The Boeing 777: It Is Not As Easy As You Think (Part 1)

| About: The Boeing (BA)

Summary

3 Generations of the Boeing 777 show the strength of the concept.

Business case Boeing 777 strengthens when oil prices rise.

Airbus A350 outsold the Boeing 777 so far.

In a previous article, I had a look at the order inflow for the Boeing (NYSE:BA) 777 and some of the conclusions that I drew were:

  • Order inflow for the Boeing 777 Classic dropped below the multi-year average.
  • Order inflow for the Boeing 777-300ER declined strongly in 2015. Boeing 777F orders supported order inflow, but it can be questioned for how long Boeing will be able to find customers in this challenging market landscape.

The Boeing 777: It is not as easy you think (Part 1) Click to enlarge

In the previous article, I solely looked at the impact the Boeing 777X had on order inflow for the current Boeing 777 family and although the impact is obvious, it is important to note and address the several other factors that complicate matters and make the situation for the Boeing 777 somewhat unique.

Boeing 777

Before addressing the factors that complicate things for the Boeing 777, it is important to give a bit of background information about the aircraft.

Click to enlarge

Figure 1: Boeing 777 Diagram (Source: www.AeroAnalysis.net)

The Boeing 777 is the result of competitors, such as Airbus (OTCPK:EADSF) (OTCPK:EADSY) that was working on the A330 and A340, working on new aircraft, while airlines pressured Boeing to come up with a clean sheet design rather than coming up with a stretch of the existing Boeing 767 airframe.

By 1995, the Boeing 777 base model entered commercial service. In the years after a stretched (Boeing 777-300) and an extended range version (Boeing 777-200ER) were introduced, completing the first generation Boeing 777 family. The second generation family included a stretch of the -300, a Long Range version of the -200 and a Boeing 777F. While the Boeing 777-300ER remained popular, Airbus came up with the Airbus A350, which would directly compete with Boeing's 777. This forced Boeing to come up with the Boeing 777X, but not before implementing a last performance improvement package on the Boeing 777.

In a time frame of 20 years, Boeing came up with 3 generations of Boeing 777 families, which not only shows the competitive market environment but also the strength of the 777 concept.

Oil Prices

One of the elements that determines the success of an aircraft is its efficiency. With higher fuel prices, which are directly related to oil prices, the efficiency of an aircraft becomes more important. Weight, number of seats, aerodynamics and propulsive efficiency directly impact the efficiency of an aircraft.

Order inflow Boeing 777 versus oil price Click to enlarge

Figure 2: Boeing 777 orders versus inflation corrected oil price (Source: AeroAnalysis)

Figure 2 shows order inflow on the left axis and the average inflation adjusted oil price per barrel. What can be seen is that in general, higher oil prices correlate with higher order inflow. Apart from fleet growth that drives order inflow, it seems that the business case for the Boeing 777 becomes stronger as oil prices head north of the $60 mark.

In the years 2007-2010, oil prices were above $60, but a worldwide economic crisis made fleet expansion unnecessary.

In the past 16 years, the average ranged between $40 and $100. Currently, the 2016 average is below $40 while Boeing has also launched the Boeing 777X. Current low oil prices make replacement of older aircraft on the short term unnecessary, while the Boeing 777X is the better option for the long-term fleet planning of airlines. These two elements already lead to declining order inflow.

Competition

As mentioned before, the Boeing 777 was launched to meet the needs of airlines and to be able to compete with the developments of Airbus and McDonnell Douglas. In 16 years, Boeing came up with 3 generations of 777s and a total of 8 models, including 1 freighter. This, on one hand shows the strength of the concept but also the fierce competition. The most serious threat probably came from Airbus that presented the Airbus A340, but could not compete with the Boeing 777. Eventually, Airbus came up with the Airbus A350, which can pose more of a threat to Boeing and was also a reason for Boeing to come up with the 777X.

Boeing 777 orders versus Airbus A350 Click to enlarge

Figure 3: Order inflow Boeing 777 Classic versus Airbus A350 (Source: AeroAnalysis)

Comparing the order inflow of the Boeing 777 Classic versus the Airbus A350, it can be seen that with the exception of a few years, the Airbus A350 outsold the Boeing 777. From 2007 up until 2016, Boeing received 582 orders, while Airbus sold 775 A350 units. So for every 777 Boeing sold, Airbus was able to sell 1.33 A350s. It is not weird for an all new airplane to outsell an existing concept, but it does show that competition has eaten or might have eaten away orders from Boeing.

Conclusion

A lot of my readers, but also analysts are quite fast in addressing the production gap as an isolated problem but it is important to look beyond that, taking into account other factors such as oil prices, downturns of economies, (geopolitical) tensions, industry crises and competition. All of these elements make the entire puzzle more complex for any manufacturer or management and complicate the decision making processes rather than adjusting production rates up or down based on backlog and projected backlog.

This article took into account oil, economy and competition and based on those elements the following conclusions can be drawn:

  • The Boeing 777 seems to be stronger as oil prices rise above $60.
  • The Boeing 777 experienced the crisis in the airline industry sparked by the 9/11 attacks.
  • The Boeing 777 experienced the downturn of the global economy.
  • The Airbus A350 was brought on the market to compete with the Boeing 777 as well as the Boeing 787 and was able to outsell the Boeing 777.

Taking into account these elements, I think it is more than fair to say that the Boeing 777 did not do as bad as most think. In Part 2 of this series, I will deal with an additional set of variables that complicate the puzzle even more, but should give a more realistic and accurate image.

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Disclosure: I am/we are long BA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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