777 decision may come before 737: JP Morgan

Joe Nadol, the aerospace analyst at JP Morgan, this week opined that Boeing may make a decision on the 777’s future before that of the 737.
Here’s what he has to say:
Boeing faces two critical development decisions in the coming months: one on the 737 (re-engine, replace, or defer) and one on the 777 sized aircraft category. Most recent industry commentary has focused on the 737 and whether Boeing will develop an all-new narrowbody, while the 777 issue has faded into the background. Both markets are clearly important, and Boeing must ultimately reach a narrowbody decision, but we believe the company will first address the 777 market. In this note we walk through our reasons, which fall into two categories: the first is the competitive landscape, which we believe requires action on the 777 first and makes 777 a better investment; the second is technology, which we believe dictates that a new larger aircraft will generate more value than a new smaller one. These decisions will impact the first two of Boeing’s three major EPS drivers over the next 3-5 years: the sustained level of R&D, the 777 production rate, and 787 margins.
  • *  Boeing still needs an answer to the A350XWB. Airbus launched the current incarnation of the A350 in mid 2006. Four years later, Boeing has yet to respond, and while some sort of A350 delay looks increasingly likely, the aircraft is still scheduled to enter service only 3 years from now. Two A350 variants—the -900 and the -1000—are aimed directly at the 777 and have enjoyed success thus far. The 777 backlog peaked in 1Q08, not long after the launch of the XWB. The A350’s impact on 777 demand has so far been most pronounced on the -200, for which backlog has dwindled to 35 aircraft from 90 in mid 2006, while Airbus has racked up 273 A350-900 orders. 777-300ER orders have held up better, and A350-1000 demand has been more contained, but this could easily change as the 2015 planned entry into service draws nearer and more detailed specifications begin to firm up.
  • *  737 backlog does not look that vulnerable; 777 backlog does. With 2,000 737s in backlog, or 4.8 years of production at the planned 2012 rate of 35/month, we believe Boeing has ample time to prepare its next narrowbody move. We see a more urgent need for action on 777, which was the only Boeing or Airbus platform in serial production to see a rate cut during the recession and which still looks like the weakest link in backlog. The ~270 777s on order amount to only 3.2 years of production at the expected 2012 rate of 7/month. We could see this slipping below 3.0 years by the end of 2011 vs an average of 4.4x next year’s production since 1995.
  • *  More competitive narrowbody market means lower return on investment. We see Boeing’s development dollars as better directed toward the widebody market, where it competes only with Airbus, rather than the narrowbody market, which could include six competitors by the middle of the decade once the Bombardier CSeries, Chinese C919, Russian MS-21, and potentially a larger Embraer offering get off the ground. All these competitors are state subsidized or supported to some degree, and some, such as China’s C919, should receive preferential treatment in sizable home markets. Regardless of what Boeing does, the days of a cozy narrowbody duopoly are over. Boeing is likely to see narrowbody market share shrink and face more intense price competition, and we expect the return on developing a new aircraft in this category will be lower. Ultimately Boeing must offer a new or re-engined narrowbody to defend its position in a more competitive market, but when weighing what the highest-return and best use of the next investment dollar is today, the widebody option looks more appealing for investors.
  • *  Composite technology scales up easier than it scales down. Either a new 777 or a new 737 will include more composite content than legacy models. However, the size and thickness required for certain composite structures—such as parts of the wings—mean they lose much of their weight advantage on a smaller aircraft. This issue drove Mitsubishi Heavy Industries, which manufactures the 787’s wings, to abandon composite material in favor of aluminum on its own MRJ despite the resulting costly delay to the program.
  • *  Widebodies can better leverage the lower weight of composite material. Because they fly only one or two long routes per day and spend more time cruising, widebodies derive greater benefit from lower weight than narrowbodies, which undertake multiple takeoffs and landings per day and fly shorter routes.
  • *  A new narrowbody could require more investment in physical plant. The supply chain for a new narrowbody must presumably accommodate 35-40 aircraft per month, whereas a 777 replacement will likely have capacity in the high-single digits to perhaps 10/month. 787 technology is highly capital intensive (such as the autoclaves and the mandrels), and the physical plant is not very scalable, meaning that a new narrowbody could be far more capital intensive.
  • *  Future R&D hinges on 777 and 737 decisions. The 787 and 747-8 have kept BCA R&D running at an elevated ~$3 bil since 2007, and investors expect a decline as these platforms conclude development. Boeing forecasts a drop of at least $500 mil in 2011, but R&D beyond that will depend on how management addresses future development program. We have a hard time seeing how R&D can fall much further than $2.5 bil if Boeing opts for simultaneous development of a new 777 and an all-new 737, and we could even see it moving back toward $3 bil if management pursues this course, which could put pressure on the earnings outlook. Management has indicated that it does not expect to have to address 777 and 737 development simultaneously, and approaching them one at a time would allow falling R&D to provide a bigger earnings boost. If management chooses this path, we believe revamping the 777 will be the top priority.

36 Comments on “777 decision may come before 737: JP Morgan

  1. It appears that Joe Nadol understands the issues facing Boeing very clearly and has outlined the issues correctly.

    I would also agree with his prediction

  2. One of the better explained and analyzed work in a while….

    I think the B777 program needs a “go”…I’ve been incessantly stating that the A350, especially the A359 has been eating Boeing’s B77E’s “lunch”..I’ve posted this comment on various boards numerous amounts of times.

    • I agree, given the huge backlog of the 737 product line, they can afford to wait, 777 looks more urgent. They are probably looking at how that will affect the future stretch of the 787, ie -10. Interesting times ahead. Both Boeing and Airbus have some important decisions to make in 2010.

  3. Falling back on the 787 as the way forward may be more interim rather than long term & looks increasingly risky.

    The 747-81 certain short production life demands Boeings emphasis must move to replace the 777 & 747-8i with a more credible commercialy viable long haul varient, that seems destined to have four fans.

    With A380 economics & subject to the A350 meeting performance guarantees I project that gives EADS at least a ten year lead in long haul high capacity.

  4. The analysis misses the heart of the situation. Boeing doesn’t want to replace the 737 right now. It’s got a huge backlog for the current model. The decision is being driven by Airbus, because whatever Airbus does regarding re-engining will require a counter-decision by Boeing. Boeing is not going to cede the narrowbody market to Airbus.

    Meanwhile, the only reason Airbus is talking about changing the A320 family because of the CSeries. Bombardier is what is driving the worry right now, so to point to Boeing’s management and tell them all the advantages of going with 777 is like preaching to the choir. Of course they’d like to offer a 777 replacement. But they have to wait to see what Airbus does first.

      • Not to the point where they’d be talking about a new model now if Airbus hadn’t started up with talk of re-engining the A320.

      • I see, then maybe you have not come across the fact that Boeing had formed a 737RS study group back in early 2006 with several years of preparation work before then. Certainly much earlier than the c-series launch and Airbus apparently crying ‘wolf’ about it.
        http://www.flightglobal.com/articles/2006/03/03/205223/boeing-firms-up-737-replacement-studies-by-appointing.html

        The fact that there has been more talk about the re-engine programme is because Airbus and perhaps Boeing want to capture technologies available for a true RS programme, towards the end of the decade. My personal preference is for an open rotor 🙂

      • Years ago Boeing was talking about having a replacement model in service by 2015. Then they decided that the replacement model done in that time frame would not offer the level of efficiency improvements airlines were telling them they needed in a new aircraft. At the same time the backlog for the current model 737 kept growing. So the talk of a replacement eventually got pushed back into the 2020s.

  5. Right now AB is getting close to firming up the 350’s, Boeing is getting the Flight Test info from the 787. In a year or so, a lot of really good data and lessons learned will be available AND additional time for tech to mature.

    In the NB, AB has not committed and firmed up any plans, and the others are now pretty well locked in. Putting this after the 777 seems the best approach to have the dominant plane, remember the 777 was 3rd to market.

    There is all of that 787 tech that could have a lot of commonality into the 777.

  6. Mr. Nadol seems to assume that the only way Boeing can compete against the A350-900 and keep the lucrative 772-ER mkt is to replace the 777 and therefore it must defer replacing the 737. There is another choice: Attacking the A359, which has 314 seats in standard 3-class, by bracketing it with the 787-9 with 290 seats and -10 with perhaps 330, (2) improving the -300ER to blunt or defeat the A350-1000, and (3) building a new 737 before building a replacement for the -300ER.

    Albaugh said very clearly at his last investor conference that the -9 would compete head/with the A359. He even likened the competition to that between the -300ER and the A346. I assumed therefore that the final -9 would have 300-310 pax in standard 3 class to compete with the A359’s 314 seats. Not so, as it has turned out. The -9 will have 250-290 in standard 3-class, I think depending on whether the tourist section is 8- or 9- abreast.

    Boeing’s web site makes clear that they have signficantly redesigned the -9 to greatly increase its MTOW; ie it is not a simple stretch of the -8 which maximizes the capabilities of that air frame. It is intended to support a significant increase in weight beyond the -9’s without any more major structural changes. Albaugh hinted at this when he said the -10 would be a simple stretch of the -9, and implied that Boeing’s goal was to create a 787 family with the three variatnts.

    If Boeing succeeds in creating this family, with signigicant commonality thruout (eg common cockpits one pilot can easily transition to all of them), then the A359 will be competing against a family which will include the -8 for which AB has no competitor. Airlines wanting the -8 will have a substantial commonality incentive to buy the -9 and -10.

    This also means that the only competition against the 777 is the 350-1000 v -300ER. This is the way Boeing wants it because they can do well against the -1000 because the -300ER already out performs it in freight and has a wider fuselage, unlike the 787. Boeing will need only to improve the -300ER to keep it competitive until the need for a replacement and new tech make that worth while. This means that Boeing, from their view, ahve plenty of time to replace the 737 first.

    • so you think that Boeing should
      use “commonality” to compete against
      Airbus, the inventor of commonality ;-?

      OK, inventor of.. probably is a bit overboard
      but you get my tangent ?

  7. Good article but a revised 777 is likely to include a stretched version and what effect this will have on the 747. Range is another area the air framers have not included in their future planning

  8. @Uwe..

    I certainly dont’ get your “tangent”…Mr. Dye was speaking of commonality within the 787 fleet. That already exists with the B777 series. Nothing new there…

    • Sure,
      but would that be usable as a competitive advantage over Airbus
      providing Boeing with a unique selling proposition?

  9. This implies Boeing doesn’t have anything useful to do in the short term in updating or replacing the 737. They have probably decided that re-engining won’t work for the 737. And they’ll hang fire on the replacement while run down the backlog and see how the engine technologies mature.

    I wonder what Joe Nadol means by “action on the 777”. Is this an upgraded 777 or a substantially new plane? Also what role will the 787-10 play, if any?

    I doubt Boeing is less concerned by the CSeries than Airbus (Rpx, July 9). Unlike Airbus, they don’t think they can do anything about it in the short term – because they probably won’t do a re-engine. Airbus have another specific reason for re-engining, beyond taking on the CSeries and a general improvement in their product. They want the A321 to get more of the capabilities of the 757 so it can act as a replacement for that plane.

    • If the water is well over your head stretching your neck a bit is of no consequence 😉 OK.
      But Airbus pulling “757 like usage” over to the dark side should give Boeing
      some heart palpations.

      Was recent disinterest in the 757 due to
      everybody having one on credit already and paying off the dept,
      the usage pattern going away,
      waiting for dreamliner
      or thanks, waiting for that fuel sipping version?

  10. Some random thoughts:

    Scott – As I heard Albaugh, he said that the 787-9 with 290 seats would compete head/head with the A359 with A314. Any thoughts on what he meant given the 24 seat dufference?

    Boeing will NEVER go the uge expense of building a
    new plane to replace the 772ER. They will take their chajces with some version(s) of the 787.

    Mr. Nadol also ever looked the fact that Boeing have 191 orders for the -9, altho AB’s succes with the A359 is obvious.

    Albaugh was crystal clear that Boeing wants to build a family fo 787s, altho he did say that they were not now considering how to design the -10.

    To me, the question is which air framer is offering the better family, Boeing with 8000 mile range and seating between 223 (-8) and ,330-40 (-10?) or AB with similar range and seating between 280 (A358) and 350 (-1000), because each would liked to sell them , andhasd ahd somesuccess.

    Then there are the failures; eg. United’s weird buy of 787-8s and A359s, apparently to replace 747s. United decreed that it would never need a VLA even tho they are large operator of 747s.

    This illustrates I think how much each customer’s decision will likely be based on its own unique criteria. British Air for example bought -9s to replace its 767s (replacement of its 772s was not in its RFP), and at the same time also chose a few A380s to replace some of its 747s.

    The one certainty seems to be that the mariket is so large that there will bes plenty of orders for both companies.

    • “A314”? A typo? We presume you mean 314 seats.

      Early on Boeing suggested the A350-900 should be compared with the 787-9 rather than the 777-200 (for reasons we never fully understood, except by the “9” in the names), in which case Boeing would make the argument that 787-9 was more economical since it was smaller. True enough, but the seating and pricing is more in line with the 777-200.

      No sale with us.

      • I think smaller airlines that have invested in the 787-8 but also want a number of bigger planes, may stick with the 787-9 for reasons of commonality, even if they are slightly smaller than ideal. Having said that, a fair number of airlines have bought both the 787 and the A350 – perhaps more than Boeing were expecting.

    • “To me, the question is which air framer is offering the better family, Boeing with 8000 mile range and seating between 223 (-8) and ,330-40 (-10?) or AB with similar range and seating between 280 (A358) and 350 (-1000), because each would liked to sell them , andhasd ahd somesuccess. ”

      AIUI a potential 787-10 with the seating numbers you indicate would be no simple stretch anymore, if you want to preserve the range? At which point it maybe a smarter investment to look at a replacement 777, and leave the 787 with the -8 and -9, since even the -10 will still not cover the A350 seat bracket completely.

      Also keep in mind that when you are comparing the 290-seat variant of the -9 with the 314-seat variant of the A350-900, you maybe comparing 2-class to 3-class layout. Boeing doesn’t say, while Airbus is explicit. In 2-class the A350-900 would presumably have considerably more than 314 seats. The A340-500 goes from 313 seats (3-class) to 359 seats (2-class).

      Finally, when comparing seat numbers it is also important to keep in mind the differences in lay-out. Airbus uses F/C/Y 62/40/32″. Boeing uses 61/39/32″. On the larger planes that means you might lose up to a row of economy seats.

      In other words, I am with the moderators. Boeing may claim the -9 competes with the -900, but that doesn’t make it so.

      • I erred. The seatings for the -9 at 290 (see Boeing web site) and the A359 at 314 are 2 class. See Max Kingsley-Jones’ superb piece 7/13/10, “FARNBOROUGH: The A350’s Race Against Time,” www/flightglobal.com.

        Boeing have been talking about a simple stretch of the -9 to -10 for a long time, trading range for seats. Mike Bare referred to it at the Potemkin role out, opining that it would be very effiicient. How much range would be traded is likely uncertain until Boeing master weight reduction, but what ever it is, the -10 will still be very long ranged. My question is, what wing would the -10 use? Can it use the -9’s? Probably because “simple stretch” would not be so simple if the -10 required a new wing. I think Boeing are thinking now about a stretch like the one from the 772 to the 777-300 for starters, with perhaps a new wing and much higher performance to follow.

        Re A320 re-engining, RR is urging that new planes be offered instead. Flightglobal, 7/14. This may give Boeing the chance I think they want to build a new 737 replacement before replacing the -300ER, but only after the have run thru their huge backlog; ie by 2018- 2020. My guess is that Boeing’s concept is to delay -300ER replacement as long as possible into the 2020s so they can take advantage of mature new tech to create a 2-variant family that will replace the -300ER and the 747-8i, but ONLY AFTER running thru their 737 backlog and offering a replacement.

        All this depends in part on whether Boeing can compete with the -1000 with a -300ER improved. I think they can. Remember this mkt is small compared to the 787/A350 mkt, and Boeing can mkt the new -300ER to the many airlines that already operate it by arguing that the commonality beween the two increase their efficiency in comparison to the -1000. Boeing can also argue that it is far better to buy the improved -300ER and wait for a new tech replacement in the late 2020s than buy the -1000 which that replacement will eclipse.

        As for reports fot he death of the 788, they are greatly exagerated. Witness Alan Joyce’s effusive endorsement when Qantas announced that they would be moving up -8 delivers for Jet Star, and equiping them with 313 seats!
        He referred to the -8 as an ideal point/point, medium density, long/medium range, plane. See Geoffrey Thomas’ piece, 7/15/10, http://www.atwonline.com. eath Uwe’s hopes for a -8 demise notwithstanding, I think his real concern is that Boeing got the 788 pretty much exactly right, and AB did not get the A358 right, and they are bing hurt as a result.

  11. To: FF2 on July 12, 2010 at 8:22 am

    The “more attractive” proposition or contigency planning, hedging? Some Airlines may feel that they have been trapped into a marketing ploy.

    If we look at the snitches that accompany Boeing’s
    Dreamliner qualification process I wouldn’t be
    too surprised if those continue well after EIS into
    active route flying.
    Too much Oh, we did it again!

    • I’m not sure. If you definitely want a smaller aircraft (as well as efficient, modern and with a decent range) then your only option is the 788. On the bigger sizes you have more choice. In this respect, Boeing has the the advantage.

      • Ok, but it looks like the 788 will be the odd kid out
        always lagging a bit in the family.
        Or will Boeing do a complete revamp backporting
        most improvements that now go into the -9 version?

        Q:
        How much money has Boeing sunk into Dreamliner
        developement ( compared to the planned effort ).
        How much money have the risk sharing partners sunk
        over budget. How will Boeing on one side and the rs partners
        on the other hand perform in recouping these outlays?
        i.e. was Boeing able to offload without remedial compensation
        most risk onto partners, having a plane on the cheap independent
        of the problems arising?

      • I agree, the 9 will end up as the definitive model for the 787 – a bit like the 767-300 versus the 200. But Boeing has been hugely successful in selling the 8 variant, not least because it addresses a major market need. When owners of the 787-8 look to buy bigger planes, they will inevitably be tempted by the 9 model, which is an even better plane, as we have just said.

        To some extent, A350-900 owners can trade down to the A350-800, but it’s a lot harder sell – because customers normally trade up and because you are going from the optimized to the less optimized one.

        Trading from A350-900 to the A350-1000, though, has a lot of potential. Although the A350-1000 hasn’t sold in great numbers yet, it’s a case of watch this space. This is, I think, the threat to Boeing. But having said all that, I believe Boeing is ultimately in a better position than Airbus because Airbus will more or less concede the sub 300 widebody market to Boeing. But Boeing can do serious damage to Airbus in the 300 plus sector with its 777 replacement.

  12. While the B789 will sell in excellent numbers moving forward…1)The B788 has outsold the B789 in >3.5:1 ratio. The B788 is the best plane in terms of capacity to replace the B767 and the A332 series. The A358 is a bit larger than the B788. The B789 and A358 are the closer of the 2 comparison.

    I fail to see how the B788 is the “odd kid out” and “lagging” with 675 sales? Maybe someone can explain that to me???

    • fail to see…
      reading comprehension!
      The -8 is a Mk1 787 version and englishmen say never buy a Mark 1.
      ( But all those buyers bought it before they realised that they would buy more of a Mk0 version than the next big thing after sliced bread.)

      It has all the ?little? imperfections a manufacturer introduces into a for him new kind of product(ion). MHO the only remedy for Boeing would be to backport all those things that will be done right on the -9 to the -8 resulting in a -8NG.
      But do they have the time or money?

  13. @Uwe:

    I have no idea what kind of unintellectual pablum you’re coming up with.

    You stated the B788 “will be the odd kid out” (regardless of what Mk its going to be)…my comments CLEARLY proved your points incorrect.

    Its a well known fact the first batches of plane won’t be a top performer as the plane will be increasingly optimized as time goes on-thus carriers getting better deals etc.

    Funny that one of carriers with one of the largest B787 orders actually wants their B788’s as soon as possible. Hmmm…maybe they should be getting advise from you instead (so Jacobin777 says in a very sardonic tone)…

    If you want to be truculent and make yourself out to look ignorant then be my guest, I’m not going to bother.

    Kind Regards..

  14. The only reason Uwe’s view could become true would be if there were mass conversions from the -8 to the -9 or mass cancellations of -8s. If there aren’t, and even if not a single -8 is sold from today, and assuming Boeing captures half the market of about 5,000 planes (from memory, I think that is the number bandied about) over the live of the 787 it would still have done very well, accounting for about 25% of the total that Boeing will deliver in this segment of the market. I can’t see anyone getting upset about that.

    • Well, my impression is that the -8 as presentend for certification
      at the moment will have a plethora of differences beyond the
      scaling in components relative to the -9. and in comparison a -10
      version will be difficult to discern as a nearly indentical twin of the -9.

      Additional orders in the last 2.5 years where not able to compensate
      for cancellations. Some customers morphed their order to -9.

      It is not obvious at which point in time the decission windows closes for
      customers to cancel or morph their order. Currently most stay the ride
      while receiving/accumulating compensation.

      Some customers are in dire straits, not able to adapt their fleet management.
      They will take the planes with all limitations just to have planes available.

      Everything depends on real world data available. That will not come about before
      EIS plus a couple of month.

      • I think this is all very speculative. I would also suspect that customers know substantially more than the great unwashed about the performance of the plane, based on flight tests thus far, and that they seem to be okay with it, judging by recent news about accelerated deliveries etc. So I wouldn’t hold my breath while waiting for the -8 to turn into a failure. You’re likely to be blue in the face long before that happens.

  15. To: Andreas on July 15, 2010 at 2:26 am

    Isn’t that what most are here for: speculation ;-?
    ( and maybe a teeny bit of astro tufing on the side
    for some )

    Now I don’t expect the -8 ( or any version of the 787 to be a failure, not by any means. but it will go into popularity “finetuning”.

  16. To: Christopher Dye on July 16, 2010 at 3:19 am

    Quantas gets 15 -8 and 35 -9 787
    And they seem to be under some pressure to
    replace their 767-300.

    First delivery used to be 2008, then partly canceled and pushed back to 2014, now freshened to 2012.
    And they go into a round robing exchange with Jetstar, with 330 going back to Quantas relieving 767-300 there.
    ( who’s delivery will this displace? Anybody with a valid picture on delivery shuffling?)

    If we return to the assessment I actually made that the original -8 will be the less popular version
    I don’t see this as invalidated.

  17. Uwe – Perhaps less popular but far from dead. One rumor in support of your view was on http://www.Fleetbuzz.com about a month ago in a discussion about the A350. A blogger claiming to work for Delta Airlines said Delta would order more than 100 -9s once they and Boeing had worked out issues relating delivery slots for Delta and perhaps others (Qantas?) arising from Delta’s cancellation of all of Northwest’s -8s. If I recall correctly, he also said American Airlines would be placing a large -9 order once they worked out issues with their pilots.

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