Boeing lays ground to cut 777 rates again

Greg Smith, CFO of The Boeing Co.

Aug. 11, 2016, © Leeham Co.: Boeing is laying the groundwork to further reduce the production rate on the 777 Classic and scrap a planned rate increase for the 787 from 12 to 14/mo.

Greg Smith, CFO of The Boeing Co., reiterated a message from CEO Dennis Muilenburg during the 2Q2016 earnings call that these rate adjustments may be forthcoming.

Smith made his remarks at an investors day conference sponsored by Jefferies & Co.

Supply and demand

“Ultimately it, is in a timely manner, matching supply and demand,” Smith told the conference. “And that’s what we go through every day as we look at these skylines and look at our production plans [and] look at the health of the supply chain.

Smith said that as Boeing looks at the skylines [the backlogs and who the customers are], “how many of those are options, what do we think the probability of those options getting exercised, who are they with, how big is their fleet? How are they operating today financially? How are they going to pay for the airplane? How much lead time away is there?

“And then look at open positions and say who are the prime campaigns around those with the same type of methodology of going through–their route structures, is this going to be new route structures, is this a take-share issue? Are they retiring an older airplane? What are the retirement plans, again, financially? How they’re performing. All of that taken into consideration, combined with our lead time away.”

Time on the 787 rate

Smith said Boeing has about two years to decide whether to boost the 787 production rate to 14/mo.

“Before we need to make the decision to break to 14 a month…we’re going to do the right thing,” he said. “We’re going to match supply and demand, and if it doesn’t play out to be 14, then we’ll adjust accordingly. I think taking that into consideration, taking maybe a 777 rate, a modified 777 rate through the bridge – even taking that into consideration, you’re still going to see growing cash flows coming out of the company going forward. And again, at the end of the day, I think that is ultimately what matters.

“I would tell you it’s not the end of the world if you went from 14 to 12, and we’re not at that point to make that decision, but we can still be profitable on the program, as I see it today, at 12 through that time period. But it’s going to be ultimately just matching again that supply/demand, and doing that efficiently.”

Good cash flow regardless

Smith said Boeing modeled several different scenarios about the market demand and supply. Regardless, Smith said Boeing will have good cash flow.

“The 777X will just add to that going forward,” he said. (The 777X entry into service target is early 2020.) “They’re generating terrific economics [in fleet forecasts] for our customers, and that’s ultimately our objective: make our customers better, which will make us better as a result of that, and a continued eye on cost and working capital in order to do that.”

777 Classic production rate

Boeing previously announced that the production rate for the 777 Classic will decline to 5.5/mo in 2018 from 7/mo, which itself is a reduction from the current 8.3/mo.

Boeing 777-300ER, a great aircraft that is nearing the end of its production life. Photo via Google images.

Smith gave the clearest indication yet that another rate cut is more than a possibility.

“As we’ve looked at the bridge through the 777, it’s been, one, early on, reset the cost targets on that going through that bridge,” Smith said. “So trying to get in front of these things and reestablish a new level of productivity in order to match the market demand versus let the market demand impact you and then deal with the results of that. That’s not how we are operating, that’s not how we operated with the 737.

“I know a lot of folks expected a decline through 737NG to MAX; you didn’t see that. Well, the reason you didn’t see that is because that objective was set two years in advance, to say, your job, our job, is to manage through this transition and manage through it at these level of margins. So what do we need to do to do it?

“And we’re two years out from those plans together, not two months. And so…the…thought process and discipline is the same we’re applying across all the programs to try to get in front of these things and manage through them at the end of the day, to do it profitably. And learn from other – obviously these experiences.”

Smith said Boeing is seeing areas of softness in the wide-body market.

“So we’re watching that closely and matching that up to our production needs. We’ve got a lot of campaigns and work on the wide-body. The real question is, do they come to fruition in the time period that we need to match the production through the bridge, for example, on the 777?” Smith said.

“Over the next couple months, we’ll know. We’ll either solidify those orders and be able to do that or we’ll modify the production rate, at least through that bridge. But, again, what’s most important is to have that supply and demand match within that period and have the 777X transition in smoothly.

“In the next couple of months, I think we’ll have better clarity on whether those campaigns true up and they true up in the time period we need them to fill the bridge. And if they don’t, then we’ll make an adjustment accordingly.”



56 Comments on “Boeing lays ground to cut 777 rates again

  1. When Boeing makes a lot of convoluted and tortuous sentences to say very simple things (remember the 787 delays annoucements for example) it’s almost sure that the worst is coming. Boeing shareholders are fortunate to have to know the unavoidable truth in advance.

  2. So in short, word on 777 production rates will be released within the next six months, and word on 787 production rates will be released within the next two years. If new orders don’t materialize, Boeing will moderate the production rates, matching supply and demand. The widebody market seems a bit soft after almost two decades of “launch pricing”, which seemingly has saturated demand for now.

    • I don’t think anyone is surprised by the upcoming rate cut. If you were surprised, you are probably shocked to know that water is wet, and the sky is mostly blue.

      Boeing can try to put out an optimistic view, but the writing is on the wall about a slowdown in aircraft orders for the next couple of years, I think. Airbus better come to grips with that, too.

    • Airbus sold 8 A350-1000 to VS, 1st sale in 3 years. Minor observation. If the 777x was in bad shape, we would know more about it through the press or through customers.

      • It is not the 777X that is in bad shape but the widebody market. Presently there is no race between the 777X and the A350 because the market is flat. The race will not resume until the patient gets better; i.e., until the economy gains some strength and the widebody market recovers the momentum it lost.

      • I didn’t include the A350

        An airframe inbetween 777-8 and -9 that flies three years earlier and weighs 30t less, will not enhance 777X sales / margins I think.

        People like to play down the A350-1000, with reason. It has 11 customers among which loyal 777 customers Qatar, United, Cathay, Ethihad, British Airways and JAL.

        Non -1000 A350 customers Singapore, Lufthansa and Delta, and American Airlines probably have switch rights in their contracts. They even say so.

        If Boeing sleeps better knowing just 8 A350-1000s were ordered over the last 3 years ,that’s all fine. But I doubt it.

        Until yesterday they learned us 5-6 777 a month will roll off the line in the next 3-4 years.

        “If the 777x was in bad shape, we would know more about it through the press or through customers.”

        Customers keep quiet, and the press, well they love to write what their target consumers love to read. Positive, supportive news. And if things go wrong, it’s a general trend and/or Airbus did worse.

        Leeham News is IMO a source for the broader news agency’s but no doubt get’s headwind for not being more supportive when telling the truth.

        • “An airframe inbetween 777-8 and -9 that flies three years earlier and weighs 30t less, will not enhance 777X sales / margins I think.”

          Wishful thinking, next year and 2019 will show nothing that’s 30t less. The 777x is fine. That plane won’t exist, hence why nothing has come to fruition. Airbus and Boeing are committed to whatever they have on the market for the foreseeable future, as far as widebody aircraft go.

          This is not a bash the – 1000 commentary. But the airlines that haven’t yet switched are likely staying put, but things could change.

        • Boeing has sold 349 777’s just in the past three years (2014-2016). Airbus has sold 8 A350-1000’s. UA, IAG, and JAL were no doubt huge sales for the latter, but again if you’re looking at recent history I don’t see a big reason to panic.

          It’s basically the inverse of the 739 Max vs. A321 debate. One product just continues to beat the other, with a few exceptions here and there.

          • No not really the 739max/A321NEO. A321NEO has absolutely crushed the 737-9. 779 is nowhere near doing the same for the A350-1000.

        • “An airframe inbetween 777-8 and -9 that flies three years earlier and weighs 30t less.”

          You “forgot” to mention that it carries fewer passengers.

          • Yes. For the 777-9 each additional passenger requires 1t of additional weight. A bit like carrying a small car for each of those pax.

          • Yes thats exactly the A380 conundrum, all those extra passengers dont come cheaply in terms of structure. I leave you to guess how that might play out

    • I am sure Airbus competed vigorously for the same Gulf carriers but was unsuccessful due to an inferior product.

      • ME-3 needed an ULR for 350 persons and Airbus had no interest, so supporting 777-X with big enough orders to get it built was their only option. Okay for Boeing as long as they get paid enough, which I am by no means sure of.

        • Airbus had no interest or Airbus had no airplane. I am imagine it is the latter.

  3. Since mid 2007 the A350-1000 has sold just 43 frames to two airlines; UA and VS. Not sure the 77x is competitive vs a theoretical larger version, but I’m pretty sure Boeing’s not TOO worried. The 779 functionally has no competition, as was the case for the 773ER for many years.

    • The question is though, “Does the 779 have the (potential) market the 773ER had?”

      • It really doesn’t have the potential to eclipse 77W sales figures but it makes buying quad engine aircraft more difficult, or even similarly matched aircraft like A350-1000 because while the A35K is lighter and more efficient, the extra revenue potential from more seats along with better cargo lift in the 779 make a hard case to pass on.

          • Is it too big or too heavy? You will probably answer “both”. But what about the 777-8? You will probably answer that “it is not too big but it is too heavy.”

            My understanding is that the 777X fuselage will be made out of conventional aluminium instead of Al-Li. Perhaps it was a bad choice. But obviously a less expensive one. I am of the opinion that in view of what the A350 has to offer in terms of technology Boeing should have opted for an Al-Li fuselage in order to keep the weight down.

            But my main concern for the 777X is the wing. It was certainly a good idea to design a composite wing. But I see it as a risky operation because Boeing has no experience in manufacturing a composite wing of this size. If they run into problems it could potentially impact EIS. Paradoxically I see the 777X as a very ambitious project that is rather conservative because of it’s conventional fuselage. One last question: if the 777-9 is too big, what about the A380? My answer is that the 777-9 is not too big, but a case can indeed be made that it is too heavy. As for the 777-8 I think it will be facing stiff competition. It was a good idea to start with the 9.

    • Many people forget that airlines do not have to order the more expensive A350-1000 to get them in the end. They just ordered the smaller and less expensive A350-900 deposit.

      It is no option to order the smaller 777-8X because Boeing would not allow to switch all orders.

      “The 779 functionally has no competition, […]” because the niche is so small. An airline has to fill far more seats to use a 777-9X economically than a 787 or A350.

    • Texl1647:
      “A350-1000 has sold just 43 frames to two airlines; UA and VS.”


      BA (2013), Cathay (2010), Ethihad (2008), JAL (2013), LAT(2008), Asians (2008), ALC (2013).

    • Yep, Boeing had a conversion (has) as well.

      Not enough feedstock but it looks like that is coming.

      FedEx would likely be a major customer. The conversion is close to an MD-11 with better economics.

  4. I know the focus so far here has been widebodies. But let’s look at a broader picture–“black swan” event–involving the acknowledged key growth market for AB and BA. The United States and China are pretty much headed towards a shooting war in the South China Sea– in the next decade. I adjudge the current chance of hostilities at 40% short term, in the next two years, but steadily increasing. Objectively, China wants sovereignty over all of it within its “nine dash line”. It’s furiously building out reefs into islands, with plenty of ground to air missiles. Nothing wrong with that from China’s perspective. The U.S. wants to preserve freedom of navigation (“FON”), sailing through these same waters. Nothing wrong with that, either. But we’re probably one or two Chinese missiles from fully taking a USN P8–on an area recce mission– down. (Don’t want it to happen, but never discount “Murphy’s Law”.) I wonder if AB and/or BA have fully done their contingency planning for this not unlikely scenario.

    • Regardless of China’s appalling behaviour, I think that they’re fairly confident that no one wants to actually confront them. It’s a long-term strategy that’s working.
      Much more likely to kick off is Russia. When dictators run out of the money that keeps them in power , they tend to get reckless.
      Also a good 50years of even more bother as demographic tsunami of unemployed young Arabs come of age.
      BA and AB have military division’s for a reason.

      • Democracies can be very reckless too, especially one that has its congress hamstrung while its President can do what he wishes. There’s a long list but this isnt the place to fulminate

        • Hypothesising on the black swan event to come is IMHO a fruitless exercise. The fact that we all see the likelihood of such an event happening as rising is the real concern. Discussing this in the context of B777x vs A351 is a tad wearisome given they are both strong competitors but within a market that is soft or worse. The ultimate risk to either OEM is not competition but instead the world economy and the knock on effect on passenger numbers. Could we do less of the partisanship stuff please as it leads nowhere but the regurgitation of old ‘facts’

    • The Chinese look at the map and ask themselves what the people from the other side of the big sea are doing / claiming here. They weren’t here 1000 years ago. Maybe they better fix their home place, they earn us a lot of money.

      =》 Not blaming anyone, but it’s all about perspectives.

  5. Did anyone catch the context that the 787 might go to 777 rates?

    Is that current, past or future?

    ranges from 9 down to 5

    • Yep, as someone who thinks and has recently posted that 10 is max sustainable 787 rate, I was feeling a bit vindicated. In the current market 8 wouldn’t surprise me, and that’s only held up by the backlog, we won’t see new orders in any magnitude until the World starts to pick up again, and I have no idea how many of those will be A330 NEOs of A330Rs. Whatever the 787 rate ends up at it won’t have the sort of margin Boeing is pining for.

      • Yes and add in the twist that you then have excess capacity and how to deal with it (two sites making 787 with one making only the 10)

    • I had looked at Boeing backlog management some years ago.
      My sifting through data indicated that a desire for 3++ years backlog controlled production rates. ( which shows int he rolercoaster curve of Boeing production numbers.)

  6. The 777X will not be as successful as everyone thinks. It will be more successful than the A380 but nothing like the 777-300ER.

    The A350-1000 is a different animal. It has a smaller number of orders than the 777x , but many more customers. A wider appeal thus far.

    I don’t think there will be many more orders for the 8x.

    There will likely be more orders for the 9x as well as the A350-1000. Perhaps the A350-1000 will have many orders to come when 777-200ER’s are replaced with an increase in capacity. The 9x will replace most 747’s, many 300ER’s, and perhaps even some A380’s but that will be a smaller market.

    There won’t be a need for a stretched -1000. The A380 neo might be build once the new RR engines take shape but only if EK is interested. Otherwise it is probably on the death bed.

  7. In this particular thread there are many people who think the 777X does not have a great future. I am not so sure about that; but if they are correct and the 777X does not sell very well over the long term, the consequences for Boeing are almost unthinkable. The 777X still represents a relatively large investment for Boeing even though it’s not a clean-sheet design. And it now appears that in the near future the 787 will not be able to pickup the slack because it has itself been in low demand for some time. That leaves only the 737 to support the entire company in the coming years. Its backlog is huge but its production rate is very high and the backlog could melt away relatively fast if the B2B ratio stays below 1 for an extended period of time. And since the 737 is an outdated model it is not likely to survive very long in this new environment.

    So the more I look at the situation the more concerned I become for the future of Boeing. Greg Smith says that “Boeing will have a good cash flow.” Perhaps, but for how long? Very little money will come from the 787, if ever; the 777 is now bringing lower revenues at a time when Boeing is investing a lot of money on its modernization; and that leaves only the 737 “to support the family.” Which makes me think that Boeing might eventually need “social security” to survive. Whichever way I look at the situation, it’s not pretty. Until recently I had a rather pessimistic outlook on Boeing, but now it’s getting positively scary.

    • They can still hit up the Washington state pension fund, theres precedent…

    • Looks like most potential 777-X customers have placed their order. 350 safe orders might be enough to keep it out of trouble if the margin is enough. What worries me is the size of some orders, EK and QR have fixed the price probably for every 777-X they are ever going to buy, ET as well. How much discount did Boeing give for these mega orders?

      I am sceptical of 777-X future orders as the A350-1000 will be more comfortable, better pressurised, smaller and easier to fill, all at the same CASM as the ¨X.¨ This reminds me of the 748i vs 77W, and we know how that ended, but the A350 will have better RASM in the long run as it is more comfortable, same as the A380 has. The ¨X¨ also depends on newer engine tech. to keep it competitive, that can be a bit hit and miss! Airbus can also RE the A350 with newer tech engines if needed.

      • Because Airbus has its A350 order book shared by more customers we can assume that its margins will be higher than Boeing’s. If this is the case, it is possible that the first batch of 777 will be less profitable per frame, just like the first batch of 787 was. What all this means is that between 2020 and 2030 Boeing’s revenues would be continuously declining, unless the market recovers quickly and more customers start buying 787s and 777s. Ironically, this would have become necessary at that time to compensate for the 737’s expected declining sales, which until then will have been supporting these presently impeded programmes. Hopefully those individual cycles will have their ups and downs happening at different times. Otherwise if they pile on top of each other it will create a destructive resonance.

      • And isn’t there the question of fatigue life to consider? As far as I know a CF airframe potentially has a much longer life, meaning that A350s and 787s could be flown for far longer than an aluminium tube. So won’t the residuals and entire financial assessment of the CF aircraft be much more favourable if one takes takes a long term view?

        • I was wondering about that as well. My understanding is that aluminium is lasting much longer with less maintenance as well. Or is it largely irrelevant because of other issues, like obsolete engine’s?
          This is why I think that the order wave will be self correcting. The planes that are now working past normal retirement age will die of old age and newer planes with older generation engines will retire early when the fuel price inevitably spikes in 3or 4 year’s time. Obviously I don’t have access to the numbers that leeham has or the brains to crunch them,also I could be wrong about the oil price.

      • It might be the 777-10 and A350-1200 that will be the big Sellers for “normal” Airlines not needing the ME3’s requirement for range.

    • ” Greg Smith says that “Boeing will have a good cash flow.” Perhaps, but for how long? Very little money will come from the 787, if ever,”

      Your confusing program profit with cash flow.The money has already been spent on the 787, it does not affect future revenues from the model which will be becoming positive quite soon

      • The 787 may indeed become cash-flow positive soon, but I don’t expect the profits to be very high and I don’t expect them to last very long either because the B2B ratio is below 1 and is likely to remain there for a while. That is what I meant by “very little money will come from the 787, if ever.” Before becoming cash-flow positive the 787 will first have to break even on production costs and we are not there yet. Remember when McNerney said before the end of 2015? Well, it has not materialized yet and that is why I am a bit skeptical.

        If we take a look at the big picture we have deficit of 30B on a batch of 1300 frames. It takes a big margin on each frame to absorb this huge amount. And that block will likely melt away fast because new orders are not coming in at the required pace. If the B2B ratio was higher than 1 I would be more optimistic, but that’s not the case. That is why I added “if ever” at the end of the sentence. Unless Boeing rights off 30B in one shot. And if the order book remains anemic they may have no other choice.

        In short, I don’t expect Boeing to make much money on the 787 even after it will break even on production costs. And after this relatively more comfortable period I don’t expect the 787 to remain profitable for very long if production has to be reduced substantially (below 10/month), because production costs would likely go up again and erase the already small profit. The 787 programme can only become viable if new orders keep coming in at a reasonable pace. That is simply not the case right now.

        • Although some posters believe that eventually the 787 will be profitable (overall that is) I have my doubts. Around 2025 new engine tech will arrive in the 70klb sector. Airbus will badly need to upgrade the A380, which might even have a market in the 900 version by then, but I think RR or P+W will hold them to ransom and force Airbus to agree to an A330 NEO mk 2 using the same engine to maximise the market. Boeing will have no choice but to fork out for a 787 RE. 3 billion R+D and some extra deferred at the start to cover before a profit comes.

  8. I think Airbus will have an upper hand longer term since the A350-900 and A350-1000 cover the biggest market, that is the 777-200 and -300 sized planes. There is too much of a jump from the 787 to the 777-8.

    The 777-X will be magnificent but will have a smaller market share, perhaps somewhere between the A380 and 747 sized planes market. Longer term, however, the larger 777X demand might increase given the continuous growth in the number of passengers flying.

    At that time, the stretched A350-8000 and the stretched -10X may surface. For the A380, however, the future remains more tenuous.

    • I think the 777-10X will further hasten the demise of the A380. Its just too big and apart from EK, it has almost zero appeal. Reduced production numbers sound like the 747-8 but the 747-8 can possibly go on as a freighter, something the A380 cannot do. Anyone have the total number of 747-8 frames sold to date?

      • The 777-10 is not required to “hasten the demise of the A380.” For the A380’s demise is already starring Airbus in the eyes. On the other hand the 777-10 may very well hasten Boeing’s own demise.

  9. While a private company, Boeing is also a national asset and will not be allowed to fail. Conceivably the current stockholders could be wiped out as per GM but it will absolutely be recapitalized and kept going.

    Now, of course, they should write off the 787 losses (or much of them), stop the idiotic stock buybacks, and run the place like the hungry #2 it is or could become. Not much chance of that, one imagines, making the first paragraph more possible.

  10. The more I look at the 777X the more it reminds me of the A350 when it was launched in 2004. The latter was criticized for not being modern enough when compared to the 787, and was considered a half-measured response. Reluctantly, Airbus went back to the drawing board and came up with the formidable A350 XWB, which was sufficiently larger than the 787 to start encroaching on the 777’s territory. This was a very radical decision because Airbus could have simply decided to keep the same fuselage width as the A330, because they were responding to the 787, not the 777. I don’t know who had this idea of tackling both with a single design, but it now appears as a very smart decision that is likely to go down in history as a major “coup”. Perhaps a “coup de grâce” to Boeing. But it must have required a little more than a fancy Power Point presentation to be accepted by the board, because the difference between the original A350 and A350 XWB is enormous. We were now talking of a very large clean-sheet design, as opposed to a simple “neo”, that was to be initiated in the middle of the A380 debacle. It took a lot of courage to undertake such a bold project under these circumstances.

    This long introduction was meant to show where the 777X stands today: a half-measured response to the A350 XWB. But where is Udvar-Házy this time around? My dear Steven, don’t you think the 777X is a little heavy when compared to the A350 XWB? Can’t you see that its big fuselage is made out of antiquated aluminium? Why are you so soft on Boeing when you were very harsh on Airbus? You did a great service to Airbus back then, while doing an equally great disservice to Boeing today. Yet, in an interview with Aviation Week, that was reported by LNC, you seem to have a high opinion of the A350 XWB:

    AW: Udvar-Hazy does not expect any quick decision on the matter and questions whether it would be absolutely necessary for Airbus to proceed with another stretch. “They have an acquisition price advantage,” he says, referring to the A350-1000 compared to the 777X. And while the -1000 may not have the same range, it would still be able to perform 90% of the flights possible with competing aircraft, Udvar-Hazy argues.

    Since the A350-1000 has “an acquisition price advantage” and it is much lighter than the 777X, why is it that the big leasing companies are not making much fuss about it? Do we have a double standard for half measures?

    • I’m confused, doesn’t the -1000 have more range than the -9x?

      Last gone I checked, the S350 has greater range than all 787’s and the 777-9.

      Also remember how the range from the -900 was increased from 7750 to 8100 now. Perhaps the range of the -1000 and its stretch may be increased as well nullifying and advantage of the 777-9.

      The -8 will is the highest performing machine in terms of payload and range.
      The -900ULR will be lighter than the -8 but carry less payload. I’m still uncertain how these two compare on an apple to apple comparison.

      • We have to keep in mind that the article was written almost three years ago. The airplanes have since evolved, and so has our individual viewpoint.

        • True, here current numbers from Airbus and Boeing after method of reporting was equalized:

          A359-ULR. 8,700
          A350-900. 8,100
          A350-1000. 7,950

          777-8. 8,700
          777-9. 7,600

          • Boeing recently changed the way they measure range to give a more realistic figure. Airbus, who weren’t as optimistic as Boeing were in the past, didn’t, I think Airbus might a bit more optimistic than Boeing these days, so I guess 779 vs 350-1000 ranges might be pretty similar.

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