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.
“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.”