Boeing cuts 747-8 production rate, takes charge

Boeing LogoJan. 21, 2016, (c) Leeham Co. Boeing today announced it will cut the production rate of the 747-8 from the current 1.3/mo and the previously announced 1/mo to 0.5/mo, effective in September.

The previously announced rate reduction is effective in March.

Boeing took an $885m pre-tax charge ($569m after tax). the company had warned in SEC filings a forward loss could happen if the commercial markets didn’t pick up. Today Boeing said the global air cargo market hasn’t picked up, and in fact has reversed itself, falling off. Boeing was counting on the air cargo recovery to fuel a resurgence in the ailing 747-8 program.

Even at the reduced rate of one-half airplanes a month isn’t going to solve Boeing’s problem.

777_748 Production Gap Jan 25 V2

Click on image to enlarge. (The current production rate is 1.3/mo, rather than the 1.5/mo as depicted on the slide.)

According to the Ascend data base, there are 12 747s remaining to be delivered this year (one already has been) that are current production aircraft, not white tails that have been sold. There are gaps in May, October and November for scheduled deliveries.

Boeing’s corporate communications office in Chicago declined to say whether any of the production and deliveries will be stretched out to fill these gaps, citing the quiet period in advance of next Wednesday’s earnings call. The spokesman said guidance will be provided then.

There is one new-build 747-8 scheduled for delivery in May next year.

“Global air passenger traffic growth and airplane demand remain strong, but the air cargo market recovery that began in late 2013 has stalled in recent months and slowed demand for the 747-8 Freighter,” said Ray Conner, Boeing vice chairman and president and CEO of Boeing Commercial Airplanes, in a statement. “While we remain confident in the 747-8’s unique value-proposition and an upcoming replacement cycle for late-model 747-400 Freighters, we’re taking the prudent step to further align production with current market requirements.”

 

44 Comments on “Boeing cuts 747-8 production rate, takes charge

  1. The bottom has completely dropped out of the shipping market in the last couple of months, fuelled by uncertainty about demand from China. I expect that this is the case with aviation freight.

    Which is unfortunate. The world deserves a large dedicated freighter in high production.

    • I don’t know deserves but it has been a good line for Boeing and I hate to see that iconic aircraft come to a halt.

      Particularly the freighter is one of the best looking aircraft of all time.

      A380 is a utilitarian aircraft and that’s the way it should be but I could never get emotionally attached to it the way I did a 747.

      Reality is its a changing world and a lot (if not all) of those things we took for granted as they would be there forever are gone.

      It will be interesting to see if Boeing builds a number of white tails at the end to sell off as someone need one or two.

      You won’t see the like again. Unlike the 777, it has the floor weight density that is needed for all but the package carriers.

      Boeing is talking about the 777-8X as the future freighter, but that’s a -300 updated, and they went with the -200 as the best viable aircraft. I don’t see the 777-8F selling well. People would convert the -200s

  2. The era of ersatz (pseudo-“dedicated”) paxliner-F airfreighters has come to pass. You can’t expect an airvector originally conceived for passenger air transport to equally excel as a tool for moving cargo. Boeing’s old allegory that “pax are self-moving freight” may be taken as a good joke, but the industrial application of the qui-pro-quo is an outright insult. Moving cargo is the daily bread of Logisticians, so to conceive an airfreighter, airframe OEM’s are well advised to ask Logisticians for assistance. Those experts are to be found in Shipping, ie in Greece, Poland, Korea, China, Scandinavia, Holland, the Persian Gulf … annually they move ten trillion FTK of containerised merchandise. To believe you can dispense with their advise and contrive a good cargo vector is not only presomptuous but irresponsible. One possibly exception : the market needs a feeder airfreighter, for pick-up/final delivery into/from one of the many long-haul airfreight hubs that’re popping up around the world ? For the rest, let the belly-freighters take care. That’s OK. But for long haul, please, Airbus, Boeing & Co : no more “paxliner-Fs” – do the real thing or stay put.

    • The era of ‘ersatz pax liners’ has picked up, as the amounts of cargo shipped under passengers feet has increased. There was a long a precedent in shipping, dry cargo and passengers coexisting for many years and it was mostly the high passenger count north Atlantic liners who went freight free because of their fast turnaround.
      The market will continue to have specialised build military freighters and converted passenger tubes as there is no possible design for a civilian cargo air freighter on the drawing boards, indeed the only major passenger conversions have low volume 747 and 300/330 types used ironically for large airliner sections.
      Its not beyond the bounds of designers to come up with a possible large volume , large payload freighter, but there is absolutely no market now or foreseeable future for such a product.

    • until a new build dedicated freight aircraft design can beat the economics of pulling a 20 year old 747F out of the desert, there will be no market for your beloved dedicated freight only design. the cost of design, certification and production startup would be no different than for an equivalently sized pax aircraft, so, $10B minimum. now, a typical new aircraft’s accounting block (# sold before cost break even) is planned at ~500 aircraft and lately has been slipping to 1000. total market for a large airfreighter competing against parked 747F/a380P2Fs over 20 years might be 500 in a booming low oil price economy, so in order to make any possibility of making a decent program ROI, you would need to sell each one @ $40M over incremental unit cost to recover your R&D in the first 250. when a parked 747F (or 777-200ER) can be had in the $7-20M range that they can just throw out at the next D-Check and grab another out of the desert for less than the cost of the D-Check, do you really think someone is going to pay $200M for a new build dedicated freighter?

      Nope. Even if they could get the cash price down to 4X a parked 747 (or in the future a parked A380), the rest of the economics would need to be absurdly good. the cost of repackaging your TEU contents into standard 747 pallets doesn’t even fall push above the noise level when compared to purchase, maintenance, fuel, crew, transit and landing fees.

      as soon as all those first gen A380s hit Emirates’ arbitrary 12 year cut off, there will be people who look at them and see that freighter conversion cost ~= refitting cabin for a new airline with modern interiors. there goes another generation of your TEU liner.

      • Well said!

        You can never move cars on an aircraft at anyting other than an astromial cost, dedicated build freighter or not.

        There is a sea change (pun intended) of psychics difference between air and water.

        Just as we don’t see much pax being moved by water (relatively speaking and virtually none beyond ferry range) we don’t see heavy freight moved by air unless there is a need to get it there quick (they ship race cars around by air).

        The cost of tonnage moved by ship vs air has not comparisons.

      • @ bilbo : The “world’s airfreighters” are a gender in its infancy. Forget all the Express Parcel Carriers (UPS, FedEx, DHL …) : they are toying with their Dinky/Corgi 1/43-scaled miniatures … forget Cargolux, ABC, Lufthansa Cargo, Korean Cargo, Cathay Pacific Cargo, etc … put alltogether (belly-freighters included) they move only 2% of world’s containerised merchandise. In other words, they are playing in the sandbox : brrrrrrr !? The rest is moving by Triple Es.

        Financials are entering the CATK picture incidentally. Not trivially, but reasonably. Suffice to say that if you finance 300 M$ over 35 years at 4 %, your annual cash disbursements to your bank amount to 15.5 M$. Now if you lower project timeline to 8 years, if you can live with the same annual financial outlays, your project can support an initial investment of 108.2 M$. What equipment can you expect to find for 108.2 M$ ? Two, maybe three 744Fs revived out of the desert. But watch out for fuel guzzling, spares/maintenance cash costs, they will dig in deep in your CATK picture.

        Besides, 8 years is a short period, what’s your Plan B, when your 744F’s are exhausted and good for the scrapyard ? More 744Fs from Mojave ? What this all adds up to, is that you’re spending 108.2 M$ four times in 32 years, flying ersatz paxliner-F airfreighters guzzling fuel and a bottomless well for maintenance/spares, each time down to zero residual value. You’re running up and down in the technical/operational planning effort keeping your end-of-life “airfreighters” in the air, threatened by AOG, ADs and what-nots … that’s not a life, man ?!

        I much prefer to play with a tip-top newbuild, reliable, fuel-efficient, designed on purpose for my trade : I’m credible, professional, dependable and I’m in this business to stay, says my corporate profile. How’s that, bilbo ?

        • if we had unlimited forever cheap oil with no environmental impact, your dream might make sense.

          but the reality is that the vast majority of freight in this world does not and never will need to be delivered across oceans overnight, oil is finite and only temporarily cheap and environmental impacts are a real thing.

          Rail and Container ships are several orders of magnitude cheaper and less environmentally damaging and sufficiently fast for everything except flowers (which is the most unbelievably messed up, wasteful, irresponsible business model ever: use near slave labor to grow flowers in south america, kill them and fly them all over the world before they rot so that people can have pretty ephemeral dead things on their dining room table for 2 days. it is the ultimate example of first world thinking) and bluefin tuna for the japanese market (which also could travel by refer container on a ship, but we want our moneeeeee NOOOOWWWW! and it rides cheap belly freight on paxliners anyway)

          I would say if you have confidence in your idea, then go get some VC money and place an order with Boeing. if you can make the business case to them, they will build it. but the fact is, you won’t be able to do either.

          basically in order to economically justify air freight, there needs to be a compelling reason why the slow boat is not sufficient, and that is basically a highly valuable perishable item, or something very valuable with an urgent business need (such as F-1 race cars that have to get from brazil to abu dabi in 1 day because the races are only 1 week apart.)

          • @ bilbo : modal shift to airfreighting hinges upon an econometric lever called “Opportunity Rate” (OR). I’ll not lecture you reviewing in detail the great variety of ORs that may come into play, but let’s list here just a few : financial OR (applies to valuables), industrial OR, mercantile OR (merchandise relocation), urgency, fashion démarque, seasonality, obsolescence, perishables, … let’s say it costs 1,200 $ to ship 10 tonnes of merchandise in a TEU from east to west, the industrial OR is 23 %, the interest rate is 5 %, maritime triptime is 28 days, airfreighting same takes 48h. The 10$-question is at what value per kg of the manufactured merchandise is it adviseable to go for modal shift ?

          • Its like oil, in and of itself it has low cost to extract (in many places).

            The value is on the fear factor of you need it, if you can keep it rare y0u can run it up to $120 a barrel, cost to Saudi to extract (best case probably) is 50 cents?

            BP it costs a lot more say in the Gulf of Mexico. Non viable now.

            Your argument is based on in ephemeral, who will pay what.

            You could test it, get a cheap plane and do like FedEx did (not sure how cheap they got the Desault) , prove there is a market.

            You haven’t so there isn’t

  3. @dukeofurl : please don’t misquote me – you say ‘ersatz pax liners’, I said ‘ersatz paxliner-F airfreighters’. Those aircraft are good for what they were built for …. passengers on main deck, belly-cargo on lower deck. Maindeck “dedicated” airfreighters require dedicated design insight/efforts. As once before for Shipping (quoting yourself) the time has come for division – specialisation – between paxliners and freighters. As for the Market, 2015 statistics for ICAO-registered air freight are not a correct measurement of air freight potential. They are but a proof of the inadaptation of current tooling.

  4. Don’t we already have a dedicated airfreighter – Antonov An-124 ?

  5. A ‘proof by the absurd’ is that neither the Ruslan nor the Mriya are selling. But yes, Volga-Dñepr are busy employing those that have been built …

    • Any more details of your ‘350t payload freight vector’?

      Remember of course the C-5 is a 380t max takeoff military freighter, maybe those freight logisticians could come up with some real numbers

  6. The low fuel prices don’t help, either.
    I assume that some B747-400F have earned a few more years of lifetime.
    The future are more efficient, downsized twin-engine freighters, and probably stagnating demand.

    • We are still seeing 747-200F (I don’t think there was a 100F) come through Anchorage. Pretty amazing.

      They stopped at the height of the oil prices, but as those prices got back down under $100 we started seeing them again.

  7. The amount of good MD11Fs and 747-400Fs in storage is shockingly high. And then there a many more waiting for conversion. 747-8F promoters love to downplay that, but it never went away. The cargo movers know they can/will get those when the market recovers. Boeing doesn’t say but knows too.

    http://cdn-www.airliners.net/aviation-photos/photos/3/6/5/2660563.jpg

    Lets not forget Plan A: When Boeing launched the 747-8 the plan was to sell two thirds as 747-8i. 747-400 Operators it could easily move over to the -8i. However BA, AF, LH, SQ, QF, Korean, MH replaced Boeing 747-400s with Airbus A380s. And the Middle east airlines didn’t buy 8i’s either. Boeing launched the 777-9, leaving plan B, the -8 to be saved by the unstable cargo market..

    • Nice photo, keesje … it brings water to my Mill : the wind is blowing into the sails of the Belly-Freighters, whereof Emirates is the Archtypo. When setting their prices, the Belly-Freighters apply Marginal Costing techniques (where the dedicated airfreighters do full costing), to the effect that the former are 35 % more cost-effective than the latter. The Mojave desert is the tangible proof of this fact. Only an Ultrafreighter can undercut Belly-Freighter pricing. Plus when you hit a certain threshhold in low prices, suddenly a Tsunami of new freight types appear, because to move them by air has become competitive, when before it wasn’t. I’m referring to all kinds of reefered perishables.

      • So now we are adding refrigeration equipment to the mix?

        Are we refrigerating the whole aircraft or containers?

        I have seen a few of those refrigerated containers go through, hate to think what that costs!

        I suppose the Koch brother could afford those prices but I sure can’t.

        Oh, that’s right, we ship salmon out of Alaska that way. In very small s high priced quantities to restaurants that people like MnNenerney habitate (oddly they go as low cost belly freight. ) hmmm

        Oddly that’s first of the season, astronomical prices, the rest is flash frozen and moved by (gasp) ship.

  8. With the enormous number of aircraft flying with ‘spare belly space’ there, especially in the LCC area, you can only expect dedicated freighters to tail out and be used for bulk cargo.

    There’s simply a lot more aircraft flying these days, and to more and more destinations.

  9. Yes, Fergal, there’s a great many aircraft out there flying, from many places to many destinations …. but not all of them are flying from where freights originate to where those freights want to end up, at the times those freights need to fly. The forwarders are patching up the paxliner offer with freight consignee’s demands, that’s all they can do, as far as belly-freight is concerned …

  10. Two points. One, no where in the numerous articles about this 747-8 production ramp down in the past day can I find the remaining, still booked, aircraft development and other soft costs– post this planned 4th quarter 2015 harge down. Second, there still seems to be high demand for the B767-300F. (Just off the top of my head, current backlog, plus 20 or so for Amazon, maybe 50 to 100 for UPS, 25 to 30 for Spring). Why not just finish out the 747-8 at its current production level, and ramp up 767/KC46/767Max(?) production?

    • Only FedEx is currently buying new build 767F (and they got a fantastic deal on them so that Boeing could keep the 767 line heated up for the AF 767 Tanker.

      Amazon is likely to used leased aircraft (to start with at least) and or people like DHL, ABX etc. No new orders there (does Amazon make any money yet?)

      UPS has not ordered any lately, not sure what their position is these days.

      And there are a lot of 767 conversions out there with good feed stock.

      A 767NEO might have some appeal if piggy backed onto airlines orders but not alone.

  11. Also of note is Airwise News take:

    http://airwaysnews.com/blog/2016/01/19/ba-may-lease-a380s-changes/

    I don’t quite get how sale of used aircraft benefits Airbus much.

    Some maybe if Singapore manages to sell off their old ones and buys new ones. That assumes anyone will buy them

    So far BA is the only one talking and with MA and Thai available that more than takes up any they think they need. Thai has a lot of aircraft stored.

    So Singapore either continue with their or they go into storage and sit.

    Emirates has the GP engines and would take someone that wants that version and again Emirate may just park them and part them out if they can’t sell or lease them.

    Amadeo is supposed to take their first A380s next year but if its an Emirates lease then its a wash as that is not new production but swapping of the slots around.

    • But it shows a second hand demand, that’s a market nobody was sure existed.

      • I think someplace there is a reference to not building a world on a single data point.

        Yes BA is interested, so far that’s a single airline. If you get 3 or4 then there is a trend.

  12. In retrospect it’s hard to believe Boeing was stupid enough to ever build this aircraft to begin with. My intermediate microeconomics textbook 20 years ago used the original 747 as an example of the “first mover advantage” – the market for a VLA was not that large, so once Boeing moved in first, there wasn’t enough space for MD or Lockheed to also enter.

    Fast-forward several decades, and Airbus commits to the A380 in 2000. At that point, it should be over – there arguably isn’t even sufficient demand for a single VLA model, and there clearly isn’t enough for two. But apparently Boeing of the 2000s is not nearly as smart as Boeing of the 1960s, and so they enter anyway, and it’s predictably a complete disaster.

    • Ergo, while there are those who dis it, with Boeing in the very limited market (1600 747s sold since 1960 something?) and hten Airbus comes in.

      Not sure what Boeing thought unless they had a lot of promises and then it evaporated.

      I believe Atlas was involved in the A380F but never seriously considered an order.

      So as noted, barely room for one (9f that) and two failing programs.

    • I believe they knew the passenger market would be thin but they did not foresee the collapse in the freighter market and that’s why they are desperately trying to hang to when/if it picks up again. As it was it was a 4 billion dollar gamble which is considerably cheaper than putting out a new model. Still 4 billion is a lot more palatable than tens of billion Airbus has squandered on the 380 (opps there I go “hating” on the 380!).

      Fun fact: Boeing has spent 240 billion producing 1,686 747s as of Sept 2014!

      • And it makes good business sense.

        Hang on as long as you can, if things pick up you are in better shape, if not you haven’t lost anything, you are not trying to do an NEO when you can’t sell what you have.

        That’s Airbus thinking as well, I expect to see a rate cut to 1 a month in the next year.

    • Who had the “first mover advantage”? Boeing–who’s been profiting in the market for 40 years and spent ~$5-6 billion updating the 747 (and had paid off all previous development costs) or Airbus who has spent $25+ billion to build an airliner that has yet to sell a single airplane at a profit? Me thinks your ire is directed at the wrong board of directors.

      My economics textbooks told me that the first mover had to devote a comparatively small amount of resources to protect their market and that the new entrant has to be willing to spend magnitudes more and endure years of losses to successfully enter the market. Ask BBD about entering a new market.

      My scorecard reads:
      747–lifetime profitable program with some (wild guess ~$3b) unrecovered development costs and a new $800M charge.
      A380–15 years and $25+ billion loses and counting.

      Its clear that Boeing is trying to outlast Airbus in the VLA market and willing to lose $800M to stay in the game delivering 6 per year (break-even is 12 per year). Airbus needs to deliver at least ~28 per year to not lose money per airplane. If Airbus has been so far unwilling to invest $2-3 billion on an A380neo to capture new Emirates orders, what do you suppose is their appetite to endure billion dollar loses to keep the line open at a reduced rate?

      • Interesting take on it, not one I had heard but I can see the logic and or merit.

        Realistically the 747 seems to be gone, A380 is a bit more run-out to go. Also interesting that Airbus supposedly needed 4 a month to make it work, not its 2 a month (rounded)

        On the other hand Airbus will get (did get) A380 orders from Emirates despite no NEO (and an engine switch which has to be an added cost).

        Boeing from my take had a more niche market for the 747 than the A380 though I thought it would have been a good hedge between the A380 and the 777. Some but not a lot.

        There is some discussion that if Boeing had made the 747 longer range it might have done better in the Pax market though the freighter market was clear they were good with the stops they already had .

        I think the A380 outlasts the 747 but it may not outlast it for long, it will be an interesting couple of years.

        US should wait for Lufthansa used ones and buy what they need out of that group and not all new (El Presdinetie flying palace though I am against it, keep the old ones or a 777)

  13. Good riddance. Obviously with this ridiculous 0.5 planes/month production rate it’s clear Boeing doesn’t want to accept the inevitable but for sentimental reasons keeps the Hunchback of Seattle available. I’m glad I don’t own Boeing shares.

    • Well I guess that’s one way to look at it.

      On the other hand there was a lot of jobs and good work for Americans in it.

      You might think about all the lives it affects, and their financial future. Its got a human cost to it.

      Obvioyusly Beoign is now playing the only hand they have got and that’s to hope for a resurgence. I don’t think its going to happen but they would know if they can break even or not at that rate

      I would say the same for the A380. It generates a great many jobs in the US as well as Europe now, I wish it well, I just don’t think it will succeed either.

    • Too bad (for you). If you had bought Boeing 5 years ago your stock would be worth 80% more now.

  14. When choosing air versus shipping one has to consider the number of points of handling too. With standardised shipping containers, you can load a container in the shipment zone of your factory, ensure that the load is securely packed and once locked, it will not need to be touched again until it reaches your destination. Unfortunately with air, your product is handled, packed, repacked and repacked again before it reaches the customer. Not only bad for your product but also very costly.
    For air freight to succeed, a similar container system that can go from gate to gate is required. Until then, it will be a niche industry.

  15. Exactly, Layman … this is substantially coincidental to me above comment https://leehamnews.com/2016/01/21/boeing-cuts-747-8-production-rate-takes-charge/#comment-143286 : the Ultrafreighter will succeed where today’s “ersatz paxliner-F pseudo-dedicated airfreighters” are failing … and what’s wrong with 762F, A332F, 744F, 777F et alias ? They don’t accept maindeck AGAs (at all or in satisfactory numbers, to commercially acceptable MGWs), they take all kinds of (the respective OEM-sponsored) ULD , involving costly, cumbersome and time-consuming re-stowing from TEU to ULD, sometime v.v. upon arrival, whereas with the UltraFreighter the AGA will travel door-to-door fron Consignee to Destinatary sealed and untouched. Saving time, sweat and €€€ … Thank you, Layman : water to my mill !

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