Boeing 787: The Key To Success In Coming Years

| About: The Boeing (BA)
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Summary

Boeing will depend on 787, 777X and 737MAX for the next 15 years.

Dreamliner technology made the 777X possible.

Dreamliner can return value to Boeing, despite being a financial mess.

Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) always have been battling each other, bringing new aircraft types and families to win market share. Besides the constant battle both Airbus and Boeing are highly dependent on the global demand for aircraft. Since 1980 the revenue passenger kilometer (RPK) grew almost by a factor 6.

Although the growth in revenue per passenger kilometer is strong, the past 30-35 years have not been easy for Boeing nor for Airbus.

Figure 1: RPK growth since 1980 (Source: boeing.com)

As can be seen in Figure 1 from 1980 until 2000, a period in which the 757, 767, 777 and 737 (sub)family entered the market, the RPK tripled. During the period that followed the world faced 9/11, financial crises and recessions.

This also had its effect on Boeing (and its order book) and required the available funds to be used efficiently. The result of this was that Boeing focused on optimizing current products. During the period 2000-2015 Boeing brought 8 derivatives of existing aircraft to the market, of which 2 aircraft were able to accumulate large order numbers (Boeing 777-300ER, Boeing 737-900ER).

Focus on the Dreamliner

Boeing came up with one new aircraft family: The Boeing 787 Dreamliner. Seven of the derivatives that saw an EIS (entry into service) between 2000 and 2015 made use of stretches and minor, yet not unimportant, technological innovations and tweaks. So during the first years of the 21st century Boeing used the ongoing advancement in technology to come up with new aircraft.

When RPK started growing again in 2002 it was too late to come up with complete new aircraft for all market segments. So Boeing focused on the development of the Dreamliner.

The Boeing 787 was an aircraft family that was completely designed from the ground up, which opened up opportunities for application of the newest aerodynamic and propulsive technology and the application of new materials.

Rapid growth of market forces Boeing to reduce development time

According to Boeing's forecast here will be need for 36,770 new aircraft (valued $5.2 trillion) until 2033, which resembles growth of 75%. Taking into account that modern airliners are very complex products and that it takes over a decade to develop and stabilize production it is not an option to come up with a new aircraft family to haul in orders for the period 2015-2033. Instead Boeing is forced to be efficient once again, this time because it is has to bring its aircraft to the market within a reasonable time span.

Although the Boeing 787 program remains a financial mess, it brings Boeing the tools for early service entry of new aircraft types in the coming decade: it's harvesting technology.

Harvesting technology is nothing more than using technology and applying it on existing products to come up with new products. On the Boeing 787, Boeing has shown that it cannot deal properly with costs and time. It is key for Boeing to show airlines, but also investors, that it can deal with costs and time and harvesting technology from the Boeing 787 should aid them in that.

The benefits of harvesting technology are:

  • Lower development costs
  • Lower development time
  • Higher efficiency
  • Higher reliability

Aircraft with 787 technology

The current derivatives that entered service or are about to enter service in the coming years make use of the technologies from the Dreamliner and the ongoing advancement of technology. This results in fuel efficient aircraft that sport the newest technologies but lower development costs and early service entry, making it possible to supply airlines with fuel efficient aircraft earlier.

Boeing 747-8I and Boeing 747-8F (Service entry in 2011 and 2012)

The Boeing 747-8 features the engine technology that also was available on the Boeing 787 and incorporates a highly efficient wing design, also derived from the Boeing 787.

The Boeing 747-8I does not meet market requirements, while the freighter version does significantly better and has a brighter future.

The Boeing 747-8 program accumulated 119 orders worth $42.5 bn at list prices.

Boeing 777X (Service entry in 2019, estimated)

The Boeing 777X combines the efficiency of the Boeing 777 with the technologies from the Boeing 787. The 777X features new engine technology, CFRP wings and aerodynamic improvements. In order to prevent a late service entry the fuselage of the 777X remained constant in cross section and material.

The Boeing 777X program accumulated 286 orders worth $110 bn at list prices.

As can be seen the Boeing 748 and 777X sport technologies that also were applied on the Dreamliner. New engine technology, material technology and aerodynamics from the Boeing 787 were used to improve existing airframes in order to come up with a new product.

So far four models benefited from the 787 technologies, accumulating 401 orders worth over $150 bn.

Additionally there are 850 unfilled orders for the Boeing 787 worth over $214 bn. Boeing is not making profit on the production of the Boeing 787 yet, but as soon the production becomes profitable the Boeing 787 can finally add to Boeing financially.

Conclusion

  • Although the Boeing struggles with the profitability of the Dreamliner production, harvesting technology from the Dreamliner brought Boeing the 777X and the 747-8.
  • If the Boeing 787 would not have been there, it would have been hard for Boeing to remain competitive in the coming 15 years.
  • Development costs for the Boeing 777X and Boeing 747-8 were lower due to harvesting technology from the Dreamliner, which to some extent compensates for the development costs that piled up for the Dreamliner.
  • The Dreamliner and its technology accumulated almost 1,500 orders.
  • If Boeing manages to make production of the 787 profitable, the future looks a bit brighter for Boeing.
  • Boeing will rely on the production of the 737 MAX, 787 and 777X in the coming decades.
  • Boeing should use the coming years to tighten its grip on the market, designing the replacement for the MAX (as it already announced), designing a 777X with CFRP fuselage and studying the need for a super jumbo.
  • Year to date Boeing has been down 3%, but has been up 6% since last month. I do not expect the stock to make major movements as it did in 2013, but with the service entry of the 777X, a delayed (but upcoming) breakeven on production for the Dreamliner and the service entry of the 737 MAX, it should not hurt to hold Boeing stock for the long term.

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