Volga deal for 747-8Fs not as solid as assumed by some; production rate reduction likely

June 23, 2015, © Leeham Co. The Memorandum for Understanding for expansion of the Boeing 747-8F fleet of Volga-Dnepr announced at the Paris Air Show is somewhat less than met the eye at the time.

748 Deliveries 062315

Despite a few orders subsequent to this chart’s creation in January 2015, the 747-8 production gap is insurmountable. The Paris Air Show announcement of Volga-Dnepr fleet “expansion” by 20 747-8Fs is more about options than firm orders, according to market intelligence, which does nothing to fill the gap unless exercised. The expansion is over seven years, which also fails to fill the gap at current production rates. Click on image to enlarge.

Although Boeing said the 20 airplanes will be added through a mix of direct purchases and leases over seven years, it didn’t indicate how many firm orders, options and leases were involved nor the delivery timeline. Market Intelligence indicates perhaps two of the 20 are white tails, aircraft that were built without customers. If correct, this won’t add to the backlog or production stream. Neither would options, unless exercised. Market Intelligence also indicates that firm orders are in the mid-single digits, which if correct is a far cry from what Boeing needs to fill the production gap

Some media and aerospace analysts concluded this deal meant 20 firm orders equal to a year-and-a-half worth of work for the struggling 747-8 production line, but Boeing said the fleet “expansion” is streaming the deliveries over seven years. If evenly spread, adds up to three aircraft in the production stream if all were new orders and not white tails, and options were converted to orders. Even this interpretation fails to fill the production gap.

A Boeing spokesperson said, “We are in discussion with Volga-Dnepr Group and will provide details when ready.  There is nothing else we can add here.”

Accordingly, we expect Boeing to announce a reduction in the 747-8 production rate sooner than later. The current rate is 18/yr, declining to 16/yr from September. Boeing previously said it can still make money at 12/yr, so we expect the rate to be reduced to at least this level. However, as the chart shows, the current firm order backlog doesn’t support even this reduced rate.

The USAF indicated it wants to receive the first of two replacements for Air Force One in 2018.

What raised questions over the solidity of the Volga announcement was the way Boeing worded the press release last week at the PAS. All other press releases were specific about orders and options, except the Volga release, which contained highly unusual wording, a departure from Boeing’s standard boiler-plate. Excerpts of these releases are below the page break. We made inquiries in the market, and the results are outlined above.

The following are excerpts of every press release issued by Boeing at the PAS announcing commercial transactions. Bold Face is added.

  • Boeing (NYSE:BA) and Enter Air have announced an order for two 737 MAX 8s and two Next-Generation 737-800s.
  • Boeing [NYSE: BA] and Ethiopian Airlines today announced an order for six 787-8 Dreamliner at the Paris Air Show.
  • Boeing (NYSE:BA) and Volga-Dnepr Group, a world leader in transportation of unique, oversize and heavy cargo, have signed a Memorandum of Understanding to further the Group’s fleet expansion with 20 additional 747-8 Freighters,
  • Boeing [NYSE: BA] and Korean Air today announced the airline’s intent to purchase 30 737 MAXs and two additional 777-300ER (Extended Range) jetliners, with options for an additional 20 737 MAXs.
  • Boeing [NYSE:BA] and Minsheng Financial Leasing (Minsheng) today signed a Memorandum of Understanding (MOU) at the Paris Air Show for the purchase of 30 737 airplanes, a mix of Next-Generation 737 and 737 MAX airplanes.
  • Boeing [NYSE: BA] and Ruili Airlines today announced at the Paris Air Show that the airline has committed to purchase 30 737 MAXs
  • Boeing (NYSE: BA) and Sriwijaya Air today announced an order for two Next-Generation 737-900ER (Extended Range) airplanes during a signing ceremony at the Paris Air Show.
  • Boeing (NYSE: BA) and SMBC Aviation Capital, one of the world’s largest aircraft lessors, announced an order for 10 737 MAX 8s today at the Paris Air Show.
  • Boeing [NYSE: BA] and Qatar Airways announced an order for 10 777-8Xs and four 777 Freighters, valued at$4.8 billion at list prices, on the opening day of Paris Air Show 2015.
  • Boeing [NYSE:BA] announced today at the Paris Air Show that EVA Airways intends to purchase five 777 Freighters. The commitment, valued at more than$1.5 billion at list prices, represents the first 777 Freighters to join EVA’s fleet
  • Boeing [NYSE: BA] and Garuda Indonesia announced today the airline’s intent to purchase 30 787-9 Dreamliners, as well as up to 30 737 MAX 8 airplanes.

27 Comments on “Volga deal for 747-8Fs not as solid as assumed by some; production rate reduction likely

  1. What a surprise…you needed to have had a lot of Boeing Cool Aid to believe it!

  2. Presumably take up of the aircraft will depend on Air Bridge Cargo’s double digit annual growth figures continuing for the next several years. They seem to have come up with a successful business model of transiting Asia-Europe cargo through their Moscow hub. They’ re possibly putting down a marker for the planes before production gets switched off.

    • That is like the A380, which business case relies on a single customer. On the other hand it could be argued that Emirates orders are a lot of eggs in the same basket while Air Bridge represents only a few eggs, and no less optimistic ones.

  3. Hands up anyone who was not extremely surprised at this “order”. Almost no new orders for the 747F, even from big cargo US outfits like Fed-Ex and UPS, and now up jumps a Russian company that suddenly wants 20. Did this pass the sanity test ?

    • FedEx does not do 4 engine aircraft. No surprise there.

      UPS got good deals at the end of the 747-400ERF production and has at least currently what it needs (if it grows enough it may go for the 747-8F but they do run a different setup than FedEx.

      No the 20 passed no one that knows the industry, but it made McNerney be able to spin some serious RPMS before they canned him.

  4. Save the tooling for the upper deck, so it can be grafted on to the top of the 777-8F.

  5. Sooner or later Boeing will need the space occupied by the 747 to build other aircraft models. But ever since the first 777 first came out I never had the impression Boeing had a well defined product strategy. But they sure have a well defined investors strategy. That is why I have no idea where Boeing is heading today. They obviously want to remain at least on equal footing with Airbus, but are they doing the right things to stay there, let alone to make any progress? I have serious doubt about that. What worries me most is that it could actually be too late to be able to do anything that might change ‘the course of history’.

    What puts aerospace into a very special category are the long-lead times of production items and the extraordinary longevity of their products. In other words it takes a lot of time to get there and even more time to get back if you failed. Which brings me to ask the following question: Is Boeing too big to fail? I don’t really know and that is why I ask the question. But I have many reasons to believe they are going in the wrong direction:

    1. The 747-8I/8F are not going anywhere. Boeing has already wasted a lot of money in that programme and cannot keep the line open hoping to make a profit on each aircraft sold, except perhaps on the presidential edition.

    2. The Dreamliner could have a brilliant future but it still has an unresolved past. When it finally becomes cash-flow positive, say next year, where will this extra money go? To develop new products? I don’t think so because a large portion is likely to be used to absorb the accumulated deficit. It’s hard to say when a new equilibrium will be reached, but it will certainly not be before a long time has past.

    3. The 777, Boeing’s biggest cash cow, is quickly fading away. The 777X will sure come to the rescue, but when will it enter service? They say 2019. I say no way. Of course I have no proof of that but this is only four years away. That may be less time than it took to produce the first 747 but we live in a very different world today and Boeing is a very different company. They are for sure more efficient today, but the workforce is a lot less motivated and the best brains are in the Silicone Valley. And the technology is infinitely more complex and difficult to implement than it was in the Sixties.

    4. The 737 is where Boeing’s future will be decided. The latest version (MAX) will likely mesh harmoniously with the previous one (NG) so that there should be no major production gap. The 737 MAX is not as big an undertaking as the 777X but the former will take as much time to develop as the latter. I find that rather strange, and no one seems to have noticed the discrepancy. Anyway, the 737 is Boeing’s other cash cow, but it’s impressive share of the market is slowly declining. Just like Boeing is, I might add.

  6. I hope the market grows and Boeing sells lots of 747s soon. A few weeks I saw a VD 748 sail low over the old city I live, against a blue sky. Great. Maybe the Atlasses and Asians can join in to sustain 24 a year.

    It seems Airbus might be able to reduce the A330 production gab with 1.5 a month in the 2016-18 period.

    http://mobile.reuters.com/article/idUSKBN0P31RT20150623?irpc=932

    • “I hope the market grows and Boeing sells lots of 747s.”

      The 747 future depends on the airfreight market, which is not particularly strong right now. And China’s economy is not as vigorous as it was in recent years.

  7. Airbus do not have the production capacity to trump Boeing in the single aisle space. Airbus wide body product will top out between 40-45 percent to 2030.

    • The battle is not over capacity but over demand. The 737 is sold out for the next five years or so, while the A320 is sold out for the next eight years or so. The question is what will the demand be for the 737 in five years from now? My answer is that it will remain relatively strong but not strong enough to support Boeing in that period, which is likely to be a difficult one for Boeing.

    • The current maximal capacity of the A320 is 54 units/month. There are still some margin left and it is not impossible that Airbus adds a new line in Tianjin for example. Boeing has a maximal capacity of 63 units/month for the 737. Boeing can produce at this rate but will consume its backlog at a much higher speed than Airbus.

  8. I enjoy all airplanes and both have their strength and weakness.

    • The airplanes are all good, including those from Embraer and Bombardier. The difference lies mainly in the way those companies are managed. This is only an opinion, but I think Boeing is not as well managed today as it was in the first four decades after the war.

      • There was another manufacturer who designed a new plane and bought in new suppliers from around the world- and stuffed it all up.
        Bombardier.

        Then there is the financial side, in spite of getting eye watering generous financial assistance, they thought nothing of trying to build a fully composite business aircraft at much the same time – something that has caught out many who tried it- the end result was white knuckle grade cash flow problems and management turmoil. Yet the very top exec got promoted ‘upstairs’

  9. This is a correction of Hamel. Airbus is sold out 7 years and Boeing is sold out 61/2 years. You have to count CEO/NEO and NG/MAX. Production is the name of the game. It is why A330 NEO was launch.

  10. I regard the Boeing claim that they can make money at 12/year about as trustworthy when they claimed back in the summer of 2007 that the 787 would fly at fall of that year. In any case the deferred production costs mean 747 will not be in black any time soon.

    • This is indeed surprising considering that Airbus need to produce the A380 at 30 units/year in order to be cash positive.

  11. Pingback: » Daily Aviation Brief – 24/06/2015

  12. Boeing just announced that 747 production will be 12 per year starting in 2016.

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