Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Goldman Sachs predicts rate 5 for 777 in 2017
Oct. 6, 2015: As Boeing prepares to discuss its third quarter October 28, a major Wall Street investment bank predicts Boeing will have to reduce production rates of 
the 777 to five per month in 2017, the year before production begins on the 777X.
Separately, an appraisal company sees values and lease rates of the 777 Classic declining, characterizing the airplane as “struggling” as airplanes come off lease and troubled airlines prematurely dispose of 777s.
In a note published Oct. 4, Goldman Sachs writes that the 777 leasing market has been overlooked by many observers for its impact on new airplane sales Boeing needs to bridge the production gap to the 777X.
“Boeing has a backlog coverage and product transition challenge on the 777,” Goldman writes. “The market appears focused on the total bridge period; but we are more concerned with the large amount of slots that need to be filled for the next 24 months, as well as several existing aircraft coming back in to the market near-term.
Goldman Sachs forecasts the Boeing 777 production gap through introduction of the 777X. This is similar to LNC’s own forecast. Click on image to enlarge. Source: Goldman Sachs.
“With 2Q earnings, Boeing stated the 777 is almost fully sold for 2016 and more than half sold for 2017,” Goldman writes. “Boeing is building close to 100 aircraft annually. Ascend data shows that there are 82 deliveries set for 2016 and 69 for 2017. We think this means BA needs nearly 50 777 orders over the next 12 months, but more importantly that all want near-immediate delivery (which rarely happens).”
Goldman writes that Boeing “has enough backlog to deliver to 7/month in 2016 and 2017, so may only cut to that rate near-term and cut further later. But with a 75-90 aircraft gap vs. delivering at 8.3/mo. for each of 2018-2020, Boeing could cut to 5/month immediately to smooth the five years.”
Goldman writes that “One item we think the market may be overlooking, is there are 122 legacy 777s coming off lease over the next five years. The majority of them are 12 years or younger. This could add substantially more 777 supply to the market than just Boeing new production.”
Collateral Verifications, an appraisal firm, separately issued its own assessment of the wide-body market, including the 777.
“The overall market has been performing quite well when it comes to aircraft values and lease rates,” Verifications writes. “Based on the latest trends, we found that more than half of the aircraft we cover have been stable or improving. Of the declining aircraft, most of them are wide-body aircraft…. Boeing 777s seem to continue struggling as more aircraft have recently become available and are competing to find homes. With Boeing’s aggressive campaigns to fill the production gap until the 777X arrives, we feel that this trend will most likely continue to put pressure on used 777s.”
Verifications wrote that the Boeing 767-300ER “seems to have found some level of stability as existing operators look to extend leases or add aircraft on an interim basis. Airbus A330-200s also seem to be struggling to find stability due to the high level of current and near term availability.”
What the situation means for Boeing was summed up by Goldman.
“Assuming 100 units, at $150m per, and a 20% EBIT margin, the 777 is roughly 45% of Boeing Commercial [Airplanes] EBIT and roughly 30% of Boeing’s total company segment EBIT. We assume Boeing slows production in 2016 but relatively soon announces it will move to 5/month starting in 2017. We revise our 2016/2017E EPS to $8.26/7.80 from $8.82/9.25 to reflect lower 777 deliveries. We are now 10%/24% below consensus in those years. We already thought the bull-case on Boeing cash flow had a lot of risk. At 5/mo. on 777 it could be missed by a wide margin. We lower our 12-month price target to $111 from $119 on the lower EPS.”
Dear Lord. This is damning… especially considering how much of EBIT comes from the 777.
That said, Scott & Bjorn have been warning about this for longer than I can remember…
The 777-200ER can IMO rightfully be see as a “game changer” in the late ninetees / 2000s. The first twin to do 300 passengers and a lot of cargo over long stretches efficiently. Just in time to support the Asian economic boom we saw in that period.
Incremental improvements to the A330-300 and large A350-900 orders kind of squeezed this variant prematurely.
Those -200, 200ER, 300s are the ones now parked. They amassed hours rapidly over then last 20 years.
Hopelfully the 787 line can start becoming a high volume cash cow towards 2020. Because the 737 looks soft & the 767 and 747-8 lines are what they are too.
Maybe Mcnerney leaves at the right moment having burned up the cash cows & taking his share. His successor will have some choices to make. (I don’t mean new stock buy back programs).
The 787 had better become a cash cow for Boeing long before 2020!
While the 737 is trailing the A320 series in terms of orders, I’m not sure you can say it looks “soft”. Boeing will be churning out 50-60 of these puppies per month.
Potential orders from announced news e.g. Korean, emirate, eva, fedex, iran and china and other orders not known at this stage have not been included in the analyses. Also, 777X starts production from 2019 onwards. Therefore, the rate 5 is too conservative.
Do not forget that 122 planes are coming off lease so at least a few of them will be leased to iran. Eva air is considering the 777X and 787-10 not the 777-300ER so the two possible customers are emirates and fedex for 15 777-200LR each. Also if you take a good at the chart you will notice that there are 94 unfufilled spaces that are enough to cover both iran and china.
I dont think Iran will be looking for a US sourced plane for a long long time.
FedEx has the orders it wants for 777-200F ( the freighter version of the 200LR), no other airline will be looking at passenger 200LR( thats what the 787 is for), the 3 delivered last year would have been ordered a while back.
I agree that FedEx has its 777-200F orders but I also think that there is an attractive opportunity to replace MD11F with a 777-200BCF.
If I read the tea leaves right, FedEx was going to launch the 777BCf program but Singapore backed out with the needed feed stock and gave them to Scoot to start up.
However, suddenly there may be a plethora of attractive 200s available.
While the MD11 seems to be doing well for FedExc and UPS its still a 3 engine fuel hungry bird (and more maint intensive all the time)
777 BCF would be great bird for both of them as long term replacement (shorter range but fits the MD11 route segments to a T)
Eva has said considering 5 777F, emirates has said considering about 15 777-200LR, korean has signed a MOU for 2 777-300ER, china has ordered an unknown no. Of 777 in its recent president visit, fedex is rumoured to order 10 777F. Iran would need long range plane immediately after lifting of sanction. 777x production may be more than 12 nos. in 2009. So goldman’s analyses may be wrong and rubbish.
“…emirates has said considering about 15 777-200LR”
– The recent comments by Tim Clark appears to put a damper on such prospects.
– http://www.bloomberg.com/news/articles/2015-10-05/emirates-steps-up-a380neo-campaign-with-20-year-utilization-plan
Starting in 2016 about a 200 777W in the backlog to fill up for four or five years. Realistically, how many more 777W sales, and how many 777X deliveries in 2020, 21, 22 are questions. Lots of competition from new and used A330, A350, and 787. By comparison, the 777W and X end up where large size becomes a liability.
Any possibility that Boeing might just build white-tails to fill the slots?
Might the next Angel 1 and Angel 2 (AirForce1) be 777’s instead of 747’s?
the Airforce 1 program has already chosen the 747-8.
“The two Boeing 747-200 planes that the President currently uses will reach the end of their 30-year service life in 2017, and according to The Wall Street Journal, the U.S. Air Force has set aside $1.65 billion between 2015 and 2019 for two replacement jets.”
Sorry, an airplane that is 30 years old is not at the end of its service life with that few hours on the frame.
If that was true we would have to ground B-52s and KC135s in droves!
Its just an excuse to spend a lot of money on a new shiny toy.
The existing aircraft may well have few hours on them, but they will run out some time. Ultimately they have to be replaced.
So look forward to what they might buy at some point in the future the choices aren’t great. They need 4 engines, and the question arises to what large 4 engine airliners will be on sale in the future.
Leave it 10 years and it’s possible that no one is making any 4 engined large airliner. I certainly can’t see the 747-8 lasting that long in the market. Even worse the only option might be the A380, and that would clearly be unacceptable!!!
So it’s probably a case of “buy now” whilst that allows them to buy American, and the 747-8 is going to be the easiest one to transfer all the extra goodies to as it’s mostly the same shape.
Of course that doesn’t solve the problem of what to buy after the 747-8’s have worn out. There might be nothing at all available on the market, and then they might have to fold on the 4 jet thing. And if they did do that at that hypothetical point in the future, why wouldn’t they do that now?
I believe I read somewhere that there was NFW the Secret Service would allow Air Force One to be a twin.
The four engine requirement stems more from the way in which the USA’s nuclear chain of command is structured. Basically someone senior like the president, or the vice president, etc, needs to be alive and able to communicate for a long period of time in order to authorise a counter strike (at least that’s my understanding of how US nuclear doctrine goes).
So Air Force One serves a critical role, and it’s no good unless it (there’s several actual aircraft which allows for maintenance) is guaranteed to be flyable at zero notice 24/7 and will likely fly for the next 16 hours or so no matter what engine unreliability occurs. There’s no divert option available for Air Force One when fulfilling this role.
Having 4 engines gives the whole policy of MAD more certainty, which is kinda the whole point of MAD. With two engines mutual destruction is still very likely, but it’s not quite so assured as with 4 engines.
Other countries do things differently. The UK gives its submarine commanders letters telling them what to do by way of a counterstrike if Britain gets wiped out by a nuclear attack. These operate like a dead man’s switch; kill the whole UK and there’s still a chance that a counterstrike comes back, assuming the letters give that authorisation. Which means that the UK doesn’t need a guaranteed communications platform like Air Force One.
Next Air Force One, Kawasaki P-1. Trade in that old Suburban for a Prius.