By Scott Hamilton and Vincent Valery
Feb. 1, 2021, © Leeham News: There are now just 191 firm orders for the Boeing 777X.
Boeing last week reclassified 118 777X orders from firm to iffy (LNA’s term) due to the accounting rule called ASC 606. There were 17 iffy 777 orders before last week. The ASC total is now 135. After the adjustments, Boeing confirmed to LNA there are 191 firm orders for the X, down from 309 previously.
ASC 606 essentially requires contracts with customers that may be unable to take delivery due to their financial condition. Alternatively, an order can receive such classification if the seller has strong reasons to believe the transaction won’t materialize, despite the customer’s ability to pay.
With an entry into service delayed by almost four years, several 777X customers may have informed Boeing of their intention to cancel their orders without penalties. As a result, Boeing had to reclassify those orders while negotiations are ongoing for potential conversion.
The reclassifications do not bode well for the 777X program. Sales stalled at a peak of about 350 orders. Cancellations brought the backlog down to 309. About a third of these were iffy by LNA’s analysis before last week’s ASC adjustment.
There are only eight identified customers for the 777X.
Etihad Airways last year made it clear it doesn’t want its order delivered. The financially-ailing airline began a major fleet readjustment. An order for Airbus A350s was rejected. The carrier is downsizing its fleet and operations. These actions began pre-COVID.
Cathay Pacific Airways deferred its entire order until 2025 and beyond. Market intelligence indicates the carrier wants to cancel this order in favor of Boeing 787s. No confirmation has been forthcoming from Cathay, which is financially struggling due to China’s crackdown on democracy demonstrations and COVID. Hong Kong Airport will also receive a third runway by 2025, which will diminish the need for an aircraft of the 777X size.
Singapore Airlines is under COVID pressure, and Singapore Airport will receive another runway by the mid 2020s. However, the carrier did not indicate it was considering changes to its 777X order. Neither Lufthansa indicated so far that it wished to convert or cancel its 777X order.
All Nippon Airways recently retired two 777-300ERs that entered service in 2005. Therefore, the carrier won’t want more large aircraft for the foreseeable future. Since the carrier is the largest Dreamliner operator, a conversion of the 777X order to 787s (or outright cancellation) is a distinct possibility.
Below are the outstanding 777 Classic orders as of Dec. 31, 2020.
Before this update, Boeing flagged 17 777 orders as iffy. LNA’s analysis suggests that they belonged to the following customers:
One scenario would involve Emirates entirely walking away from all or part of its 115-strong 777X order. Tim Clark, the president of Emirates, publicly complained about the engines and the delays. He is known to want to swap between 50-70 orders for more 787s. The delays incurred so far probably trigger the option to cancel orders without penalty. Cancellation is believed to be based on a plane-by-plane basis after a 12 month delay, not the entire order in a block.
Since other customers, notably Etihad, have expressed a stronger desire to cancel their orders, this scenario is the least likely.
Excluding orders for Emirates, Qatar Airways, and British Airways, the total orderbook is 116. The customers are All Nippon Airways (20), Cathay Pacific (21), Etihad (25), Lufthansa (20), Singapore Airlines (20), and the unidentified one (10). LNA believes that the three carriers listed first are the least likely to entirely cancel their 777X orders, due to their size (Emirates and Qatar) and operations at congested airports (British Airways).
This scenario, which would be grim for the 777X program, isn’t much more likely than the first. It would be hard to envision two customers, Lufthansa and Singapore Airlines, canceling their orders without any public notice beforehand.
LNA believes that the orders from Cathay Pacific, Etihad, and the unidentified customer are the most likely to have been reclassified as ASC 606 by Boeing. The total of those five orders is 56. That leaves 62 orders for the other airlines.
Emirates previously threatened to cancel a portion of its 777X order or do more conversions to Dreamliners. After converting a portion of its original 777X order to the 787-9, Emirates still envisioned taking 777-9 deliveries over the 2021-23 period. LNA believes that the other 62 orders reclassified as ASC 606 are Emirates’, representing almost half of the carrier’s total 777X order for 115 units.
Claudius said in Shakespeare’s Hamlet: “When sorrows come, they come not single spies, but in battalions”. This sentence comes to mind when reflecting on last week’s news surrounding the 777X program.