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.