Will Boeing 747 Fly Steady In The Face Of Current Headwinds?

| About: The Boeing (BA)


Boeing 747 orders remain weak with just one order so far this year.

The Jumbo Jet is losing edge over newer aircraft that claim better fuel efficiency.

Changing technology and shift in customer requirements are weighing on the demand for large jets such as the 747.

Boeing 777X, which is slated to enter service this decade, could eat away a share of orders that could have gone to the 747.

The 747 still remains one of the best choices for the cargo market.

The world's largest jet maker, Boeing (NYSE:BA), may very soon see the end of the era of its iconic jumbo jet, the 747. Continuous weakness in demand in the cargo market and changes in requirements for large commercial jets are having a bearing on the Chicago-headquartered aerospace major's wide-body commercial jet offering.

In Want of Orders
The plane maker has seen no orders for its 747-8 jet so far this year. The 467-seater capacity plane is facing difficulty in getting orders. However, the 747-8F version managed to receive order for just one aircraft. Fears linger that if the market for such jets continues to remain as dull, the 747 series jet would fade away soon. Presently, Boeing's order books show a firm backlog of 51 747-8s. The 747 has received total orders for 120 since it was first unveiled, of which 69 have been delivered.

Japan-based airline operator All Nippon Airlines has been flying the 747 for more than forty years. On March 31, it operated the 747 jet, which was a frequent plane seen flying on Japanese skies, for the last time. Even IAG's British Airways is said to be planning to put its 747 fleet (around 25 jets) to rest by the end of this decade. JAL, one of the first buyers of the 747 and a loyal Boeing customer for the past five decades, is also preparing to bid farewell to the jumbo aircraft.

Lack of orders has made the American aircraft giant put a brake on its 747 production rate. The backlog isn't huge, and there is no near-term delivery for these aircraft. The company already has ready inventory that can form the next set of deliveries for these planes. Consequently, the aerospace major has brought down the production rate from 2 aircraft a month to 1.5 this February. It has no plans of increasing its production rate beyond this at least till 2015. Boeing is more focused on getting orders for the 747 at the moment. But in an effort to win orders, the company might also compromise on the price of the jet, which would in turn squeeze profitability margin of the 747 program.

The Shift from "Outdated and Obsolete"
Upgrades in technology, changes in the architecture of airplanes, increasing competition, shift in customer requirements and demand are some of the reasons leading to such change. One of the issues with the 747 is its four fuel-guzzling engine, which becomes very unviable for airline operators. More than one third of the expense incurred by airlines is that on aviation fuel, and with the market growing extremely competitive, fuel efficiency is one of the main factors that airlines consider while placing aircraft orders. Fuel prices have soared to a never-seen-before level in the past years - weighing down airlines' profit, which makes them rethink their decision of placing firm orders for the 747.

Airlines are choosing to develop a fleet of fuel conserving jets that would save them a lot on fuel cost, and thereby, help in improving operating margins. Options of such aircraft are also increasing with both Boeing and arch-rival Airbus (OTCPK: OTCPK:EADSY) ramping up production of fuel efficient jets. The giant size A380 competes with Boeing 747, and is way ahead when it comes to the engine technology. The material used to make the jet is much lighter, which again saves on fuel costs. Airbus COO John Leahy did not hesitate a bit before saying that Boeing's 747 is "outdated and obsolete." The A380 is a bigger plane with 525 seats that are wider, and gives more seating comfort with better legroom and space compared with Boeing 747's squeezed-up seats.

Losing Edge
There was a time when the 747 claimed an edge over most of the other long-range competing planes. But gone are such days. Things have dramatically transformed over the past two decades when both Boeing and Airbus started fine tuning their fleets by incorporating upgraded technology. With the advent of the wide-body 777 and A330, aircraft offerings went on to another level that the 747 failed to match. In fact, both the plane makers are now re-engineering their jets using the proven platform of their existing versions.

Boeing's 777X is slated to enter service in the latter half of this decade. The 777-9X would have a capacity to seat 410 passengers with a range as good as 747's and better fuel efficiency. Obviously airlines would prefer 777X with enhanced technology to the 747 jet, thus eating away orders that could have come to the latter. Demand for the jumbo jet looks bleak under the current scenario, which is quite visible from its order volume that is drying up.

The jumbo jet was conceived with the idea that the global market would see sustained growth and mature as international traveling routes would grow with the passage of time, demanding higher capacity planes. But this isn't the case. Routes that would require airlines to fly such planes with capacity of accommodating more than 450 passengers haven't grown as expected. Order volume is expected to remain a big concern for the 747s, but it should be compensated by the firm orders for the 737s and the 787 Dreamliners. These smaller planes are booking record volumes and pulling the firm backlog to massive levels that would keep the production capacity engaged to the fullest for the next eight years at least.

It's too early to say whether it's the end of the 747. The life of an aircraft cannot be ascertained by one single poor year. Even the A380 hasn't had a fantastic year so far as orders received are lower than expectations. Such transitory phase shouldn't question the success of an aircraft model. Moreover, the fact that the 747 freighter model is more suitable than any other plane for goods loading and unloading cannot be disregarded - thanks to its design. Although the 747 order is facing some headwinds at the moment, Boeing is very optimistic about the overall demand for aircraft in the near and long-term. For 747, it's time to wait and watch how things turn out to be for the jumbo jet in the next few years.

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