A Second Coming For The Boeing 767?

| About: The Boeing (BA)
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Summary

The type looks to be a small but increasing bright spot for Boeing in the years ahead.

A surge in interest among cargo operators, interest from Amazon and lack of available frames could lead to new orders.

The 767 has development costs paid off and can deliver solid profits to Boeing's bottom line from any additional orders.

Image 1: A FedEx Boeing 767 Takes Off

News these days surrounding Boeing (NYSE:BA) is generally focused on the Boeing 787 Dreamliner, upcoming 737 Max, 777X and a potential 757 replacement, all exciting and mostly new game-changing aircraft. Interest among the general public surrounding the 35-year old Boeing 767 seems to have long gone. For Boeing investors, however, they should be looking at the plane with much enthusiasm as commercial interest in the type begins to resurface.

While the Boeing 787 program is years away from making any money and the appetite for Boeing 777's, Boeing's most profitable aircraft, seems to have dried up for now, the potential for the Boeing 767 to deliver solid profits to Boeing's bottom line is looking quite strong. The aircraft's development costs have been paid off years ago and all profits from sales of the jet should flow directly to Boeing's bottom line.

Passenger Aircraft

Image 2: A Delta Air Lines Boeing 767 Aircraft

The interest for using the Boeing 767 as a passenger aircraft remains tepid, however Canadian carriers Air Canada 'rouge' (OTCQX:ACDVF) and WestJet (OTC:WJAVF) (OTC:WJAFF) have selected the type for their long haul missions. WestJet has started out with 4 of the aircraft as it tests the waters for long haul low cost flying. If successful, WestJet is expected to eventually opt for the Boeing 787 in the long haul, as its aircraft of choice. In the meantime, however, the airline is likely to acquire additional Boeing 767 aircraft. Air Canada has also stated it is looking at picking up additional used Boeing 767 aircraft for passenger flying. Beyond these airlines, there does not seem to be anyone else publicly looking to acquire any large number of Boeing 767 aircraft at the moment.

Tankers

The tanker version of the Boeing 767, the KC-46 Pegasus, has got 179 orders from the USAF, which will keep the Boeing 767 line open through 2028. In addition, there is interest in the type from Japan, and other countries may select it as a tanker aircraft for their military.

Israeli Aerospace Industries has developed a passenger to tanker-conversion package for the Boeing 767. It has stated that they already have 5 customers for the type and interest is growing. This program will siphon additional used 767s off the market and away from customers looking to the aircraft for cargo conversions and passenger use, a positive for Boeing.

Cargo Aircraft

Where the Boeing 767 really shines, however, is when used as a cargo aircraft. The aircraft has been popular with United Parcel Service, Inc. (NYSE:UPS) for years, with the company operating 59 of the type. With no orders for UPS on the books at the moment, there is certainly the possibility it may order more, either directly from Boeing or as converted freighters, as it looks to replace its 52 aging A300 freighter fleet in the future. FedEx Express (NYSE:FDX) has 69 of the type on order brand new from Boeing with options for an additional 50 on top of that. SF Express of China is looking at acquiring 30 Boeing 767 freighters, either conversions or new-build aircraft.

The passenger to freighter conversion has currently been a big success with 184 of the converted freighters ordered and 109 delivered to date. Many cargo operators like the aircraft for its overall economics, maturity and commonality with the Boeing 757, a popular aircraft among freight airlines.

The big news lately however with the Boeing 767 and news that may spark renewed interest in it is rumors from within Amazon (NASDAQ:AMZN) that the company is looking to acquire 20-60 Boeing 767 aircraft for its exclusive use, as it develops an in-house logistics and transportation solution. With only 774 Boeing 767 aircraft active, and many of these with too many hours and cycles on them to be considered for freighter conversion, a shortage could result. ABX, Kalitalla, and Atlas Air are already picking up frames for conversion to freighter aircraft with many speculating the move is to win business from Amazon, as Amazon does not currently have its own AOC and therefore would need to outsource flying initially. The rumor from within Amazon may also prompt companies considering acquiring the model to pick it up sooner to avoid a shortage of aircraft later on. The end result could be companies like Amazon are forced to either acquire the aircraft from Boeing new or partially fill their needs with new aircraft; both situations would be positive for Boeing.

Overall Economics

Despite not having the incredible fuel efficiency of the Boeing 787, the Boeing 767 is still a very economical aircraft. Many people are unaware its empty weight is lighter than the Boeing 787, meaning it will pay less in landing fees. In addition, despite using 20% more fuel, the aircraft has a list price much lower. Looking into the numbers deeper, it becomes obvious why cargo airlines love the plane so much. Take a look at the following,

Boeing 767 Boeing 787 Difference
$199.3 million list price $264.6 million list price $65.3 million
$20.01/NM fuel cost @ $5.00/gallon $16.01/NM fuel cost @ $5.00/gallon assuming 20% improvement over 767 $4.00/NM

Table 1: Operating costs of Boeing 767 and 787

The above numbers are by no means exact since airlines negotiate different prices based on their orders with list prices almost never being paid and fuel consumption depends on many factors including weather, payload, and an abundance of other factors. They are, however, good numbers to start with.

Image 3: FedEx fleet utilization

The above chart was put together in a report by MIT and showcases average aircraft utilization for FedEx Express. Looking at the above chart, an average utilization of 5 hours a day for a 767 cargo operation is probably a safe assumption to make.

Assuming the Boeing 767 flies at its standard 530mph cruising speed for those 5 hours of utilization, this gives us a total distance flown of 2650 miles per day, which translates into 2302 nautical miles. So the difference in fuel cost in a 767 versus the 787 when flying 2302 nautical miles is $9208 per day. Taking the $65 million price difference into account would give you 19 years of flying before the increased fuel consumption cost would equate to the $65 million difference. Even assuming huge daily utilization of 10 hours+ gives us almost 10 years before the increased fuel consumption would equal the difference in list price.

These numbers clearly show why the aircraft is a winner among cargo airlines. For cargo airlines that generally have less aircraft utilization, and fly shorter routes the Boeing 767 is an ideal aircraft compared to the much more expensive, complex 787. It also has the benefit of being available right away as opposed to the Boeing 787 that does not even exist in freighter form but in its passenger form has a backlog stretching for years.

Conclusion

For Boeing the 767 looks to be a winner for its next 12+ years of production. The increased interest in the aircraft has resulted in Boeing announcing an increase in production from 2 to 2.5 aircraft per month starting Q4 2017. The aircraft has its costs paid off long ago, allowing profits from sales of the jet to flow directly to Boeing's bottom line. In addition, a long wait for the Boeing 787 aircraft and the competitive economics, and mature airframe make this a popular choice among cargo operators. With air cargo growth forecasted to grow at 4.7% per year going forward and disruptors like Amazon showing interest in making the aircraft the backbone of their fleet, I say the Boeing 767 could be an unsung hero for Boeing and an area of strength for the commercial division, as its other programs suffer many issues.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.