April 27, 2015: c. Leeham Co. With the announcement on the 1Q2015 earnings call that American Airlines is deferring Boeing 787s, I received an inquiry from a media person: what is it with the 787 that “everyone” is deferring the airplane?
I found the question puzzling.
True, this comes on the heels of United Airlines swapping 787 orders for 777-300ER orders, but this hardly counts as “everyone.” And the reasons for the maneuvering was well-stated and for very different reasons.
United’s 787-for-777s deal was well known. It had been reported months ago, and it’s been in the works since the fourth quarter of last year. Boeing actually hoped to seal the deal by year-end to further get the PR boost of “strong demand,” as well as the cash flow influx (which we’ve now written about ad nauseam). But to get this deal, pricing was dropped well below previous standards (to around $130m-$135m vs $150m-$170m, including Buyer Furnished Equipment), a pricing UA could hardly refuse. The 777-300ER has the range to fly from UA’s Newark or Washington hubs to Asia, and it has more capacity (nominally 365 passengers) than the 787-9 (nominally 280 passengers) in three class configuration. Market demands drive United, and it didn’t need 10 777s in addition to its current orders, so swapping the airplanes at the price obtained makes perfect sense for UA, with only incremental capacity additions.
For Boeing, getting the 787s back from United at near-term delivery slots enabled it to satisfy the early demands from others. More-or-less a win-win, though there is much more to the back story as it relates to filling the 777 production gap and the cash flow.
Over at American, the story is different.
America said weak traffic demand prompted its deferrals of five 787s. The deferrals were just a little bit to the right, not much: four to 2017 and one to 2018. Our Market Intelligence is much more basic: AA wanted to swap 787-9s to the smaller 787-8s (market demand), which is allowed in the contract. Boeing couldn’t accommodate on the timetable AA wanted, hence the new schedule, according to our information. Plain and simple.
These two examples are hardly “everyone.” These two examples are specific circumstances to specific carriers. When it comes to the broad topic of cancellations or deferrals (as I am often asked, in context of the ever-present “order bubble” topic), I have always responded that absent some shocking global or terrorist event, any cancellations or deferrals will be specific to carrier circumstances: poor finances, changing strategy, changing market conditions or whatever. I don’t see wholesale cancellations of deferrals at any of the Big Four OEMs–just spot transactions for reasons described.
Consultant Richard Aboulafia was quoted about the UA transaction as this proved the 787 isn’t a game-changing airplane after all. Rich and I are friends and we have a long, friendly kind of needling relationship. I think his statement (if accurately reported) is just flat-out wrong. Boeing has sold around 1,000 787s. It’s in a market sector that is smaller than the -300ER. UA’s opportunistic deal fits UA’s needs.
There is nothing wrong with the 787. Not “everyone” is deferring and the 787 remains game-changing.