Assessing the 747 program

Since Boeing’s earnings call last week, spurred on by the Flight International and Everett Herald stories doubting the future of the 747-8 program, we’ve received media inquiries whether we think the program will be canceled.

For those who missed or already forgot our first post of 2009, the answer to this is No. We called 2009 the year of program recovery for Boeing, and this included then and includes now the 747 program. Nothing has happened to change our view.

Our post earlier this week, Keeping or Ditching the 747?, added some color and independent reporting to the stories in Flight and The Herald. We reported–as did Flight–that Boeing has run various scenarios about what to do with the program: cancel it entirely, or keep the freighter but cancel the passenger model, or slow the program down.

For those who understand Boeing’s way of doing things, running all scenarios is SOP, Standard Operating Procedure. For those who understand Boeing CEO Jim McNerney, he’s going to want all options laid out for him. This is his SOP.

Word of these studies quickly became known.

McNerney’s endorsement of the program on the earnings call was hardly reassuring. JP Morgan’s post-call report contained this analysis of the 747; the last line is noteworthy:

“747 charge a tough pill to swallow given maturity of program. While the 747-8 may end up a successful program in the long run, it appears to us today to be a low-volume program extension that mainly serves as a strategic counterweight to the A380. As a result, while high return expectations might be unrealistic, the significantly negative returns that appear likely at this stage are making the justification look more “strategic” every day. The true incremental financial costs to shareholders include not only the $685 million charge for a forward loss, but also what is presumably hundreds of millions of dollars yet to be spent on R&D and the negative carry on the heavily back-end weighted cash flow profile. These financial considerations don’t even factor in the huge distraction the 747-8 provides from making progress on the real future of the BCA franchise, the 787. Offsetting these heavy costs would be the penalties with customers and suppliers for canceling the program and the loss of the counter to the A380 (which Boeing says won’t sell much anyway). We left the call unconvinced that the case for cancellation has been fully vetted.”

We know some other Wall Street analysts continue to have doubts similar to JP Morgan’s. We also have talked to some customers for the freighter who wonder if Boeing will cancel the program. And we have talked to Lufthansa, the only customer for the passenger model, who maintains confidence that Boeing will continue the passenger and freighter programs. That cargo customers question the future of the program speaks to how low Boeing’s credibility has sunk, all driven by the credibility issues with the 787–something (credibility on the 787) Boeing Commercial President Scott Carson acknowledged long ago.

(JP Morgan calls the 747 a distraction to the 787; we view the 787 problems a distraction to the 747, P-8, 777RS, 737RS and the KC-767.)

Those who are long-time readers of this column know that when Boeing announced the launch of the 747-8, we said then we’d never been a fan of Boeing’s over-reliance on derivative airplanes but in this case, we thought it was a good strategic move to keep pressure on Airbus and the A380. (We note that JP Morgan shares this view.) The problem, of course, has been program execution, impacted by the 787’s insidious effect throughout the company.

The 747-8 is no longer a straight-forward derivative of the -400, as CFO James Bell detailed in explaining the $685m charge taken against the -8 in the fourth quarter. The -8 is almost an entirely new airplane.

So what do we think will happen with the program? We believe it will continue at a slower rate than was originally planned, given the huge drop in cargo traffic slowing the need for the airplane now. The 747-8F will be a superb cargo airplane. The 747-8I will be, like all Boeing airplanes, technically good but in a slow-selling model. Recall that Steve Hazy, the sage CEO of ILFC, long ago said he liked the freighter but not the passenger model. The 747-8I will be nothing more than a niche airplane, in our view, but one that still essentially denies an A380 sale for every 747 that’s sold.

We still think that’s a good strategy.

15 Comments on “Assessing the 747 program

  1. With the current lack of sales and a luke warm freight market, the 748 is a serious dilution of resources urgently required to put the 788 and probably more importantly the 789 on track.
    Building something to simply “hurt” Airbus in the present climate is frankly immature!

  2. “The 747-8I will be nothing more than a niche airplane, in our view, but one that still essentially denies an A380 sale for every 747 that’s sold.”

    Or…squeezes the margins of every A380 sold.

  3. It is all interesting how this A380 vs 747-8i competition keeps getting brought up. Boeing itself keeps insisting that the A380 is a niche airplane with a very limited potential.

    YET Boeing feels the need to spend alot of money on a product that will take away sales from this “niche” airplane?! When words and actions do not agree, I tend to suspect that all is not as portrayed.

    Also the only airline customer for the 747-8i is also an A380 customer who have gone on record to say that the 747-8i fills a slot for them and does not replace the A380 in any way. To them it appears to be a matter of apples and oranges.

    So until Boeing can sell a 747-8i to another airline (one that has not yet ordered the A380 would have more of an impact), this “strategy” of Boeing’s could be considered a failed one.

    Scott, your thoughts on this would be interesting and appreciated.

    Cheers,
    john

  4. I like JP Morgan’s euphimism “strategic”. Sounds much better than “basket case”.

    Even if Boeing canned the 747-8 program, I assume most freighter operators still on the list would buy the existing 747 model instead. The number of incremental sales Boeing is going to make for its large 747-8 investment is minimal.

    The strategic toe-hold in the VLA market was predicated on a small investment for a small return. Instead, Boeing will make a large investment (according to JP Morgan more than $1 billion in addition to sunk costs) for essentially no return.

  5. Boeing’s 20-year forecast is for some 900+ Very Large Aircraft (vs. the Airbus prediction of ~1,700). Boeing assumes 300 freighters and 600 passenger models, the latter split about 50-50 with Airbus (hence the long-running assumption Airbus will sell only ~300 A380s).

    If one assumes Boeing is correct and it receives a disproportionate share of the freighter market (it is the better airplane than the future A380F) AND if Boeing is correct about the number and market share for the passenger VLA, the original business case for the 747-8 was acceptable if not great, with the added benefit of squeezing Airbus. Without the 748, an Airbus monopoly for the VLA means that even with the two aircraft vying for somewhat different markets in the VLA category, the sales would have likely largely gone “up” to the A380 rather than “down” to the 777 or A350.

    Although there has been the long-running dispute between Airbus and Boeing over the size of the VLA market, it’s worth noting that in one of Randy Baseler’s final columns before he retired from Boeing, the father of the 747, Joe Sutter, predicted Boeing would sell around 700 748s–inferring a total market of 1,400, larger than Boeing’s forecast but somewhat smaller than Airbus’.

  6. It would be pretty sad for a company like Boeing to have a strategic objective of sinking money into a 40-year old program to try and squeeze Airbus on the A380 margins. A slightly better use of Boeing’s budget would be to design a new and better product.

    How many years and effort have they spent bashing the A380? Then they launch a 747 with a re-profiled wing and new engines apparently in a strategic move (does A350 MK1 sound familiar?).

    Saying that, the freighter they have is a winner! 🙂

  7. Hi Scott,

    thanks for the clarification on the VLA market forecast. I did not know about that Joe Sutter comment but did he make that based on gut instict and/or heart?

    Not knowing much about the freighter situation, could you please explain how the 747-8 freighter would be better than the A380?

    On a very basic level, I would have thought that bigger is better but perhaps there is a limit?

    Cheers,
    John

  8. John, In our view, the A380 is better for volume for something like FDX or UPS operations but the 747F is better for heavy weight, and the nose opening is an advantage over the A380.

  9. With respect to Joe Sutter, it was a throw-away comment in Baseler’s profile. No idea the basis of his prediction.

  10. A reader suggests that instead of the acronym VLA for Very Large Aircraft, BFA might be appropriate for the A380.

    You can figure out what BFA suggests.

  11. Sadly enough, Boeing does not realize their one and only 747-8I commercial customer Lufthansa (order of 20pcs and option for another 20 pcs.) now has a mostly Airbus fleet and keeps the order with Boeing desperately open to win an enormous compensation payment, once the 747-8I program will fail, respectively abandon the order in favor of Airbus A380, shortly before Boeing gets ready to deliver their first 747-8I plane.
    Either way, Boeing’s 747-8 program is doomed.

    • Mr. Steve you are right the 747-8 in going to be doomed and lufthansa is just waiting to get his compensation …Boeing better stop waisting his money and invested on other project.

      VIVA EUROPA VIVA AIRBUS

      nice talking to you

      ciro caprioli

  12. So in both you gentleman’s estimation do you believe the future of the 747-8 is dismal at best ? Do you believe that program will fire on the vine by 2017-2018 ?

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