Saturday, July 19, 2014

ANALYSIS: As 777X Finds Success, Boeing Struggles with Production Gap; 747-8

By Vinay Bhaskara & Jeremy Dwyer-Lindgren / Published July 13, 2014

FARNBOROUGH, UK: At a briefing ahead of the Farnborough Air Show on Sunday, Randy Tinseth, Vice President of Marketing at Boeing Commercial Airplanes, gave an update and talk on the company’s 777X program.

CGI image courtesy of Boeing.

CGI image courtesy of Boeing.

He pushed the jet’s strong economics, particularly against . While Airbus touts the A350-1000 as a viable competitor to the 777X, Tinseth was largely dismissive. On comparing the two aircraft, Tinseth stated that “the 777-8X and the A350-1000 essentially are head to head competitors; almost the same size. But what the 777X does, with its new wing and its new engine, it’s about 5% more fuel efficient per passenger than the A350-1000, and you take that it can fly 150 nautical miles further or carry more cargo, I think it’s just a better value proposition…. It’s got efficiency at all ranges.”

The 777-9X largely consists in its own class of aircraft, with about a 15% seating gap (optimistically) up to the 747-8. Realistically, the gap up to the 747-8 is somewhere between 6-8%, and Tinseth admitted on the sidelines of the briefing that the 777X and 747-8 had overlapped during several customer campaigns, and that the 777X has been seen by customers as an effective VLA competitor.

This isn’t surprising. Based on our analysis, on an operating basis (including finance cost), the 777X has between a 10-15% cost advantage per seat mile versus the 747-8i on a 5,500 nautical mile route, and about a 3-4% advantage per seat mile versus the present-day A380, though performance improvements for the latter aircraft and/or a potential re-engine could restore parity.

Tinseth was predictably down on the prospects of the A350-1000, stating that Boeing’s launch of the 777X last year and the solidification of its wide-body strategy have raised questions such as, “what will Airbus do with the A350-1000.” He described customer reception of the A350-1000 as lukewarm and re-iterated Boeing’s ability to dominate the wide-body sphere. It is our view that Boeing will retain leadership in terms of wide-body deliveries and orders for the next several years, though the launch of the A330neo, and production rate challenges for the 777 while bridging the transition to the 777X will constrain the gap to some degree.

Indeed filling the production gap to the 777X remains a key challenge facing Boeing. For the six year period between the present day and the launch of the 777X, Boeing has about 300 orders for the 777 program (largely the 777-300ER). At the current production rate of 8.3 aircraft per month (100 aircraft per year), Boeing has three years worth of production on tap, and would need to sell another 300 777-300ERs and 777Fs to fill out its remaining delivery slots.

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According to Tinseth, “We [Boeing] have six years to sell three years worth of 777 delivery slots.” The focus for the program remains “de-risking 777 production” (filling delivery slots), and “solidifying the 2017 and 2018 skyline(s).” While Tinseth asserted the current generation 777’s competitiveness, he did mention that Boeing would “increase capacity, increase efficiency, and take cost out [of the 777-300ER]” so as to help boost sales.

It is our view that Boeing will struggle to find enough customers to fill the remaining 777-300ER slots, though a large cargo order from say UPS could certainly help things along. It’s also unclear how much discounting Boeing is able to offer given the 777-300ER’s cash cow status, though further discounts would preserve reasonable margins. Moreover, cash generation is not as essential of a priority for Boeing in the near term, given that 737 MAX, 777X, and 787-10 development costs for the next five year are likely cumulatively less than 70% of those incurred for the 787-8 and -9 alone. Without any major orders, the fun begins in 2016, when the current production rates become unsustainable in relation to its backlog (though the A330, without a neo, will face a similar problem next year).

On a slightly unrelated note, the 777X’s sales to large Middle Eastern customers are in some sense under-pinned by the Export – Import Bank of the United States, which has recently come under fire from myriad political actors in the United States. Tinseth stated that the US government ought to, “[m]ake sure that we continue to have a level playing field with our competition. We are hoping to see the Export-Import bank re-authorized, and I don’t think that things are going to change here in Europe, in Japan, Brazil, China, Canada, or Russia. So we hope that the US government will do the right thing and preserve American jobs and competitiveness.”

Boeing 747 factory June 2014-1As for the 747-8, Tinseth says the majority of sales in the near future will come from the cargo market (nothing especially novel here).  Long term, he says the company sees up to two-thirds of future demand coming from passenger airplanes. Given it’s less than spectacular sales record so far, that certainly feels like a tall order.

Yet the company, in its recent twenty-year market outlook, forecasted a need for up to 600 airplanes in the 400+ seat category (a figure Tinseth skewed up to 640 during the briefing). Either figure is substantially lower than last year’s 760-jet outlook, with Tinseth saying that the decrease “frankly…reflects the reality of the market.” It also still assumes a production rate that is roughly equivalent to current production rates of both the A380 and 747-8 combined.

Unsurprisingly, Tinseth isn’t worried. He believes the -8i customers will come back as they “continue their string of profitability,” though didn’t add when that might be (we suggested two-three years, something he didn’t disagree with). He only said that that is why the cargo version of the jet was so important, though cargo sales of the airplane have been equally slow (Boeing has continued to forecast a round-the-bend turn-around in the freight market next year for several years).

Despite its muted optimism, the company isn’t nearly as rosy as Airbus about the future of the very-large aircraft market. Its has been keen to note that the world’s largest air markets are only set to become more congested, something that can be solved by (you guessed it), the A380 super-jumbo. But Tinseth won’t have it: “Big cities, big markets, big airplanes? Nice story, no relationship at all.” He points to a decrease in aircraft capacity size into those same cities by two percent, adding that the heart of the wide-body market exists in the 787-9, 787-10, and A350 markets.

We aren’t exactly sold on the VLA market ourselves. In our recent chat with program VP Eric Lindblad, he continued to hammer home that he believed the 747-8 was the right airplane for the right mission. The problem? The number of right missions appears to be disappearing. The overlap with the 777X, the trend toward twins more generally, and the moving away from super-high capacity certainly aren’t the 747′s friend.

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Contact the editor at Jeremy.Lindgren@Airchive.com

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