In one of my earlier pieces, I concluded that Boeing's (NYSE:BA) value proposition of aircraft it currently offers to customers is not as compelling as was portrayed by former CEO, Jim McNerney. In that article, of which I think is an interesting read for people who are investing or planning to invest in Boeing, I said that I was planning on presenting the results that would support my view.
Now, before I begin, it is important to note that part of the Dreamliner's value comes from its ability to open up new city pairs. That is a part that I will not address in this article since it is not possible to properly address this in terms of value. What I will do is look at how much operating one airframe costs versus the other airframe. So I will be looking at how the aircraft performs as a 1-to-1 replacement of current aircraft.
I will be making 4 comparisons and will give a detailed break out of the results. The first comparison takes into account a lease of the Boeing 767-300ER versus a lease of the Boeing 787-8 at high fuel prices. In the second comparison, I will be comparing the same aircraft, but at fuel prices of $1.50 per gallon.
One needs to recognize the fact that airlines are favoring the Boeing 787-9 over the shorter -8, so after I have compared the -8 to the -300ER, I will also be comparing the -9.
By the end of this dive into the operating costs and revenue that is likely to be a 2-part article series, you should have an idea of the impact of oil prices on the attractiveness of the Boeing 787 Dreamliner.
Sample flight and method
For the analysis, I will be using a model that I developed. The model does not only calculate fuel consumption for a certain flight, but also calculates other costs such as maintenance costs, crew costs, navigation costs and other expenses. For this analysis, I have chosen a sample flight between Munich and Atlanta, a flight of 4,160 nm.
The Dreamliner: A combination of higher efficiencies
The keys to cost savings for the Dreamliner over any other given competitor are its propulsion systems and its higher aerodynamic efficiency. The aerodynamic efficiency of the Dreamliner is approximately 14% better than that of the Boeing 767-300ER. The propulsive efficiency currently is 12.5% better than that of the propulsion systems of the Boeing 767-300ER. The Boeing 787-8 aims to cut fuel consumption by at least 20% on a per seat basis. In our view, this certainly is possible but also depends on the seat configuration of the aircraft and the route that is flown.
Next to having higher aerodynamic and propulsive efficiencies, the Dreamliner's overall efficiency comes from the use of advanced materials. The use of lighter materials is one of the reasons why the Dreamliner has been able to open up new city pairs and has lower maintenance costs.
One of the most important decisions that has to be made when ordering an aircraft is about the seat configurations. In day-to-day operations, aircraft tend to be filled for 85%, which is something that does not only affect revenue but also the fuel burn per seat.
Using both airframes at an 85% load factor and typical configurations, the following revenues are calculated:
In this analysis, belly freight has not been taken into account, since the amount of belly freight tends to vary quite significantly with route and flight direction. What can be seen is that the revenue of the Boeing 787-8 is slightly higher, but this does depend on the airline specific configuration. In this analysis, I did not use the figures that Boeing uses but looked at some typical configuration and concluded that airlines are trying to maximize revenue by putting more business class seats in their aircraft.
The result is that the Boeing 787-8 generates 6.5% higher revenues.
Mission operating costs
The costs table shows that the costs for the Boeing 787-8 are higher by about $4,850 or 6.5%. The Boeing 787-8 burns about 2% less per seat in our specific seat count for the flight and 8.5% in total fuel costs. At prices of $3 per gallon, this translates to a cost saving of $4,052. Lower navigation and landing fees for the Boeing 767-300ER can be attributed to the lower maximum take-off weight of the aircraft.
Insurance and lease rates
The lease rate for the Boeing 787-8 is almost 90% higher, while the insurance costs are almost 25% higher. These costs are strongly related to the value of the aircraft.
If we now view the entire picture for fuel prices of $3 per gallon, we get the following result:
What you see is that the profit for the Boeing 787-8 is about $13,666 higher compared to the Boeing 767-300ER. The direct operation costs are about $3,260 lower for the Boeing 787-8, but the revenue potential is higher as well. On a per (nautical) seat-mile basis, the Boeing 787-8 total costs are $0.104 compared to $0.094 for the Boeing 767-300ER.
If we change the fuel prices from $3 per gallon to $1.50, we get the following results:
What you see then is that the mission operating costs are only $2,824 lower for the Dreamliner compared to the Boeing 767-300ER. The total direct operation costs for the Boeing 767-300ER are 8% lower compared to the Dreamliner in the low fuel cost scenario versus 4% in the high cost scenario.
Currently, airlines are looking at preserving cash and they also see that capacity has grown faster than demand. So despite the Boeing 787-8 having a higher revenue potential, it currently is more rewarding to operate existing fleet members for a couple more years. A big part of the high costs from the Dreamliner are related to the lease rate and insurance of the airframe. These are directly related to acquisition costs of the Dreamliner; Boeing is not planning on dropping sales prices any time soon.
During times of high fuel prices, airlines accelerate fleet renewal, while they slow down fleet renewal when oil prices drop. Combining this with capacity having grown a bit faster than demand, the higher revenue potential does not play big role in an airline's decision to keep a certain airframe in the fleet for a couple more years.
Instead, it is more important to look at the costs per available seat-mile (nautical seat-mile) in this case:
What we see then is that the costs per nautical seat-mile during times of high fuel prices are $0.0938 for the 767-300ER and $0.1044 for the Dreamliner, a difference of $0.011 or 11.3% higher compared to the Boeing 767-300ER. During times of low fuel prices, the difference in cost per seat-mile is $0.011 or 16.4% in favor of the Boeing 767-300ER. So what we are seeing is that from cost perspective, it certainly is more rewarding to keep the Boeing 767-300ER in the fleet for a couple more years. Attractiveness of accelerated fleet renewal will increase when demand picks up in combination with higher oil prices. Slowing down fleet renewals can be considered normal under current circumstances where airlines preserve cash and to some extend mitigate risk.
The -8 has a higher profit potential, but it remains a challenge to fill those extra business class seats that make a difference in revenue and profitability.
In Part 2 of this article, I will be dealing with the Boeing 787-9 and Boeing 767-300ER.
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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.