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.