As Boeing exits 2019 and moves beyond its MAX complications, we expect the firm will capitalize on ramping 737 and 787 production, turning rate hikes into solid top-line growth and margin expansion. We also believe its budding services business will boost operating income in coming years, as the company aims for $50 billion in annual revenue from this segment. We assume that coordinating with suppliers when vertically integrating its supply chain, and introducing the new 777X in 2020, while also attempting matching demand through production increases will be Boeing's biggest challenges. A backlog of nearly 6,000 aircraft will allow Boeing to boost production into the next decade and drive commercial aircraft growth. We think the 737 MAX groundings and subsequent 737 production cut will prevent deliveries from growing year over year in 2019, but a resurgence in production by 2020 should bring commercial aviation deliveries above 1,000 units.
Recent U.S. defense budget increases have buoyed growth in Boeing's defense business. And the company's wins on the T-X trainer, MQ-25, and the UH-1N replacement, as well as the initial phase of GBSD (modernization of U.S. land-based nuclear missiles), will also drive revenue growth. However, we think there will be margin headwinds over the next few years because of development on these recent program wins.
We anticipate margin expansion and operating cash flows to increase as the 787 deferred production burns down. Despite the recent MAX groundings, we think the 737 will eventually ramp to 57 aircraft produced per month and top out in the mid-60s next decade. Moderating R&D costs plus improved 787 margins (related to supplier pricing step-downs, the introduction of the 787-10, and block extensions) should also improve margins. Boeing continues to toy with the idea of launching a new next-generation midsize aircraft; we expect management may secure authority to offer this in 2019 with a formal launch in 2020. Lastly, we believe the planned acquisition of Embraer's regional jets will unlock strategic opportunities--a younger engineering workforce, military transport sales, and a global production footprint--for Boeing.
We assign Boeing a wide moat rating based on the intangible asset and switching cost moat sources embedded in each of its core businesses: commercial aviation, or BCA; defense, or BDS; and global services, or BGS. Operationally, Boeing manufactures aircraft for commercial aviation markets and offers a host of defense services for domestic and international governments. We believe wide-moat commercial aircraft and defense system operations possess intangible asset moat sources (regulatory approval, product and service complexity, and long, expensive development times) and the switching cost moat source (significant monetary investment, time investment, few if any viable market alternatives, highly risk-averse customers, high industry concentration, and long product upgrade cycles). We also find the manufacturer's ability to consistently generate cost savings for customers upholds customer adoption over several cycles in each of its markets.
Boeing's wide moat rating is predicated on its manufacturing expertise, supply chain familiarity, and ability to consistently produce globally certified aircraft. We consider its strong track record to be particularly impressive, given commercial aviation is littered with aircraft programs ruined by cost overruns and launch delays. More recently, Bombardier failed to control costs on the former CSeries program, while Comac's attempt to get the C919 narrow-body aircraft in service still suffers from delays. We recognize the capabilities of state-backed Comac in domestic Chinese markets, over the long term, but we don't see it establishing trust with foreign airlines or regulators soon enough to challenge Boeing's wide moat. The U.S. Federal Aviation Administration's aircraft certification process offers an example of challenges Comac and other would-be competitors face. The certification process takes several years and requires aircraft to pass strict testing and generate over 4,000 documents to prove its aircraft meets safety and performance standards. Certification includes elements such as aircraft design approval, hundreds of rigorous flight test-hours, and an audit of manufacturing and quality processes to ensure production reliability. After gaining certification, performance records are expected to remain flawless, or manufacturers risk long and costly groundings, like Sukhoi's Superjet in Mexico. At this moment, only one Sukhoi aircraft operates in North America because of the model's inability to remain airworthy.
We find similar barriers to entry and moat characteristics with Boeing's defense operations. Interacting and negotiating under domestic and international defense procurement is often highly sophisticated and requires time-tested expertise before sustainable returns are earned because of arcane contracting rules. Domestically, contracts are expected to follow complex cost accounting standards with which compliance can be challenging. Comparatively, international defense deals are subject to high scrutiny and intense regulation to protect intellectual property. International contracts are often pushed through the Foreign Military Sales program, then proceed like a U.S. domestic defense contract but with some distinctive features.
Steep switching costs in the form of crew training and maintenance costs often prevent airlines from flipping between major aircraft manufacturers, and high costs of failure usually eliminate newer, riskier manufacturers from airline purchase decisions altogether. This tremendous customer friction underscores Boeing's wide moat from switching costs. Airlines depend on manufacturers for aircraft support and service over the life of the aircraft (more than 20 years) and power by the hour contracts have strengthened relationships. Switching manufacturers would require incurring pilot certification and crew training costs, rebuilding spare parts inventory, modifying maintenance supplies and procedures, and ultimately consuming time for airlines that rely on tight fleets to keep networks running. Even if an airline switched from Boeing to Airbus or vice versa, long backlogs prevent a smooth transition and may erase potential savings. Transitioning to lesser manufacturers increases friction on safety and operational risks. Not to mention, newer manufacturers likely lack adequate production capabilities to service new demand. We believe Boeing checks each of the boxes for the switching cost moat source: significant monetary investment, time investment, few if any viable market alternatives, highly risk-averse customers, high industry concentration, and long product upgrade cycles.
Boeing also benefits from an entrenched position with the U.S. defense customer, a client that is typically conservative in its buying patterns and hesitant to switch to new contractors, particularly for mission-critical systems like aircraft and weapons. Areas where Boeing has won sole-source awards (not opened to any competition) include missile defense, U.S. presidential transport, satellite terminals, and space launchers. In addition, since the Department of Defense funds much of the development on major weapon systems, it would need to spend considerable amounts of money to cultivate a new competitor to Boeing.
Our fair value estimate for Boeing stands at $335 per share. We continue to forecast fewer MAX deliveries in 2019 than we had previously been modeling, driven by Boeing's decision to cut the 737 production rate to 42 per month from 52 as result of MAX groundings. In 2020, our model shows Boeing ramping production and clearing deliveries originally set for 2019. Our 2020 forecast incorporates a catch-up on MAX deliveries due to supplier inventory (suppliers are maintaining a 52 rate) unwinding once the grounding is lifted. We assume a $5 billion contingency based on costs incurred by airlines during the six- to nine-month grounding and litigation.
We project Boeing will grow average annual consolidated revenue at around 7% over the next five years, and we expect GAAP operating margins will reach just over 14% by 2020, above the 12% reported in 2018. The commercial airplanes business will drive growth over the medium term, thanks primarily to the 737 MAX ramp coupled with 787 production increases. Commercial airplanes margins will expand due to ongoing efficiency measures on Boeing's assembly lines and with the supply chain, as well as improved mix via more 737 MAX and 787-10 deliveries. Block extensions on the 787 will also boost margins significantly. We anticipate commercial airplane margins peaking at 15.5% in 2022.
We expect margins in the defense business to hover around 11% through 2021 as new program starts get underway and then begin to ramp. We forecast 12%-plus operating margins in the defense unit by 2023 and midcycle margins of around 13% for this business. Under Boeing's growing services business, we expect top-line sales will average 7% over the next five years on the back of acquisitions but yield operating margins between 15% and 15.5% during the same time.
We assume midcycle operating margins land at 14.3% compared with a five-year historical average of around 9%. We think secular growth in commercial aerospace, automation on assembly lines, a permanent shift toward higher-margin services work, and a restructured defense business will enable structurally higher margins.
Operating cash flows climb above $22.2 billion in 2021 in our model, compared with $15.3 billion in 2018. Higher profits, a burn-down of 787 deferred production, customer advances as 787 and 737 deliveries ramp, and better working capital management with suppliers (payables) drive the increase in operating cash flows. Our normalized operating cash flows circle $18.5 billion.
Commercial aircraft customers are often reluctant to renege on orders because of down payments of roughly 1% of contract value on signature and another 25%-30% tied to aircraft that are made in a phased manner about 24 months prior to delivery. Nonetheless, deliveries (and definitely orders) can vary with air travel demand.
Boeing uses program accounting, which assumes an average margin for programs. Actual costs at the beginning of a program are lower than the costs embedded in these average margins. Boeing calls the difference on its balance sheet deferred production. Deferred production and unamortized tooling on the 787 increased significantly, peaking at around $32 billion in 2015, up from $18 billion in 2012. This 787 deferred production balance has begun to decrease, and we see this continuing, which will provide a cash tailwind.
Boeing launched the 777X program at the 2013 Dubai Airshow. 777X development problems or order cancelations (Middle Eastern carriers hold 70% of the backlog) could undermine financial performance and curb future sales growth.
Roughly 35% of the workforce is unionized, and a 2008 strike caused significant disruptions to commercial airplane assembly lines. We think Boeing's transfer of some production to South Carolina represents steps into a right-to-work state and the planned acquisition of Embraer's regional jet business also gives Boeing access to engineering talent outside of Washington state.
Lastly, we'd note that defense procurement is arcane and lengthy, involving multiple stakeholders. And unless a program is under multiyear procurement, which is not typical, the U.S. Congress must approve funding annually.
Boeing is one of the largest aircraft manufacturers globally because of its willingness to introduce revolutionary products like the 747, a plane that didn't have a market when initially launched, and the 787, which made use of composites and electrical systems in innovative ways. Following the 777's launch in the mid-1990s, Boeing pursued a strategy of harvesting its existing portfolio. After a decade of no all-new aircraft development programs, Boeing became more aggressive with the 787 launch in 2004.
Following the 787, management has focused more on incremental innovation, as opposed to all-new aircraft, which typically cost at least $16 billion to develop. This is evidenced by the recently introduced 737 MAX and 777X, which are both derivatives of existing aircraft. Another stretched derivative of the 737 MAX was recently introduced, christened the MAX 10. We believe Boeing may formally launch a new, clean-sheet aircraft targeted at the middle of the market in 2020.
In July 2015, Jim McNerney handed the CEO reins to Dennis Muilenburg, who also took over the role of chairman from McNerney in March 2016. Muilenburg, a longtime Boeing employee, comes from the defense side of the business and held the COO position before taking over as CEO. Muilenburg quickly put his stamp on the company. He replaced management at the commercial aircraft unit and launched a plan to reorganize the business in order to capture more services work via an entirely new operating unit that recently began operations. Muilenburg also enjoys a better relationship than his predecessor did with the unions and has struck agreements with organized labor at Boeing.
The 13-member board is largely independent and brings diverse business experience. The firm asks its CEO and senior management to maintain stock ownership of between 3 and 6 times the value of their annual base salary to align management's incentives with shareholders'. Boeing's annual incentive program for executives is linked to economic profit, whereas its long-term incentive program awards are tied to both total shareholder returns and economic profit. We like that Boeing is using a value-creation metric for both its short-term and long-term incentives.
Following the end of strong investments in new products over the past five years, the company has become extremely active in share repurchases. During 2015, Boeing repurchased 47 million shares for $6.8 billion and paid $2.5 billion in dividends. In 2016, it repurchased 55 million shares for $7 billion and also raised its dividend 30%. During 2017, Boeing again repurchased a significant number of shares (spending $9.2 billion). Boeing also hiked its dividend by 30% in 2017 versus 2016 levels. In 2018, Boeing spent $9 billion to take 26.1 million shares off the market. We expect Boeing to continue returning a good chunk of its free cash flow to shareholders, but we do note that it may launch a new midsize aircraft in 2020 with a nonrecurring development cost that will likely land well above $18 billion.
The wildcard in all of this is the potential launch of a next-generation midsize aircraft, which would be a small wide body aimed at replacing aging 767 aircraft, while also opening up new point-to-point routes. Boeing continues to consider launching the aircraft and has stuck by an entry-into-service date of 2025 despite the tight development time frame this would entail. Although Boeing has solicited engine proposals and has floated various configurations of the aircraft by customers, management seems to be struggling with the business case. We think it's possible that Boeing's management team will be granted authority to offer in the spring of 2019, which is tantamount to a launch in many ways. A formal launch would then follow in 2020.
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