Air France-KLM defers 2015/16 777s, cites poor financial results, low fuel prices

Dec. 18, 2014: Air France-KLM said today that it will defer delivery of 10 Boeing 777-300ERs scheduled for delivery in 2015/16 due to lower than expected financial results and because the current fuel price environment makes taking the airplanes less compelling.

This is the first high-profile deferral that we know of citing the thesis we’ve been talking about: that the current fuel price environmental threatens the Classic wide-body airplanes (as opposed to the next generation of re-engined, new technology aircraft).

Bloomberg News has this report. The key passage:

The carrier had earlier planned to take about 10 Boeing 777s in 2015 and 2016 and will now look to postpone those deliveries, the CFO said. One reason the airline can afford not to take the new planes is that the lower oil price reduces any gains from having more fuel-efficient aircraft.

Today’s 777 Classic is only marginally more fuel efficient than earlier models. As David Strauss of UBS Securities noted in a report that we summarized yesterday, the capital cost of new aircraft that don’t have substantial gains in economic operating costs don’t outweigh keeping older, current generation airplanes in service.

Some Wall Street analysts have made this point for some time. Filling the production gap for the 777 Classic and the Airbus A330ceo becomes more challenging the lower the fuel price because the increased fuel efficiency of today’s models isn’t that much greater than those 10 years old.

Boeing is going to end this year with around 60 777 Classic orders, the high end of the 40-60 it says it needs to maintain current production rates. Airbus has a steeper cliff and a shorter time frame to fill the production gap for the A330, but it’s already indicated to analysts rates will come down to about 6/mo in advance of the 2018 EIS for the A330neo, at which time it shows rates climbing back to current levels.

We believe the current fuel price environment exacerbates the challenge for Airbus and Boeing.

13 Comments on “Air France-KLM defers 2015/16 777s, cites poor financial results, low fuel prices

  1. Should we expect LH to buy new frames on short notice 😉
    ( There was a hint around that they “would like to” )

  2. Against all odds (at least as seen six months ago) … the A340 will be flying a few more years yet.

  3. So, they will order them when the oil price rises, and complain that they cant get short deliveries .

  4. According to internal sources KLM was stated to receive delivery of less than 5 777s in total. However for the period of 2015-2016 they are due to receive 10 787-9s. Could you clear up whether the delivery of the 787 or 777 is postponed? And the amount if it is stated different from the article?

  5. AF-KLM financial situation is not brilliant, following a long 15-days strike from the French pilots (similar to what LH is now witnessing).

    There were rumors and talk about how much such a strike was costing, but it may very well be those 10 planes.

    Add to that the prices of oil, and you get this defferal.

    I’m not sure it was the other way around, but rather an opportunity for AF-KLM to somehow balance a bit its book for 2014-2015 and not present too much loss.

    • I don’t think the strike made much of a difference.
      AF has burnt through the KLM savings.
      Now they have to work for their money 😉

  6. This trike has created or surfaced internal discussions within the group. Resulting in a comment by the KLM CEO the dutch part of the company would share in the financial damage created by the strike. He’s gone now, basically because he had no “blue blood”. This deferral is another sign things are going very smooth.

    Apart from that, question is if a 777-300ER is a real smart long term investment (for an airline) after you committed to much lighter A350 slots. maybe more 777-300ER’s are at risk in the industry.

  7. I don’t see how the strike could not have affected Air France. I was in Germany on vacation during that strike and it was hell trying to get on a flight out of Berlin (my flights were Air France all the way back to the US). Good thing Delta stepped in and got us out. When we arrived at CDG, the airport looked like an Air France airplane sales lot, what with all their jets parked everywhere.

  8. Looks like the irrational exuberance of ordering aircraft will get evened out in the years ahead.

  9. Its cyclical and I do think some people saw this coming. Boeing not being one of them as their MO is to squeeze max for management bonus vs the long term reality that cycles are always a part of business. In this case it looks like Mr. M does have to deal with it rather than hand it off to the next guy.

    Another good deal for Delta in the works?

    It still seems the 777-300ER is a better replacement for the 747s.

  10. The state of denial from the OEMs regarding the impact of fuel prices is bizarre.

    I ran across the following on Randy’s Journal. I could hardly believe my eyes.

    “Even in a low price fuel environment, it’s hard to argue that 15 to 20 percent better fuel efficiency isn’t a good thing.”

    Teaching moment on airplane economics: When an airline is trying to justify the tremendous acquisition cost of a new airplane, there is a huge difference between $60 oil and $120 oil.

    As Warren Buffett famously said, “you can’t eat percentages”.

    Perhaps it is time for Boeing to bring Randy Baseler out of retirement.

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