777 production rate cut likely: Wells Fargo

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.

Pearlstein writes:

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.

38 Comments on “777 production rate cut likely: Wells Fargo

  1. I do wonder that people get paid to put stuff like that out.

    “I predict they may be building too many or maybe not”. That is really going out on the proverbial limb.

    Somehow I think Boeing with all their issues has that figured out as well despite McNerney moving his lips.

    • Transworld, you saw that, too? I quote “in other words, actual demand could be somewhat better -or worse- than our forecast.”

      What? So in other words, you have no idea so you want to play both sides of the fence, so you come out looking correct no matter how it turns out?

      I need to get in the airline analysis business if people PAY for such “demanding” and “hard hitting” analysis.

  2. “This conclusion is highly sensitive to assumptions of global capacity growth, aircraft retirement rates, and competitive dynamics with the Airbus A350-1000”

    Boeing itself seems to believe the A350-1000 will effectively kill the 777-300ER. The board wouldn’t greenlight such an extensive overhaul of a design for pure love of engineering. No matter how much their engineers would love that 😉

    If you have the choice to keep your old planes that wee bit longer without running out of cycles, where is the business case? Why would an airline want to retire an aircraft to replace it with a design that is already becoming economically obsolete?

    If can’t get hands on an A350-1000 yet and if you can’t wait, you’d order a 777-300ER. But then again, why buy that beast when you could lease it for 10 years, then switch to an 777-9 or a A350-1000 with some PIPs later? Let the leasing companies worry about the dismal resale value in 10 years.

  3. There are 352 unfilled 777 orders. 250 Further 777ER orders required until 2020. 6 777s ordered sofar in 2014.

    • X cuse me, of those 352 777 orders, 66 are 777X. Why is EK hesitating so long?

      • Aren’t the A350-1000 and 777-9 (10 abreast) be expected to be similar in seat mile costs? In that case it may be just prudent to wait and see how the A350 performs in service.

        EIS is not far away and there’s always a chance that it performs much better than expected and originally guaranteed. If that happens, competitive pressure on Boeing would be much higher and you could get much better performance guarantees and pricing from Boeing.

        If the A350 performance is not better than expected, you’d have at least elliminated the risk of not buying the superior product offering. The only remaining risk then is Boeing failing to honor their performance guarantees. But you’d at least get compensation in that case.

        If slot availability is no issue there is really no reason to commit early.

        • The B-777-9 will have 407 seats (3 class), carry 48 LD-3s and fly at least 200 nm further than the A-350-1000. The A-3510 only seats 315 (3 class), and carries 44 LD-3s. The B-779 is only 2.62m longer than the A-3510 yet has about the same wingspan at the gate (wings folded).
          The 250 unfilled orders are only for the B-77W, the B-77F has another 42 unfilled orders and two more for the B-77L.
          The B-777 line suffered a slow down in deliveries before, as did all aircraft types in the 2002-2006 time frame as orders slowed after the 9/11 attacks.
          The A-3510 only has 189 total orders, and the A-350 line is sold out until at least 2020.
          Assuming the A-3510 certifies and EIS in mid-2016, and the B-779 EIS can be successfully moved to 2019 (Boeing is hoping they can do this but are staying conservative with the 2020 EIS schedule), that is only a 2.5 to 3.5 year gap between the two.
          Don’t forget, LH was the first airline to order the B-779, and is the launch customer.

        • I think Randy asked the Boeing management team to look each other in the eyes deep and loudly repeat “10 abreast is fine for airlines on 777s doing 10-15 hour flights”, 10 times. And now its part of the strategy. Passengers just don’t understand industry dynamics and must stop whining.

        • I’m struggling with the maths on KT’s post – the A3510 is only 2.62M shorter than the 777-9 but the latter but seats 92 more pax? That is three extra rows of Y (30 seats) and one extra per row at 10 abreast – are three really 62 more rows of Y seating?

        • ” The A-3510 only seats 315 (3 class)” – KC

          I hope that’s a typo…

        • If you got that number from wikipedia, that table is totally messed up. The A359 seats 315 and the A351 seats 350+ in 3 class layouts.

        • If you’ve noticed KC’s posts, he tends to fudge up Airbus’s numbers A LOT. Intentionally to be misleading? I’m not sure yet.

      • I could be wrong but I am inclined to think that they are wrangling over the pricing of the order. GE is already doing wind tunnel testing so it shouldn’t be about performance guarantees. But then again it could be the case.

        Those extra 250 frames might be hard to come by since it’s becoming clearer and clearer that the A351 is closing the gap, as it should. The saving grace for the 77W would be a bridge to a 778/9x order or a handful of other pocket orders like the one announced today. Besides the RFP from DL, I see no domestic carrier possibly buying the 77W. Perhaps Boeing has some surprises waiting for us in Farnborough and in Dubai.

        What stands out to me is that I personally thought it (the A351) would’ve been a better seller by now on the merit of better economics and newer technology. We’ll have to see what pans out.

  4. I’m curious if the production rate slows down and the deliveries are postponed, is there any compensation need to pay and how to deal with the followed flow shop stuffs cut?

    • I think in Europe most companies nowadays would try to keep most of their staff or would be negotiated by the unions to do so. They know they’ll need them in 2-3 years and it’ll be hard to hire new people because the overall active work force is shrinking.

      This is the main reason germany sailed through the credit crunch so fine. Everyone just sat tight and waited, hardly any layoffs. The state offensivly subsidized much of that, but still. When demand recovered, it was just a matter of days to recall the full workforce and get production into full swing.

      In germany that’s a result of a learning process that started some time ago. The unions at the large german motor companies negotiated a reduced working time to prevent layoffs in the last crisis way before the credit crunch.
      Airbus’ first solution for their last crisis with their famous “Dolores” plan was to cut staff numbers and close facilities. In the end the unions “convinved” them to just reduce work time and wait for the next upturn, which worked just fine for everyone.

      Not so sure about the US companies, however. If Boeing is any standard they’d probably just let-go the surplus staff and worry about re-hiring and re-training when the 777-X is there.

      • Thanks~(๑•ᴗ•๑)
        So it means people get less salary with shorter working hours? Well, after the first A350 delivery the manufacturing should be recovered and they finally come to this moment. Cong~
        For the Boeing, as known it has faced workforce conficts for a while…I was always having a feeling that the threat of B777X leaving Seattle is only a smoke screen in order to request more benefit from both gov and employees because they had confidence that they won’t be rejected finally.(Though first time the mechanic union vote no, the only consequnce is next voting and there is no differences for the final results as I thought at beginning.)Keeping the workforce and cut the cost ,very smart really. However, the relationship damage is not good actually…(•﹏•๑)<——Enjoying game theory now
        I don't remember exactly but are they seem to layoff the engineers right now while not the mechanics?

      • For longer periods the unions would try to negotiate a contract where you e.g. work 80% and get 90% salary.

        But in economic crisis german companies can (unilatterally) reduce your work time for a short time by factor X (up to 100%). You’ll then earn factor X less.
        But you will get 60% of the missing netto salary from the federal state. It’s called “Kurzarbeitergeld”. Taking into account deduction for taxes and compulsary social insurances you’d otherwise pay (which is nearly 50% of your income) you don’t loose more than 20% of your income.
        You can get “Kurzarbeitergeld” up to 6 month. The federal governent can decrea to increase that to 24 month, however.

        Most industry contracts nowadays include provision for a time conto.
        You will earn hours in peak times by working overtimes. You could use them later to retire early.
        In an economic crisis you can burn those hours plus 4 weeks of yearly leave entitlement. That can bridge some months. Plus you can drive that conto below zero (up to some pre-negiotiated threshold), then refill it when demand recovers.

    • At least it happened in testing, not after certification, and anyway, what are tests for?

      • That is not correct. If you are going to blow an engine up, it should be in the engine mfgs (P&W in this case) hands, be it in a test cell or on their test aircraft (747 I believe). And it should really not be on the airplane, it should be test cell and early, not late. There should be no blowups after it leaves the test cell.

        Once its on a customers aircraft, the testing is not intended to blow them up, its to confirm they work right, meet performance specs, controls operate, com, wires and pips hook up, bleed air works.

        This is bad news for P&W, they can hope its bad assembly or components but these are hand built and thats definitely not good. You would think it was an early hardware issue rather than design, but stay tuned.

    • FTV1 has less than 100 hours of flight testing under its belt while PW’s own test engines have accumulated thousands of hours of testing including under more rigorous conditions. At this stage, it seems more likely to be a manufacturing issue rather than a problem with the gearbox design IMO. We’ll see.

  5. keesje
    I think Randy asked the Boeing management team to look each other in the eyes deep and loudly repeat “10 abreast is fine for airlines on 777s doing 10-15 hour flights”, 10 times.

    I think Leahy asked the Airbus management team to look each other in the eyes deep and loudly repeat “passengers will pay more for a seat that’s a thumb width wider”, 10 times.

    • “I think Leahy asked the Airbus management team to look each other in the eyes deep and loudly repeat “passengers will pay more for a seat that’s a thumb width wider”, 10 times.”

      Wouldn’t you, for that thumb width difference?

    • I guess Leahy thinks differently. “We can offer them comfartable 9 abreast. We sold 9 abreast on A330. If our costumer likes 10 abreast, who I am to blow against the wind.”

      • Also the math is not so simple. It is one thumb for every seat but this means the person in the middle seat has three thumbs more space and the two persons left and right habe 1.5 thumbs more space.

  6. http://i191.photobucket.com/albums/z160/keesje_pics/Boeing777-10XConceptfeb14_zpsdf3d7445.jpgttp://i191.photobucket.com/albums/z160/keesje_pics/Boeing777-10XConceptfeb14_zpsdf3d7445.jpghat Boeing should and hopefully will do, is pulling forward some of the 777X enhancements. The new wing/engine is for the -X, but weight reductions, cockpit enhancements, winglets, cabin options, GE90 PIPs, generous Ex-Im financing could help narrow the gap.

    Still I wonder, if the OEW difference with the 350-1000 is really 30+ tonnes and social mediaand surveys keep telling all, 777 /10 abreast airlines better be avoided, how e.g the 777-8x will sell. Maybe this time it is not too late for Boeing to adjust the strategy, reduce CASM and set the 777x apart in capacity, also using real world seatcounts.

    http://i191.photobucket.com/albums/z160/keesje_pics/Boeing777-10XConceptfeb14_zpsdf3d7445.jpg

    • For a plane that size, a 3m stretch isn’t a whole lot, is it? Is it really worth the development for a 27 seat increase in capacity – the kind of capacity increase you’d find appropriate for narrowbodies. Too close to what the -9X can do, IMO.

      • If I was Boeing I would skip the -8 and go for optimized 9x and 10x. After that a new bigger wing for the 787-10 and possibly -11 would be on the agenda. The 787-8 wing on the 787-10 makes it unsuitable for the key cargo heavy “from Asia to ROW” markets. Giving the 350-900 a free ticket.

        • But still, the -10X will need to be stretched more than 3m to set it apart from the -9X. A 27 seat difference is too small to justify having two planes of that size.

        • A 777-9x would be 8 m longer then a 787-10 and have 1 more seat per row in the back. Giving it 70-100 more economy class seats. And the capable A350-1000 positioned right in the middle of that.

          Stretching an aircraft over 80m puts it out of a agreed upon 80×80 box, related to airport infrastructure. OEM’s sofar avoided that.

        • “Stretching an aircraft over 80m puts it out of a agreed upon 80×80 box, related to airport infrastructure. OEM’s sofar avoided that.”

          Therein lies a dilemma. Even though the agreed box is 80×80, Airbus has stated that you can stretch an aircraft to 85m if airports are willing to spend on some modifications to airport infrastructure, but beyond that, the costs will rise significantly.

          As an alternative, Boeing could have kept the -9X at the 77W size and turned it into the ultra-long haul version, while doing an 80m -10X. The -8X ought to be scrapped for a longer range 787-10 and possibly the -11.

  7. Say the price of a 777x will be 20 million more per aircraft than a 747-8, will it save that much more in fuel?

    • Consider – in addition to fuel costs – maintenance costs, crew costs, airport fees, resale values, demand for the particular plane etc.

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