By Scott Hamilton

March 8, 2015: Boeing cracked open the door March 5 to a production rate reduction on the 777 Classic, the first time since launching the 777X in 2013 that officials have publicly deviated from their insistence the current rate of 8.3/mo can be maintained to entry-into-service of the 777X.

At least that’s how I see it. Boeing sees it differently. Boeing says nothing has changed in its messaging.

In an appearance at the JP Morgan Transportation Conference, Greg Smith, EVP of Business Development and Strategy and Chief Financial Officer of The Boeing Co., Smith appeared to back away from the Boeing messaging to-date that has been all (to paraphrase) “We’re confident we’ll bridge the gap,” “We have three years of backlog and six years to bridge the gap”, “We’re confident we’ll maintain production at the current level,” etc, etc.

At least that’s how an aerospace analyst for a New York firm expressed it when he called me. After listening to the event, I agree with the analyst.

In the recorded playback of the JP Morgan event, here’s the report of Smith’s comments starting at 9:36 into the presentation.

“This airplane is operating in a market place that’s somewhat in its own.

“We’re sold out this year, we’re essentially sold out next year and we’re about half sold out in 2017.

“We’ve got some time to continue to work it” between now and when we

Greg Smith, EVP of Business Development & Strategy and chief financial officer of The Boeing Co. Boeing photo.

introduce the 777X. “We’re off to a good start. We’ll continue to monitor it. We’ll make whatever adjustments we need to make but we don’t see any need to make those adjustments at this time.” (Emphasis added.)

You have to be a long-time watcher of Boeing-speak. I’ve been a Boeing watcher for 25 years and I believe this represents a shift in the “confidence,” starting to lay the groundwork for the potential of a rate adjustment.

Smith continued:

“At the same time we’re looking at how do you transition the 777 to the 777X…. We’ve got some moderation through that period into production levels very similar to what we did on the 787-8 going to the -9. [We’re] taking those lessons learned for a very smooth transition …. We’re off to a good start, we’ll keep working it… it’s a great product and we have some time on our hands to continue to fill in that bridge.”

I asked Boeing’s headquarters Corporate Communications team about Smith’s comments. Smith is located in HQ offices in Chicago. My query was referred back to Boeing Commercial Airplanes Corp Com in Seattle, which said nothing has changed in its messaging and further gave this reply:

“We remain confident in our ability to successfully make the sales bridge from 777 to 777X. As the 777X is introduced to the production system, we’ll evaluate whether there’s any need for an adjustment for a smooth transition in the factory.”

Let’s look at this statement closely. The first sentence is the Boeing messaging that’s been going on ever since the 777X program was launched in November 2013 at the Dubai Air Show. The second sentence talks about 777X production.

The first part of Smith’s comments were in response to a question about orders. Then he talks about the transition to production, and ends returning to orders. BCA’s reply to my query did not directly address Smith’s response about orders. When I pointed this out, BCA’s spokesman said he had “nothing more to add.”

Even the second part of the BCA response seems to me to be a subtle shifting of previous positions. Boeing has consistently said it would be able to maintain 777 Classic production at the current rate of 8.3 per month right up to the entry-into-service of the 777X, slated for 2020. Boeing CEO Jim McNerney has made references to “feathering” Classic production into 777X production. But the company has been firm on claiming Classic production will maintain at the current rate right up to 777X EIS.

Most aerospace analysts have long-questioned Boeing’s claims it would be able to maintain 777 Classic production at the current rate, deviating mainly on how steep a rate reduction might be and when it might happen.

Leeham Co. a year ago this month identified the production gap for the 777 Classic (and the Airbus A330) and told a client to start preparing for production rate reductions on both programs. Late last year Airbus announced a rate reduction on the A330 from 10 to nine; and last month an additional rate reduction to 6/mo beginning next year. As recently as January 28, the 2014 earnings call, Boeing CEO Jim McNerney continued to suggest Boeing would maintain rates on the 777 Classic:

“We expect demand for the 777 to remain healthy through the end of this decade, with an anticipated average order capture of around 40 to 60 airplanes per year to support the transition to the 777X….”*

McNerney later comments on the 4Q call, in response to a question:

“On the 777, the good issue there obviously is the bridge, transition to the bridge because I think the market is focused on the launch of the 777X, a very robust launch. As to the bridge, there [are] 63 orders this year that Ray [Conner, CEO of Boeing Commercial Airplanes] and his team secured bodes well for the 40 to 60 we need over the next few years to get to the bridge. So I am feeling increasingly comfortable there. Long-term demand for the airplane, there is no competition for the airplane. So I feel very good about the long-term demand for the airplane.”*

This has been the consistent messaging since 777X was launched. Smith, on the first quarter 2014 earnings call, responded this way to a question about the production gap:

“We do have high confidence in being able to maintain production rates up until the introduction of the 777X. There will obviously be some feathering in at the transition point itself, but by and large maintaining production rates. Where do we get that confidence? It’s in airplanes sold to-date, it’s in proposals accepted, it’s in campaigns that are ongoing today where as in the case of ANA we are selling both 777-300ERs as well as the new Xs, the requirement versus the alternatives still is favorable.”*

I know from my own Market Intelligence that internally, Boeing Commercial Airplanes is far less sanguine about hitting that sales target of 40-60 airplanes annually. This year is young and so far there have been five firm orders for the 777 Classic. An order for 10, possibly more, 777-300ERs from United Airlines is pending, and has been since December, according to Market Intelligence. I expect this to be completed at some point this year; the 787-9s ordered by United that will be swapped out for the 777s have already been released and are being remarketed by Boeing, according to Market Intelligence.

My interview requests with top BCA officials who could address the production rate issues have been declined. (The requests were for a broad-based interview, of which 777 sales and production would have only been a part.)

Boeing is expert at parsing words. Comparing Smith’s March 5 remarks at JP Morgan with his own previous remarks and those of McNerney, I sure see a distinct shift in messages. It sure seems to me that Boeing is cracking open the door to production rate reductions of the Classic well before EIS of the X.

*Transcripts via SeekingAlpha.com.