Sam Pearlstein, the aerospace analyst at Wells Fargo, predicted a production rate cut today in a research note for the Boeing 777.
An announcement could come as early as this year, he writes.
Pearlstein, one of our favorite aerospace analysts, reached a conclusion similar to one we came to a few months ago: Boeing won’t be able to sustain the current production rate of 8.3/mo to bridge the 777 Classic to the 777X, which has a planned entry into service in 2020 (Boeing would like to advance this to 2019).
Pearlstein initially predicts a rate cut to 7/mo, followed by another to 5/mo. We believe a cut to 5/mo will be required, though a “step-down” rather than a “leap-down” along the lines Pearlstein suggests is certainly possible and would be in keeping with Boeing practice.
Analysis. We estimate Boeing will need to see demand for 600 777s (i.e., six years at 100/yr) to sustain current build rates until the 777X is available. Our analysis suggests Boeing could come up ~125 units short of this target. This conclusion is highly sensitive to assumptions of global capacity growth, aircraft retirement rates, and competitive dynamics with the Airbus A350-1000. In other words, actual demand could be somewhat better – or worse – than our forecast.
Rate Cut Likely. Assuming our estimates are reasonable, Boeing will have to cut the 777 build rate – with an announcement possible as early as year-end. We would expect the initial cut to revert back to the previous 7/mo; should the order skyline continue to show a large gap, a subsequent cut to 5/mo is possible.
Boeing CEO Jim McNerney said on the 1Q2014 earnings call that he believes full rate production can be maintained to the 777X EIS when current firm orders, options, letters of intent and sales campaigns are considered. We don’t think so.