Challenges working against 777 Classic production goal

Discussion

Since the launch of the 777X in November 2013, Boeing has maintained it will keep production of the 777 Classic at its current rate right up until the EIS of the 777X. Then, Boeing officials constantly said, it will “feather” production of old and new.

777 Delivery Stream 031915

The production gap for the 777 is in blue. Boeing has said it plans to maintain production at the rate of the 777 Classic of 100/yr up to the introduction of the 777X and then feather in production of the two airplanes. This language softened somewhat March 5. The dark blue represents the production gap. Filling the gap remains heavily dependent on converting options to orders and booking 40-60 orders a year. 2017-2019 are especially challenging. Click on image to enlarge.

On March 5, Greg Smith, CFO of The Boeing Co., softened this view ever-so-slightly, although Boeing Commercial Aircraft said Smith’s comments were consistent with the messaging all along. So did Randy Tinseth, VP-Marketing of BCA, when we asked him about it at the ISTAT conference in Phoenix on March 10. However, Tinseth identified 2018 for the first time as a potential when Classic production might be adjusted. We noted in our write up of this exchange that this date is important because of Boeing’s desire to accelerate EIS from 2020 to 2019. Still, “feathering” production before 777X EIS is not what Boeing had been saying.

Regardless, Wells Fargo cites the following as reasons for its skepticism:

  • A thin backlog after 2016;
  • Lessor difficulty placing airplanes;
  • Lower forecasted GDPs; and
  • Limited customer opportunities.

According to our Market Intelligence, a key reason there are open slots in 2016 is because of not only lessor difficulty in finding customers this close in, the BFE advance requirement to place an order makes it difficult to meet 2016 delivery schedules at this late date. Further, well-publicized issues with key seat suppliers are affecting not only the 777 but, the 787 and aircraft orders at Airbus.

American Airlines had to defer delivery of its first 787 from late last year to early this year because of seat supplier issues. While BFE is strictly the responsibility of the airline, the knock-on effect obviously applies to the airframe OEM.

Our Market Intelligence indicates that at least two 777-300ER customers in 2016 are facing seat supplier issues. Both indicated to Boeing that they need to reschedule their airplanes. This opens slots, which can’t be filled by other -300ER sales or lessor placements for the same BFE advance-order requirements. This means 777Fs must fill these slots, since (for obvious reasons), no BFE is required.

Wells Fargo points out there are a limited number of potential customers for the Classic. Most are already 777 operators and most have already placed orders for next generation airplanes. Although Boeing introduced a new round of Performance Improvement Packages for the Classic, beginning in 2016, Wells Fargo questions whether this will be enough to spur sales.

With current oil prices in the $40 range and likely to stay well below $100 for the next couple of years based on recent history of price fluctuations), the advertised 2% fuel burn improvement is tough to justify the capital cost of a new 777-300ER.

Wells Fargo believes Boeing will have to cut prices and production. It’s already cutting prices, according to our Market Intelligence. We hear of prices for the -300ER as low as $120m plus BFE or $130m including BFE. We hear 777F pricing of around $150m, down from $170m.

The low prices might encourage some sales for the -300ER from airlines that don’t need the capacity of the 777-9 or the range of the 777-8, which is about the same capacity of the -300ER. However, Airbus might be willing to counter the -300ER’s low price range with the A350-1000 in key campaigns to “flip” a Boeing customer and help kill off the -300ER.

As for remaining 747-400 customers, for which the -300ER/PIP could be an attractive prospect, there are limited opportunities. Wells Fargo, in its note of last week, identified British Airways as the largest current operator of the 747-400, with 43. BA has 19 A350s on order and no 777s. Our Market Intelligence reported months ago BA had rejected a -300ER offer, although this was before the PIP version was created.

Saudia Airlines has more 747-400s in operation than “replacement” airplanes on order. There are four other 747 operators that don’t have any 777s or A350s on order, operating 26 airplanes, and two that have two more 747-400s than 777s on order with, according to Wells Fargo This is a small universe.

Boeing’s opportunities for selling are shrinking. As the chart above shows, to fill the production gap as the current rate of 100/yr through the EIS of the 777 in 2020, Boeing needs to convert 100% of the options and letters of intent, plus obtain new orders. This equals about 252 to 296 orders through 2020. We just don’t see how Boeing gets there from here.

 

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