increases over the last 6 years. Our teams have done a fabulous job.
A lot of them are in the back of the room there and I want to tip my hat to them because they've done unbelievable. We've been to hell and back a couple of times and each time we don't like it. It's not a great place to be. But we have kind of really done a nice job with this and we've maintained the stability throughout the rate increases. And we're in the process of kind of breaking industry records, both on the narrow body and on the wide bodies, which we just broke another record with 12 a month on the 787.
I think when you were here last time, did you think we could get to 10? Now we're at 12. The question then is the next step will be 14 a month. And I think it's important to keep in mind that we've not only been able make these rate increases, we've also introduced into that same production system 3 derivatives and a tanker, all of which have been pretty big deals. And then on top of that, the customer introductions and customer configurations that we've put into the production system has been mammoth, 100 of millions of hours, 4,000,000 hours last year of engineering, 4,000,000 hours of engineering the year before.
And those are the kinds of things that can really disrupt a production system and we've gone through those without much of a hiccup. A great job by not only our engineering team, our supply base, but also the operation side of the house and the house. Terrific work. On the development side, we are moving right along with respect to the MAX, the 10, the 777X, all progressing very, very smoothly with an overarching objective to reduce not only the recurring cost, but the non recurring cost as well. And the development programs have successfully been meeting not only the cost side of this thing, the schedule and the performance objectives.
In conjunction with the manufacturing team, they're working very closely in terms of how do we minimize the risk in the plans of these rate increase as we bring these new programs on. Greg talked about the 7 37 MAX flight test program. We've surpassed 400 hours of flight by our 3 flight test programs. The 4737 MAX test airplane completed its first flight on Saturday. So now we've got all the test airplanes up there.
The testing is on track. The airplanes are performing well. We've completed flutter. We've completed stability and control, high altitude testing. And with the CFM achieving the FAA and EASA Part 33 certification last week, the LEAP-1B is in a very good state with respect to that program too.
So overall, the MAX is progressing really well and now it's about integrating the MAX into the production system. When you go out there, you'll see how that's going. But the 737 MAX 5th airplane, which is the 1st airplane to deliver is in paint and then airplane number 6 has rolled out as well. So really moving along in the right way. We're going to deliver in the first half of next year, and we're still on track for that.
Major assembly has begun in on the 787-ten within the supply chain, and we're on track to start final assembly down there in South Carolina on the -ten. We've reached 95% commonality now between the 9% and the 10% and that has done a tremendous job in terms of reducing complexity and cost and risk across the entire production system while still providing that operational efficiency to the commonality. 777X, we're progressing to the final systems design. We reached that earlier this year in commencement with the in February with the final round of wind tunnel testing. And to close out here, I think the development team, they're just progressing well.
Now we've moved Mike Delaney, who is the Chief Engineer for BCA, to lead that effort in combination with the product development. And I think Mike will just pick up right where Scott left off and continue to drive the performance of that entire group and integrate very well with our program managers on how we bring those programs into the production system. On the productivity side, we continue to drive and manage all elements of cost. And that's really at the forefront of our minds here in order to win new business and expand our margins going forward in the future. Every step improvement in process enhancements throughout the business, the production system and within the supply chain are strategically designed to accelerate productivity, mitigate risk, reduce recurring and non recurring costs.
And while most of the costs are outside of Boeing, we have been working really hard on our internal costs as well. Now a lot has been said about our employment reductions. We're in a unique situation with respect to our demographics. We have a lot of people that can retire in the next 5 years. And so we're using the voluntary layoffs, not backfilling attrition to make those kinds of reductions.
It's good for our people and it's very good in terms of reducing risk in the production system. Because when you start to move people, because of our seniority base in terms of our manufacturing side, there's an awful lot of disruption that occurs because there's bumping then that happens throughout the production system. By doing this, we're able to really manage this in a much different way than we have in the past. And all that is just our efforts to kind of flatten the organization. We're taking management layers out.
We're reducing executives and everything about this is to drive more organizational efficiency and operational efficiency. What we're doing in the supply chain, all this is underpinning the ability to provide more affordable products and services and compete more effectively in the marketplace same time, so we can invest in our future. On the services side, Dennis talked in this. This has been, I think, a real highlight that sometimes we don't talk about a lot. But we see a significant growth opportunity here.
The 20 year market forecast $2,800,000,000,000 that's as large as the wide body market and the narrow body market when you break it out. And by differentiating ourselves with world class customer support, which I think we would still be viewed as the number one player in the support side. And when you combine that with the knowledge of the fleet, in our utilization of data analytics, I think we've got a great opportunity here to grow our aftermarket business. Our strategy is to deliver high value parts, low cost modification and upgrades to existing fleets that leverages the deep OEM knowledge that we have and more broadly utilizes technology in terms of our data analytics. Last year at the Investor Conference, we were just kind of moving down this path.
Let me just talk a little bit about what we've done in that year. We've successfully transitioned our customer support organization from the Puget Sound here in Seattle to Southern California. We've gone through, we've analyzed parts demand with the fleet needs on their maintenance cycles. And as a result of that, we've adjusted our inventories. We've looked at our pricing to be more competitive going forward, so we can capture more of that parts business.
We've changed our GoldCare offering. Instead of just providing nose to tail maintenance, we've been more flexible now. We're giving tailored packages for each individual customer. And as a result of that, 60 airlines are now enrolled in subscription contracts for Boeing maintenance and engineering on 2,200 airplanes. We're seeing a rapid increase in subscriptions to our data analytics services.
Last year, we saw 25% jump in the number of airplanes subscribing to airplane health management, going from 2,500 units to 3,200. And we've augmented this now with more of a wide range of offerings that help our airlines can serve fuel, operate more efficiently and save a lot of money in the long term. And we continue to harvest the synergies with Leanne's team to generate significant savings by bringing a lot of these things together, doing more of the back office work together. And that's been able to generate about $400,000,000 of savings over an annual basis as we look into 2019. The result of this though, I think is kind of interesting.
We established a new record in 2015 for sales and we expect we're going to top that this year. And with that winning in the market share, we're now the industry's 2nd largest provider of aviation services, which is a big deal. We're just behind GE now. So something to think about as you look forward. Ultimately, we're looking to provide lower cost solutions, improved fleet management and greater insight to our customers.
And where possible we're cross leveraging with Lianne's team to see what we can do on a broader one Boeing basis. On the margin side, Dennis and Greg talked about this. At BCA, we're also very focused on the near term objective of double digit margins and the long term aspirational goal of mid teens. To achieve these goals, it's still all about the same things I talked about, execute on the production rate changes, meet the schedule and cost objectives of our development programs and drive the internal and external productivity by transforming the production system and growing the services by expanding our offerings there. You saw in the tours yesterday and you'll see it again today, we're really focused on our lean manufacturing and driving step function efficiencies throughout the production system.
Automation is just one piece of this, but we're doing everything we can to be more competitive and also to support the long term margin expansion, so we can invest in the future. Still at the early stages here guys, but a lot more work to do, but long term we see a significant opportunity. We clearly don't have all the answers, but I think we're focused on the right things in order to do this. And we're taking a very disciplined approach in terms of how we manage this going forward. In summary here, guys, I would just say that we're pretty well positioned to capture significant opportunity over the next 20 years by executing on the strategy.
We have very solid product lineup and we have a plan to in terms of executing on these development programs and leveraging our position in the marketplace to grow our services. But I think the biggest thing that you've got to count on is this team. The team of people that we have, particularly the management team. They've all been through a lot of tough times. We know how to balance risk now in a much better way, And we're not going to let things get out of hand any one way or the other.
And I think that that's something that you can count on. You can count on me. You can count on the entire team that's back there and the team that's over here. This is not easy to do, but we have a clear vision on how we're going to go do that. And so with that, I'll turn it over to Leanne Perrette, who's going to talk about the defense side.
Leanne?
Thank you, Ray. Good morning, everyone. It is an honor to be representing the Boeing Defense, Space and Security team and so many of our key leaders are here with us today and I know you've had an opportunity to meet them. We are so excited about our 100 year anniversary and the impact that our defense legacy has brought as we look to the future. Our intent is to grow this business as well as deliver on our commitments both to our customers as well as our stakeholders.
And I'd like to spend a little time talking about that. Everyone in this room recognizes the cyclical nature of our defense business. There aren't any surprises here. When you look at the U. S.
Side, what you'll find is modestly increasing budgets over the next 5 years and a continued strong pull for some of our from across the range of our products from our aircraft to our satellites to our services business. When you look outside the U. S, you see very much the same thing. Our focus across this environment is to create not only the adequate funding that allows us to deliver those products and services our customer needs, but create the stability in order to do it in the most efficient way. Similar to Ray, when we talk about diversification, you'll see that we have made great strides over the last decade.
You'll see that we are very focused on our aircraft sales portion of our business and we've modulated between our services and our networks and space. You'll also see that we were predominantly centered in the Americas similar to Ray's business And with our focus on being a true global partner, you see we have increased our strength across the world, specifically in the United Kingdom, Australia, India and Saudi Arabia. There is one item I'd like to draw your attention to when you look at our backlog. As our commercial derivative business has continued to expand, the airframes associated with those, the 737s, the 767s, they actually show up in Ray's backlog versus in ours. It's truly another sign of how Ray and I and our teams are working together as one Boeing.
As we look at this market, it is $3,000,000,000,000 over the next 10 years. And it offers us a lot of opportunity from evolving our core business and the products and services we deliver today to winning new franchises to continuing our global expansion. We all get captivated by those new franchises and several of them that we're focused on that you see here include the U. S. Air Force Tx Trainer, the recapitalization of J Stars as well as the recapitalization of Minuteman.
And then ultimately in the future, the Army's future vertical lift. But what's also important to note is that we are making steady progress on capturing elements of this business every day. And just this quarter this past quarter, we have seen 4 significant wins I wanted to talk about. First off is a $2,500,000,000 contract for 20 additional P-8s for the U. S.
Navy and the Royal Australian Air Force a $1,500,000,000 contract for additional Apaches for the U. S. Army a $144,000,000 contract to provide services and support to a police force in the United Kingdom, and a $71,000,000 contract to the Defense Logistics Agency to provide them parts and services on stabilizers. Now you may wonder why I bring up stabilizers, vertical stabilizers and such a small value. But if you look at 2014, you would find that we have $1,000,000,000 worth of contracts with the Defense Logistics Agency made up of products and services of that size and scale.
It's an opportunity for us to bring competitiveness, competitive pricing, taking advantage of the supply chain, raise and my team work on together and then allowing them to have the availability that they need in support of their aircraft. It's a win win. Before I move on, I'd also like to spend a moment talking about our fighter business. I know in our conversations last evening and again this morning, it continues to dominate the conversation. We are strongly encouraged by the support that we're seeing in the U.
S. From both the Navy and Congress for our Super Hornets. We're strongly encouraged by the demand we're seeing for both the 15s and the 18s around the globe. And it is my estimation that we will be building fighters into the 2020s. What I'd also like to emphasize is that we will be modernizing and supporting that global fleet of fighters for decades to come.
And the combination of bringing that together is what prepares us for the next global fighter opportunity. Another opportunity I wanted to share about is how Ray and my team are working together on commercial derivatives. Many don't realize, but every commercial 7 Series aircraft with the exception of the 787 and the 777 have been modified for military use. That's pretty impressive. And I wouldn't be so bold as to say this 87 to 77 won't will be happening in the very near future, but I do believe it will be happening before my career with the Boeing company is over.
We brought that expertise to the Navy's PA program with the 7/37 line that you're going to see later this afternoon in written. And what the Navy will tell you is that we have spent approximately $2,000,000,000 less than was originally budgeted for by capturing production efficiencies and different production efficiencies to make that a more affordable product. In addition, they would go so far as to say we saved $700,000,000 in acquisition costs by incorporating Navy unique, desiriments into the production line rather than doing it post production. Nobody else in the world delivers that kind of value. And I would be so bold as to say the U.
S. Air Force will recognize that same value if they select the Boeing team and our 737 for JSTARS recapitalization and other special mission aircraft. Our path to growth starts with the 4 objectives you see on the left. The team that's with me in the room today are relentlessly focusing on delivering a cost competitive business that differentiates us in the market space and truly expands our global reach. For us, that's going to result in a more industry leading position in 6 specific markets: commercial derivative, rotorcraft, satellites, services, human space exploration, and autonomous.
A great place where we've seen this strategy come home is in Australia. Between 20132015, Boeing Defense Australia won 14 out of 14 competitions across these markets. They did that by operating as a local company with a local presence, with a local understanding of their customers' customs and needs versus overlaying a U. S. Centric approach.
They did that by driving competitiveness into everything they've done, taking advantage of our partnering for success efforts, taking advantage of optimizing their own rate structures, so that not only do we win business, but that we can invest in the future. And most importantly, they did it by delivering on their commitments, because there's nothing that does more for us than to meet our customers' needs and establish trust and confidence in us. This is the roadmap we plan to use not only for our global businesses, but for all of our businesses in Boeing Defense and Space. The 51 Foot Echo Voyager was unveiled 2 months ago. It is our most advanced unmanned underwater vehicle and it allows continuous presence without long term human involvement.
It is a game changer. But it's also an example of how we're targeting investments to specific markets to meet customers' needs. And it is going to position us to grow in these markets and capture part of that $3,000,000,000,000 market that I just showed you. 1 of the other markets you saw that I shared that we're going to be industry leading on and you heard Ray talk about it as well is our services business. And this is something very near and dear to my heart.
It would have been really easy for me to put Ray's chart up here on the screen because we talk the same language when it comes to this. And this is one of our unspoken heroes. Around the clock global support, broadening reach and the use of data analytics to differentiate not only how we do business, but how our customers operate and do business. In Boeing Defense and Space, we are succeeding because of 3 things, our global reach, having a local presence and providing uncompromising service. Our vast installed base of commercial and military aircraft give us an entree point into markets no one else has and helps us build on relationships that already exist.
That is global reach. I mentioned our successes in Australia and similarly I referenced our work in India and Saudi Arabia and the United Kingdom. Those teams there are local with local decision making and empowerment to make the decisions that they need to, to not only grow, but execute their business. That local presence. And we're taking advantage of those ideas we learned from those parts of the business and we're bringing them back home to the U.
S. As well as to other parts of around the world. For instance, the U. K. Chinook team has higher availability and lower total ownership costs than any other Chinook fleet in the world.
That is because they partnered with us on a collaborative sustainment model. It is so intrigued the U. S. We're having conversations with them as well as other customers who operate the aircraft. Here's another example, data analytics.
You hear a lot of talk about it today, Boeing has been doing it for years. Doing it better and helping our customers take data and make it into information to make decisions about their fleets is what differentiates us from our customers. And while Ray's customers and mine are different, there's one thing that we all align against. When it's time to take off, we need to go, no questions, no surprises. And whether you're a war fighter or you're a commercial airline, you need to be able to depend on the aircraft to go when called upon.
Predictive data analytics make a step forward improvement in readiness. Components can be ordered when needed, shelves can be stocked as needed, repair intervals can occur when it's convenient for the customer and aircrafts will go when called upon no fail missions. That is real value and that's uncompromising service. As we go to the future, we're investing nearly $1,000,000,000 in the business this year. We're evolving our core products that you all are familiar with, but will we be refocusing our investments towards those 6 specific markets I shared with you earlier.
We're investing to stay on the cutting edge of advanced manufacturing as well as data analytics and we're going to continue to invest in our global business that will help us continue to diversify and expand our products and services. Dennis talked about how Boeing connects, protects, explores and inspires. No other company does what we do. And if you look at the Boeing Defense and Space portfolio, what you will find is not only is it diversified, but it allows us to interplay among these four aspects and provide value propositions for our customers to help them achieve their missions around the world. That is going to allow us to build a better Boeing for the next 100 years.
Boeing demonstrates its commitments to its customers every day with every decision we make. Let's start with the KC-forty six. That is the Air Force's top priority and it is my top priority. We have 4 aircraft in flight test. We've achieved more than 6:30 hours of flight.
We've flown we've refueled 3 classes of aircraft and our tankers have been refueled themselves. When you flew into point, stop, no questions asked. Our focus is achieving milestone C and production approval decisions. Our plan is to have that at the end of the Q2. We are on track subject to normal government process.
The next major milestone is delivering 18 aircraft in 2017 and our entire team is focused on that. This is a development program. We do have significant flight test time left in front of us, but I can say with confidence that we have not uncovered any major technical issues that we have not been able to overcome. We now have an 8 aircraft in our production line and we have 19 aircraft in the build cycle through our supply base. The market for the KC-forty six is approximately 400 aircraft and this is going to be an enduring profitable franchise for decades to come.
I'd like to move on to our other another development program, the CST-one hundred, also known as Commercial Crew. Boeing is the leading human space exploration company and it's our intent that will remain that. It is our vision that the CST-one hundred will be the first of the new American capsules to take astronauts to space. Our team is located in Houston and at Kennedy Space Center, working closely with NASA. We're working towards our first unmanned flight in 2017, followed by a manned astronaut flight in 2018.
The program is progressing well. We had astronauts just last month in St. Louis looking at our training systems. We're soon sending our structural test article to Huntington Beach for testing and then we'll be starting the final build of the vehicle that will actually go to the space station. We're making strong progress on a program that will benefit not only NASA, but has opportunities in the commercial sector alike and that's pretty exciting.
And finally, I'd like to talk about Space Launch System, which is the rocket that will take us to Mars. We're building the flight hardware, which will allow NASA's heavy lift rocket to go there. And at the same time, we're designing the next evolution of this rocket to go faster and further. Mars is the next great step in human space exploration. It's not a matter of if, it's a matter of when and Boeing is proud to be on the team
to help make it happen.
You've heard Dennis, Ray, Greg and now myself talk about margin expansion. And you'll see our charts are very similar because not only is our near term focus the same, but our aspirational goal is the same. Boeing defense space has made great progress. In 2013, our margin was 9.8% and twenty 15, we had grown to 10.8%. We have taken more than $6,000,000,000 out of our cost structure, becoming more affordable and contributing to that expansion.
But we're not done yet. We continue to focus on partnering for success. As you heard, it is not an initiative. It is a way of life and we do believe there's win win opportunities for us in our supply base. We are driving first time quality in all that we do from our designs to the production floor to how we deliver and prepare for launch.
And I have challenged our team with even more aggressive internal challenges as we look to further optimize our business. Dennis spoke about Boeing's place as a global industrial champion. We innovate at scale and that inspires all of us as a team to do more. Our culture of continuous improvement is driving real benefits and you see it in our bottom line. And we continue to attract the best people who want to make a mark on this world.
I have seen what the men and women of Boeing can do. And since my parents both worked at Boeing, you could say I've lived it every day of my life. I wake up inspired, not only by our customers, but by our teams. And as I look to the future, while I have a healthy dose of pragmatism and how I look at the world, I'm fairly confident that our next century is going to be even more amazing than our first. Thank you for your time this morning, and I'm going to turn it back over to Troy.
Thank you, Leanne. Just want to mention a couple of items before we go to break. Prior to returning from the break, please make sure you've checked out of your room, you bring all your luggage back to a roped off area outside of the ballroom. There'll be designated backdrop areas that correspond to a bus number on the back of your badge. After the Q and A session, please feel free to grab a box lunch, get your luggage and then promptly head to the buses.
Now we'll take a break and we'll start back up at 11:05. Great. Thank you.
On on on on. To and to on on on on to to on So on to on on. On to
Okay, if everybody could take a seat, we're going to go ahead and get started. Just as a reminder during this session, if you'd like to ask a question, please raise your hand. When you recognize, just push the button on your microphone closest to you, ask your question, just make sure you turn off the microphone. In the interest of time, we ask that you please limit yourself to one question. And with that, we'll go ahead and get started with questions.
Yes. Noah? Thanks. Dennis or Ray, a decade or so ago, If I look back to the middle of the last decade, the strategy seemed to be to sort of on the commercial side, not intentionally, but intentionally, if you will, undersupply the market, not quite increase production relative to what demand suggested, build a big backlog. Financial crisis happens, you have that backlog protecting you, you don't really have to change production.
But since then, you've increased production quite a bit. You've basically doubled production from that period of time. Backlog to sales has come down a little bit. It's still pretty high, but it's come down a little bit. If I go forward with your production plans, even if I assume book to bill is about 1, the next 3 to 5 years while you're increasing production, backlog to sales keeps coming down.
If I assume book to bill is below 1, which could happen given the much higher delivery rates, you could kind of get to the end of the decade and have backlog to sales be something in the 4% to 5% range. And so you'd be staring out to the next decade without near the conservatism in supply demand and the backlog protection you've had. I guess I just wonder how you think about that. Is it do you have to chase Airbus for market share and so you can't be as conservative? Am I missing something in the math?
Is there a reason bookings would be much higher? How do you think about that conservatism and supply demand dynamic?
Let me take a first cut and then I'll ask Ray to add on to it. You take a look at our approach and it is a measured approach. And when I look at our production rate plans going ahead over the next 5 years, we think we've done a pretty good job of balancing demand and supply, talking to our customers, looking at the projected plans and managing our backlog. We are not going to chase market share for market shares sake, right?
We want to do good
consideration. And the production rate increases that we put in place to go from 42 up to 57 a month by 2019 on the 3 7 is one that accounts for all of those factors. So I think it's a measured conservative approach. As Ray will tell you, we've been oversold in general to that profile, right? And so we're not chasing rate as fast as we could if we wanted to.
So that measured approach is important. Now you look farther out 20 years, we're seeing sustained growth. As Ray said, 38,000 new airplanes around the world, and we'll see what happens on an annual basis book to bill. But we're not getting ahead of our skis here on production rate for the future. We want to build a long term sustained growth business.
That's our headset, not a cyclical business. We have the opportunity now uniquely to have a long term sustained growing business. And that's our design.
I guess just a little more directly, if you got to 2020 and you had 4, 4.5 years of production in backlog and you were building 900 Is that a position in which you'd feel comfortable for the next 5 years? Or is that something you just don't see happen?
Hey, if we had if we were at 5 years of backlog at that point, that's not a bad position to be in, right? You can have backlog that's too extensive as well, right, in terms of having slots available for customers. So being in that range, depending on mix is not necessarily an issue at all. The key is a sustained long term business. Ray, you want to add
to that? Yes. I'll go back a little bit on that. When we were very fortunate, we had to take the rates if you recall in 'eight on the 777 we had to go down to 5. On the 37, we were still burning off a backlog that had been built up because of a strike.
And we did not take the rate up because we were less confident at that point and we didn't have the overbookings to feel very confident. So we didn't take the rate up. And you know what, it worked out for us because of that strike.
But I guess had you done that, you then would
have had to lower it. That's right.
And now you're producing much higher than you were then.
But we are in a significantly particularly on the single aisles, we're in a significantly different spot with respect to what we're seeing in the marketplace, how far out we've sold, how good we feel about the backlog and how much we have on an over commit basis. We didn't have that back then. And twin house is a little bit different story and we'll really monitor that. But we're not going to the whole thing here is not to overproduce and we'll make the adjustments necessary. But we got to have a production system.
I think the biggest thing is making sure and that's what we're working on today being so having that production system that can kind of move kind of up and down and not get hit with these big swings in margins as a result of us going up and down. But as Dana said, this long term outlook, it'll fluctuate, but it's typically pretty strong, unless there will always be potentially be some exogenous effects that could change things, and we'll deal with that. But I feel pretty good about where we are. Now we've got to be very diligent about watching the marketplace, But particularly in the single aisles where we've taken the rates really high, we're feeling pretty strong about that. Next question.
Thanks. Peter?
Ray, right here. Over here.
Sorry about that. Sorry. You gave us a lot of information on the 7 37 MAX, the 200 customers have yet to kind of order and you've got a lot of runway there. Can you guys give us kind of a similar analysis how you feel about the 777, kind of the bridge? You've got some active campaigns, how you feel about the opportunity, I guess, the installed base that's out there and what the replacement wins that potentially are available to you?
Yes. I mean, the replacement, in particularly if you're looking at when would the 777X airplanes come in, 777X and those things they'll be able to pull the earlier deliveries of those. They're still going to need that lift and that would then be the later airplanes that they pull out. I think the great commonality between the two airplanes gives us an advantage on that. There's a couple of markets where we haven't even stepped into yet that look like there could be good growth.
I think Asia is continuing to grow. If you look at what's happened in China with respect to the traffic there, it's pretty phenomenal. The Chinese carried more passengers across the Pacific than the U. S. Guys did this year for the first time.
And that's a big 777 opportunity for us. And there's still a lot of replacement demand that's out there for the 777s. Now the competing factors will be used airplanes or somebody wanting to extend a lease. And some of that we saw a little bit of that in a couple of places. But I think overall when you marry either 87s or 777s, putting a new 777 in that would be the last airplane that you take out on the stream of the 777X coming in and that's kind of where our opportunities lie.
Just to follow on, is this the can you describe that where the risk is though? Is it mainly Middle East? Is that just given the reset in the price deck?
There's risk. I think South America is a little bit of an issue right now, particularly Brazil. You look at I mean, we're not as exposed there, particularly on the wide bodies as some other people. But Brazil is in kind of a tough spot. Russia obviously because of sanctions and those kinds of things.
If oil prices come back, the Middle East will be okay. They've got a great model there, all three carriers. Qatar seems to be doing quite well. Emirates has got a pretty good business model going too. Abu Dhabi is a little more susceptible to oil than the other guys.
And they'll just manage it as a whole. But I think hopefully we can get through this, oil prices will start to come up. But there's other opportunities in the Middle East that haven't exposed themselves totally to us yet. Doug?
I want to get into cost reduction, because obviously this has been a big emphasis this year. And right now you're at 9% guidance for margins. You're talking a lot about being able to expand those over the next few years. But we've seen over the past decade a number of initiatives on costs before. And they may have delivered something, but we haven't seen them deliver the kind of margin expansion that you're talking about.
Can you discuss why this will be different this time when you attack costs? And how we should start to see indicators of progress? Yes.
Let me start there and then Greg you may want to jump in and Ray and Leanne can jump in with some examples. But part of this is taking the productivity framework foundation that we've built over the last decade. And you could argue that while those programs have been implemented, not all of it is rolled to the bottom line. But now building on that productivity framework and then combining that with a leadership commitment and focus as an emphasis point. So I take development program excellence, for example.
Over the last decade, we put that in place. We had to stabilize our development profiles. Now going forward, we have a stable sequenced R and D profile. We're starting to hit the marks on delivering development programs on cost and on schedule as witnessed by the 7 37 MAX. So our opportunity over the next 5 years is to reap the benefits of putting that development program excellence framework in place.
Partnering for success, another key element of it. We built that framework over the last 5 years. You're going to see the outcome of that begin to hit the bottom line over the next 5 years. Greg talked about how that's a key part of recovering the 787 deferred production inventory as an example. What we're doing on lean plus CVQ, 1st time quality.
Again, the framework has been implemented. And hopefully what you've seen in the factory now is it's not just a framework, it's part of the leadership culture. I think we had a discussion during the break with a couple of folks on as you're talking to the people now it's ingrained in how we do business. That's going to be augmented with some of the work we're doing on advanced manufacturing and automation. As I talked about earlier today, now how do we design for automation?
That's going to unleash another wave of productivity. So part of this is taking the framework that we've built over the last 5 years and are reaping the benefit of it. And part of it is a leadership commitment to doing this and an aspirational goal. We're not talking about double digits next year and mid teens towards the end of the decade as a slogan, right? It is a commitment that we set as a team because we want to compete at a higher level as this global industrial champion.
And getting the whole team aligned on that and committed to it is another part of it. And that's different than what we've done in the past. Now how are you going to measure it? You're going to see it in the results. And you ought to see it in our margin performance next year.
You ought to see it in our cash performance. And the growth we've talked about on both margin accretion and cash delivery, right, is going to be the key point of measurement here. Greg, do you want to add? I think you hit the really big levers or differentiators from the past, certainly R and D 1 and the PFS effort. It didn't exist 5 years ago.
And that's 65% of our cost structure. So we got to go capture it. There's no question about that. And we got to execute on the development programs as we talked about in order to achieve that. And then combined with that, the internal, I mean, yeah, you could argue that it's a similar approach.
I would tell you we've raised the benchmark and starting to question functional costs, just as an example, and looking at how much functional costs do we have, meaning people that aren't touching the airplane and how does that compare against the peer group, how does that compare against the global, we would consider industrial champion and challenging ourselves that why are we pick a number 20% higher and how are they doing it versus how we're doing it? And I frankly not being arrogant in a way to approach that, that we're willing to we're going outside and meet with some of these companies and saying, how did you get here and you're delivering these kind of results and can we learn from that. Now does that happen overnight? No. But everybody's focused on it and we're going through that effort.
And as we're reaching some of these milestones or targets, we're retargeting ourselves. And again, we realize you're not going to get all of that. It may not all be in the timeframe we want. But I think the focus and the effort in those major categories along with the automation that didn't exist 5 years ago, is that huge needle mover right now? No.
But I think again, you'll see today on the 37, that's what's helped go through the NG to the MAX profitably. Go back in time and look at transitions on these programs. You know, because you're one that's asked me about it. You go through these transitions and you see the margin dip and then come back. It didn't happen.
What didn't happen because of things like that and that just wasn't there. So we got to stay focused on it, Doug. But it's those, I'd say, major components and the approach to those. And again, we're trying to capture as much of that as we can. That going to happen overnight all of it?
No, it isn't, but it's the right focus.
But if I can follow on that, are you at a stage today as you push this through the organization where it's already down accepted and being driven by really the rank and file. If you went to an individual department, are they all on board pushing this now?
It is. It is. And hopefully you saw that when you're in the Everett factory yesterday. You talked to people on the floor who are doing the work. I think when you get to Renton today, ask the people on the floor what they're working on.
You'll see it in the culture, right?
I've been around a long time. Long time. And we never talked like this to our teams. This is we have changed and we are changing. It's not all there.
But the competitive mindset that you have to have to go do this is really critical. That means you have to share things that you maybe wouldn't have shared before. You have to bring the reality of the marketplace to people sometimes that you were somewhat afraid to do or you were reluctant to do. And let me tell you, when this place gets their head around what it takes to win, it's an amazing thing that happens. I think you can see it across the board.
And if you provide the people the right kind of data that compares them or where they need to be, particularly early on in a program when you're making the design and you're saying we got to do this for this much money. This is what it needs to cost on a recurring basis and this is what we can spend on it's amazing what they'll do. Left open, they'll just go create the coolest thing ever and it may cost way too much money. But this competitive mindset that's being driven throughout this at least at the BCS, I don't know what's being driven at BDS as well, but it's across the whole company. It's much different than what it's been in the past.
And I think a lot of it is about thoughts. It's a reality. We see what's happening in the new players. We see what's happening with our primary competitor. We see what we're going to do.
And nobody let me tell you, nobody wants to be number 2 in this company, nobody.
Leanne, anything you wanted to add on cost?
Well, BDS has been at this for a number of years now, and I shared how much we've already taken out. And you haven't seen us slow down. What our focus is on really attacking that first time quality and eliminating the bureaucracy. It can sometimes be a warm blanket we wrap ourselves in, in terms of how we make decisions, how long it takes and how it builds in actual delays and allows us to be a little bit less efficient. Folks recognize where we want to be, and they want to be there, and they want to own it and own the decisions.
And so that you're seeing not only the top down guidance that we're providing, but you're seeing a groundswell from the folks across the company who want to own this and make a difference. And it's all about focusing and finishing. And I really see you see the results in the numbers.
Jason?
Yes, thanks. This one's for both Ray and Greg.
Ray?
It seems like you're kind of circling
on the middle of the market for development program that gets started in the 2020 timeframe and has entry into service in the 2024, 2025 timeframe at least in the conversations we've had with you over the past several months. The question is can you confirm that that's the case? And then secondly, what are your customers telling you at this point? Is that your conversations with them aligning with that time? It seems like it's the optimal time for you to do it, but is that when your customers want it?
Go ahead, Randy. I'm always hesitant to. We've had a lot of conversations with customers. And this is not a market that's addressed by either any of the single aisles or what the twin aisles are today. So it's a very unique marketplace.
We have a and we're having a number we're still in the conversation stage about what's the optimum size airplane, optimum capability of the airplane and then obviously kind of where does that price range need to be. They're the ones that have kind of indicated a timeframe for us. And it works kind of nice in terms of where we are too. But it's really we're just receiving at a particular point in time and then generating ideas off that and then it's a kind of a catch ball at this particular point in time. Howard?
Howard over there.
That works. Thank you. Until I'd heard Leanne, I didn't think anybody was more intense than Ray. Now I see that he has some competition. But I want to compare and contrast.
Where are you Howard? I'm as far away from you as possible. Okay. There you are.
So I
want to compare and contrast the MAX and the KC-forty six for a moment. I mean they're both sort of development programs you want to win with and you have now some flight test data on the MAX. So maybe you could share with us sort of what kind of fuel burn and what kind of performance you're getting out of that aircraft versus the specs you promised the customer? And then on the KC-forty six, you missed a bunch of development milestones and took another charge again in the quarter. And you still have some airplanes you haven't tested yet properly.
So can you kind of give us each a path of how the customers reacted to your experiences?
Ray and Leanne, why don't you guys
take it? Yes. We're kind of right on the money, Howard, with what we anticipated. When we were in the marketplace early, we're going to give people a better airplane than what they initially purchased. That I can't go back and get more money for it, but we are.
We're going to give them a better airplane. I think we're going to be right on the money with what we thought we would be ultimately. And all the flight test data would indicate that. I think we're at least that piece of it's going really well. And nothing has given us any indication that we're not going to be there.
I will say this about the tanker. I had an international customer with me yesterday, who is also who would be a buyer of potential tankers. And we went out on that thing. And let me tell you, that is an amazing, an amazing machine. Yes, we've had some issues with it, but it is so far more capable than anything else out there.
It is phenomenal. And the U. S. Government is going to get a far better aircraft than I think than what they even know. And the international side, it's going to be so compatible with what we want to do.
I think when we finish this thing up, it's going to be off the charts. Now we got to get there and got to finish, but now it's all about finishing on that, just like it is about finishing on any development program. Extending them, it's the worst thing that can happen is when those things start to slide. So we got to be really disciplined about hitting the mark and making those things go. I think that the MAX is clipping off all the milestones right on time, right on time.
And if we can keep that up, then we'll be in really good shape in terms of when we're ready to deliver the airplane.
Leanne, you want to add on tanker there?
Well, first, I want to thank Howard for complimenting me with Ray. Actually, I'll probably I'm going to make that a note. I don't know. Honestly, tanker, our customers standing right next to us. Boeing has made a commitment.
We stand proudly behind that commitment. We have continued to invest as we need to to make certain we meet that customer's needs. Their teams are ingrained with ours. They're partnering with us as we go through the flight test program. They've had total insight into the issues, even though it's been fixed price where many, let's say, folks in industry may have put their hands up and said, it's on us and or we're not going to give you the insight.
Instead, we have partnerships from the top of the Air Force all the way down so that there is total insight into where we are in the program. We have a fix for the BOOM software access load that you all have seen and heard about in the press. We'll be up in the air here in the next couple of weeks proving that out. We'll finish up the last three aircraft with the 17, the F-sixteen and the And then we will move into our change in corp. That charge we took in Q1 was really about understanding the configuration of the not proud Jim O'Neill is in the back of the room.
He leads the development program organization for us in Boeing Defense. He and that team are just rock solid. And to raise earlier point, we had the Secretary of Defense and the Secretary of the Air Force here in the last 60 days. We toured them through. And once they got on the aircraft, they truly understood the capability that they're getting as a combat tanker versus simply a tanker that pumps gas.
This aircraft has so much versatility and is really going to work out well, not only for the U. S. But for its allied nations.
And Howard, just to add just one final comment on that. And Ray and Leanne, compliments to both of them on how we're working the tanker as a 1 Boeing enterprise and best teams together working it in an integrated fashion. I think that's a unique advantage of the company. And on tanker in particular, as I've also been very close to this from the start, And we take these charges personally, right? These are things we're very serious about.
And while that the last charge we took was difficult, it's a very different nature of charge than the earlier parts the program where we had technical discoveries. Now we're into concurrency between finishing up development and ramping up production. And as Leanne said, we've got beyond 18 aircraft already in our supply chain. We've got 8 airplanes in our final assembly, 8 tankers in final assembly in Everett. So delivering 18 airplanes by next August is clearly on target.
We had to finish up certification and the government process associated with that. But it's important to keep this all in context. We are focused as a company on delivering that capability on schedule. And while those charges have been painful, it's keeping the program on schedule and we're eager to get it into production because this we're going to build at least 179. We think the market's more like 400.
And as you know, tankers stay around for decades. The KC-135s that are in the fleet today have been around for 50, 60 years. This is a 50, 60 year wide body franchise. And that's the way we think about it in terms of our company strategy.
Thank you. Ron?
Thanks.
Question for Ray right here. So when you look at the 7 37 MAX kind of a flash count, there's the 9, there's the 8, there's the 7, there's been talk of a 7.5, maybe a 10. How does that strategy play out? And how do you think with the success Airbus has had with the A321 at the top of the market and then you've got this kind of widely competitor up in Canada who's getting a lot of government money them at the bottom of the market? I mean just trying to
sort that out. Well, okay. So Airbus is we have basically the same advantage with the Max 8 versus the 320, okay, about 12 seats. They've got a seat advantage on us at the 9. And but we still believe the heart of the market still sits in the 8 size.
We are in conversations with our customers. We can we have the ability potentially we're thinking through how do we do we want to address the very top of that market with the MAX. At the lower end, the airplanes that have been purchased have been CS-100s. We aren't competing with those with the MAX. We competed at Delta with a used 717s and used Embraers.
And then they came in and had to do amazing things and then take immediate $500,000,000 write down. We can we're in a position at the lower end to make an adjustment to the -seven if we choose to because we haven't really we're not very far in the design. So those are all decisions that we're in the process of making along with the conversations that we're having on the middle of the market. Again, the middle of the market is a different segment as far as we're concerned. So again, no decisions have been made, but a lot of analysis, a lot of discussions about that.
If we want to do something with MAX 7, that's it. That's something we could do very easily.
Just how stretchable is the MAX 9? Is the MAX 10 a reasonable stretch?
Technically, we could do that. I think we are still working our way through some of the thought process around it, how big and whatever it could be. But we could, if we needed to, we could do that. But we haven't decided what we want to do there.
And as we're thinking through those options, it's all enveloped in that broader R and D plan that we talked about.
If we wanted to go the route of a We haven't been any. We could do it within our Any decision, again, the 7, because we haven't really started that one, we could do that really
pretty easy.
Thank you. Miles?
Greg, you started
right here.
Yes. You started to give us some color on the buckets of deferred and the drivers of the improvement there.
Yes.
And the 70% sounds like it's tied to variance and the backlog. So you've got a couple of 100 left to sell in the block. So that's an uncertainty. But the variant mix and the pricing of what you have is kind of you should know it.
Correct.
So the 25% in the supply chain, how much of that is actually contractually in place today versus your assumption of what you'll be able to recoup?
There's about 80% to 85% that's under contract. The balance that's outstanding there is DASH some DASH late DASH9 negotiations in DASH10. But again, when you look at the cost associated with that because of the commonality, I mean, we have a pretty good idea what those parts or components will cost, but they're not all completed under contract. I think when you look at the 70%, again, you got to keep in mind what took place to build up to the deferred, right? The delays, the payments made to customers on settlements and suppliers.
And then if you kind of snap the chalk line now going forward, you don't have that. And so that's why it's such a big piece of the mix of, I'll say, the burn down or the improved cash performance. And then as you indicated, mix of -9s and 10s predominantly, as you said, sold out. We know the price and those that aren't sold, they're at default pricing similar to what we've sold the current airplanes at. So that's why that I'll say that 70% is so weighted on that front end.
Okay. And as I indicated, obviously internal productivity is going to we want to do better overall on margin and cash, but that is the smallest piece of that overall recovery. And then
the slide you put up? Yes. How much did you actually want us to literally read into your cash flow for 2020?
I'm not a graphic artist, but just listen to what I said and I think go based on that. I think the fact is that when we look at the production rates, as I discussed and execute on those 5 production rates, burning down the deferred as we talked about, we have the opportunity to have cash flow growing at a higher rate than earnings. That bar is directionally correct. Looks like $15,000,000,000 That's why I'm not a graphic artist. Yes.
Thanks for the opportunity.
With respect to R and D, you had it going up to I think $3,800,000,000 this year. Should we think conceptually that it should continue to go up in 2017? Or does it level off at this amount till presumably the next development program?
Yes, it won't be that high this year. It will be about $3,600,000,000 this year and we see similar level next year. Now the mix of the R and D is different next year because we got the MAX kind of more ramping down in the -ten. So next year is really all about 777X. And then you'll see CapEx coming down a bit as well as we get into next year.
So really hit the peak on CapEx with 777X this year.
And on the free cash flow going 100% back to shareholders versus the previous 80%, is that presuppose that your services growth is targeted to be exclusively organic and that you're not looking to add something and use up the free cash flow there inorganically? Currently it's organic.
Thank you.
You're welcome. Kai?
Yes. I think you've made a comment that you expect commercial book to bill to be relatively close to 1.0. Is that units or dollars? And maybe give us some color if you could where those orders might come from both geographically and by market by model?
It's by speed. It's by units, right? So this is book to bill of roughly 1 by units. It's going to be weighted to the narrow body side. But Ray, you want to comment on where you see opportunity?
Yes, I mean we still see tremendous opportunity in Asia. We continue to do very well there. Again, on the narrow body side, particularly around the U. S. Guys, some of the just in general North American guys.
Europe, we've done some big things there. And again, I want to back to my comment about the big five. Well that's still a big opportunity for us as we move forward on the single aisle. Wide bodies, that's going to come from all over. I mean, we're not going to be again, Asia is typically a big wide body player.
But also we've also seen some replacement market opportunities in some of the big U. S. Guys too. But we've been all over the place on those. And this is going to be that's probably narrow bodies will be a predominant of the sales and the wide bodies will be working hard on those.
Rob?
Thanks, Raj. Ray, over here. Over here. Hey, Rob. You reported to say some pretty negative things about pricing recently.
So I was wondering if you could clarify what you're seeing out there and also whether foreign exchange is playing a part in this situation?
Yes. I don't know if it is or not. The competition has been very tough. I mean that's there's no question about that. Sometimes don't confuse
motivation
with totally with the facts, I guess. But I will say that the competition has been really it has been tough in certain campaigns. They've deemed some things as must wins. We've deemed some things must wins and we always balance those with other places where maybe it's not as critical, but we use I use particular campaigns just to give people a real sense, bring it to life for them, so we can get this competitive mindset that we need to have and a cultural change all the way down to the factory floor. The one thing that people do relate to around here and that's winning.
And they know how important winning is to the long term of not only the Boeing company, but to them personally. And if they know they've got to be they've got to work more efficiently and more and create more productivity to win, they're going to go do that. And so that's where I use a lot of those things. But I will say, particularly in the wide bodies, it's been more competitive than what we've seen. But that's just that's the normal course of business.
That's why we're very intense about what we're doing on the cost side, because we want to offset that competitive piece of that and we also want to be able to grow our margins at the same time so we can reinvest in our product lines.
And I want to reinforce, Ray, and the actions here. And I like you have read what's been competitive marketplace, we always have, and these campaigns are important to us. And we are driving cost competitiveness. And we intend to play offense on cost competitiveness. And the points Ray is making about the competitive headset, our expectations as a team, how we want to compete and win, that's very clear that we're all aligned on doing that.
And you ought to see that as a good thing. We're not taking cost competitive actions because we're somehow playing defense or we need to catch up. We see productivity and investing in cost competitiveness as playing offense for the future. We need it so we can generate pricing flexibility if we require it in the marketplace. We also need it to return cash to you and we need it to invest for the future.
All three of those are imperatives for us And our headset around cost competitiveness and playing offense on productivity is very clear. And so I just want to buttress important on
everything that we've these are not conversations that I just it seems crazy, but these are not the kinds of conversations that we've had with our workforce all the way to the factory floor. This is we're bringing the whole game to them and understanding so they can understand exactly how they fit into the entire system. That's a sales thing. No, no. That's my job thing.
I got to do my job better so I can help this company sell more airplanes. I got to do my job better so we can reinvest in the future so my children can work at Boeing and enjoy the benefits that we've that I've had for these number of years. That's the mindset we're trying to create around this place. And let me tell you, that's not something that has existed here before. It's we played at such a high level, we were kind of at the very top of the game for we've got I love the competition.
It is great. It makes us so much better. But we have the ability to be so much better. When you look at some of the waste that we have in this production system that's not we have great opportunity. And now we're getting so many ideas from our teams about how to get it out.
The energy level within our team is so much higher now as a result of being really straightforward about what we got to go do.
Rob?
So this is really related follow on question on pricing, but it's for Greg. In your graphic chart there, your graphic art, as you drive forward and those numbers go higher, obviously, 787 pricing is a tailwind. You've talked about that mix and fewer problems on the forward airplanes. How about the rest of
the program? Sorry, Robert, are you talking margin or are you talking which chart are you referring to?
I'm talking about your cash flow chart.
Cash, okay. Yes.
And the importance of pricing in boosting cash flows over time and getting to those higher cash flows. And 787 is a tailwind. You're going to have better mix, higher prices. It's an important component to driving cash flow on that program. Right.
On the other programs at BCA, is pricing a tailwind or a headwind, especially in light of what Ray is talking about in the competitive environment?
Well, look, it varies by model, by campaign. So there's just a lot of mix in there, Rob. I think the biggest driver is 87 because of what we talked about in that mix and the other elements of that. But on the other programs, I wouldn't say price is a significant driver upward or downward as we look forward through there. It's really more about the productivity and getting to rate.
And that's really what's going to drive the cash flow, the pricing, not as much. 3.7 is a cash generator because of volume increase.
And also because of the productivity we've been able to drive into this thing. It gives us flexibility, so we can
go in. I'd really I tell you, I'd really encourage you today to ask those guys questions about how they're running that production system and you'll see the amount of space that they've created to put the MAX down that line. That's all been happening in those four walls with the headset that Ray was just describing. And obviously, we want to bottle that up and share that with everybody because it really is a best practice for our company and we know how to do it. So how do you do more of that?
So in sum, it's rate and it's cost and prices neutral?
I think in general that's probably a fair assessment.
Yes, given where we've been. Yes. Yes. Yes. And I would kind of indicate that.
Course, that can change over time. It depends on what kind of campaign and which product you're going up against or those kinds of things. But we're not seeing much different than what we've seen before.
And don't forget our defense business, not to leave Leanne out here, but that is a solid cash generating reliable cash generating business where cash and earnings follow pretty closely because of government contracting structure. And then the international blend that Lianne has on the defense business is also a very good cash generator. So don't dismiss the cash component of our defense business as well as part of that growth profile. Yes. And our Diane, you want to add to that?
I thought you did a great job.
All right. Thank you.
Yes. Just
right here in front.
On the I mean you're talking about margin, you're talking about cost competitiveness, you're talking about winning and I realize these things are all interrelated, right? But there's a sort of blurred line between cost cutting for necessity versus cost cutting to be proactive and how that all fits into margin. I wonder if you might talk about incentives and whether or not at the whether it's the highest levels of the organization or all the way on down, if you're willing to incentivize people on margins
to drive that outcome. Yes. We have an incentive program not only for our non executive team that is driven directly to how we perform against the plan. We have an incentive program for our hourly workforce that's driven against those things that contribute to lower cost, productivity, quality and safety. And there's they have the ability, and that's some of the things that we put into these new contracts that we did long term.
There's incentives from the top all the way to the bottom. So we've incentivized the entire team to
a operating profit number the way the executive comp plan would look like? Yes,
some of them are like that, but then there's some of them like in the hourly because that's more driven by specific productivity levels. And we established those targets at the beginning of the year. So those targets are kind of driven off what
the plan Yes. Linked to the overall.
Yes. They all link So it all links together, Carter, and kind of drives to the same things. But they're all set up to be putting us in a position, kind of building off one to get to the get to where we want to be longer term.
And it ties to economic profit. So it's both earnings and cash performance as well as good use of assets, working capital efficiency, inventory efficiency, delivery, which ties to revenue, all that.
And we do that across the business. We've been we do that on the defense side as well. And the contracts with depending on what labor contract we may have may be a little different, but we have those same elements.
And we do that in our nonunion facilities too. And I
think back to Doug's question earlier, that wasn't in place
5 years ago. No.
So the right incentive structure makes David When we went through these
we went through the labor contract in 20 I think it was 2011 we put some of that in place. Yes. And then the last contract we did in 2014, then we put it fully in place. David?
Thanks. Ray, on 777, can you help level set us as you go through the initial stages of the transition in 2018 2019 between 777X. Can you level set us in terms of how many revenue generating deliveries we'll actually see in 2018 2019 when you consider the flight test articles and then the blanks? Thanks.
Yes, I can. I don't I can't.
Yes, I mean when you equate for to your point the test article and then the additional flow Then we do additional flow Like the -nine.
And the 10.
Yes. You got on the 777 you get to about 5.5 equivalent to about 5.5 versus the 7 production.
So there will be a slow kind of taking down of the 777. I think that's what you're asking.
Yes. Yes.
So Greg is that 5.5 percent kind of the equivalent rate that we'll see in 2018 2019?
Yes. It will really be late, think late 2018 2019 timeframe.
It kind of steps down a bit because you'll be producing those airplanes back in that timeframe.
And the expectation
then 2020 we go back up again? Yes.
Well with the X, And the static airplanes up, there's 2 static airplanes
that will
and the static airplanes up, there's 2 static airplanes that will never deliver. But the test articles that are in there, they'll start to deliver then out in 2020 beyond. Okay. So it will fit to your point, there'll be a little bit of that inventory buildup in there, but that's kind of what we've taken into account as we talked about growing cash flow, That's taken into account. But we got to execute to that plan.
I think that last point is key here for context. So what we just described here at our 7 month production rate minus test aircraft and flow time extension to do the transition. This is normal efficient transition to the product line, but our expectations for margin accretion, as we laid out, and cash growth, that's already baked into our plan, right? So this is not a change to what we've talked about. This is how we have pre planned this transition and it is baked into our expectation that we will grow cash through the 5 year plan.
Similar approach we took with -nine, similar approach we're taking with -ten, maybe not the same degree, but with the 777X definitely that approach.
Thank you.
George?
Yes. I was wondering if you could update us on the 87 from the standpoint of some of these older planes, because it seems like now you're kind of delivering at rate, but we haven't heard much about these older planes, the teenagers are all delivered at this point. I think you had a test airplane that you were still trying to sell. So how many of those are actually still sitting in inventory to be delivered and how many will you deliver over the next couple of years?
Yes, there'll be kind of a handful
of those, George, that will deliver over the next couple of years. And then we have 2 unsold, 45. 2 test airplanes 45 have not sold yet. George, everything else has been sold either and it will deliver over the next couple of years. We're in the process of preparing those airplanes now.
So how many in total are in inventory right now?
I'd say there's probably around 12, I think, in total. I think that's about right. Yes.
I think that's about right. And those will deliver we're going to deliver a handful over this year. They're part of the delivery stream. And then we'll do another over the course of the next year.
Okay, thanks.
We have time for one more question, go with Ken and then we got to get you off to the tours.
Okay, great. Thanks a lot. So I just wanted to follow-up on the services discussion. It's obviously been very prevalent today, both in BCA and of course in BDS. But Ray specifically,
when do you expect to be
sort of number 1 in the services market? What kind of organic growth do we think about for this business? And then 3rd, where do you see the specific opportunities to really drive growth because you've got a pretty broad portfolio of businesses here?
Yes. I like your mindset there. I appreciate that. Stan? As do I.
No, GE is they're number 1 and that's a little bit tough nut to crack just based on how long they've been in this game. Based on what we have today, I think if we can maintain a solid number 2, that's really good. If we wanted to jump into the next tier, there would have to be I think that we would be looking at some type of inorganic growth to do that.
And organically, from a growth standpoint, how do you think of this business?
As far as
I mean in terms of annual growth, is
it better than what you get on other parts
of the BCA or how do we think about this? Yes,
particularly from a margin perspective, yes.
Sure. Leanne, you want to comment on services at the defense business also?
Yes. And we've continued to see the business grow. It's dominating our plan looking forward. And with Stan's team, Ed Delansky and Stan are perspective and really capture additional value to increase the offerings to the customers. Perspective and really capture additional value to increase the offerings to the customers.
And there's a lot of leverage points between the 2 of us that no other company can provide because of the commercial aircraft, access to the parts and then what our customers And distribution.
I mean, when we start to combine distribution, we can be very strong.
Leverage our OEM knowledge and build these new information based services. Those are 2 big growth plays for us, do it across defense and commercial. And the organic growth opportunity here is big and selective acquisitions to help us build that out as part of the game plan. But the organic growth model here just leveraging our OEM base is a big opportunity for us.
Okay. With that, that completes our executive Q and A session. Just as a reminder, please grab your luggage, grab a box lunch and promptly head to the buses. Buses start leaving promptly at about 12:15. Depart from the 10th Street side, buses 12 will leave first, then we'll load buses 3, 45.
Bus 5 goes to the airport. And again with that, thank you attending. Appreciate your participation.
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