1 Big Warning Sign in Boeing's 737 MAX Order Book

On the surface, Boeing (BA 0.33%) is finally on the mend after several years of turmoil caused by the 737 MAX grounding, COVID-19 pandemic, and 787 manufacturing flaws. Air travel demand is booming around the world, driving strong order activity across Boeing's commercial jet portfolio.

That said, new statistics on the breakdown of orders within the Boeing 737 MAX family should give investors pause. The relative lack of success of Boeing's larger 737 MAX models compared to the Airbus (EADSY -0.27%) A321neo is creating an opportunity for Airbus to build a larger version of its A220 family. That could severely cannibalize future demand for the 737 MAX, Boeing's most important product.

Demand recovers -- mostly for the 737 MAX 8

Between early 2019 and early 2021, Boeing's 737 MAX order backlog plunged by over 30% as customers canceled orders because of the 737 MAX grounding and the pandemic. However, orders have rebounded over the past couple of years.

That has allowed Boeing to rebuild its backlog even as deliveries to customers have accelerated. For the 12 months ended in June, Boeing grew its 737 MAX backlog by 11%, from 3,431 to 3,818 units. The resurgent order activity has helped Boeing stock nearly double since bottoming out last fall. Based on the stock's recent price, Boeing's enterprise value sits just 4% shy of where it stood at the beginning of 2019, before the 737 MAX grounding and COVID-19 pandemic.

Boeing Enterprise Value, data by YCharts.

Last week, Boeing provided data on the breakdown of orders across each member of its aircraft families for the first time. That showed that the smaller 737 MAX variants (the 737-7, 737-8, and 737-8-200) account for 78% of the type's unfilled orders, compared with just 22% for the larger 737-9 and 737-10 models. The 737-8 alone makes up 63% of the backlog.

A different story at Airbus

The A320neo family's order backlog looks quite different. The largest model, the A321neo, had 4,150 unfilled orders at the end of July, roughly as many as the entire Boeing 737 MAX family. Meanwhile, Airbus had 2,523 unfilled orders for the A320neo model and 47 for the A319neo.

Data sources: Boeing and Airbus orders and deliveries pages. Percentages may not total 100% because of rounding.

Over time, the composition of Airbus' backlog has shifted steadily toward the A321neo, including the longer-range A321LR and A321XLR variants. As recently as early 2021, there was a near-even split for the A320neo and A321neo models, representing 47% and 51% of the type's unfilled orders, respectively.

Airlines are increasingly voting for the A321neo because of its excellent per-seat economics, as well as the flexibility to serve longer routes with the A321LR and XLR variants while maintaining fleet commonality. The 737-9 and 737-10 haven't had the same level of success, primarily because of their subpar runway performance and the lack of longer-range options.

An opening for a bigger A220

The differing compositions of the 737 MAX and A320neo family backlogs might not matter if those were the only two narrow-body aircraft families on the market. However, Airbus also makes the smaller A220 family, the most modern and efficient narrowbody jet.

Today, the A220 doesn't compete meaningfully with the Boeing 737 MAX. Even the larger A220-300 model is smaller than any of Boeing's jets. But Airbus executives have repeatedly said that building an even larger A220 model is "a matter of when and not if." A bigger A220 could come close to the 737-8 in seating capacity while offering significant fuel and maintenance cost savings.

Two things have held up the launch of a larger A220. First, Airbus wants to reduce A220 production costs to enable the program to turn a profit. Second, Airbus has had to balance the likely boom in A220 sales that would come if it launches a stretched model against the risk that it will cannibalize A320neo sales.

With the A320neo family backlog increasingly tilting toward the A321neo, the downside of cannibalizing A319neo and A320neo sales decreases. A stretched A220 would primarily eat into Boeing's sales, as the A321neo would remain well differentiated from the A220.

A larger A220 probably won't enter service until 2029 or 2030. But when it arrives, it will compete against an aging 737 MAX lineup, setting the stage for further market share gains by Airbus. While Boeing appears to be getting back on track today, investors should not ignore this looming risk that could weigh on the stock's long-term performance.