The Boeing 777: It Is Not As Easy As You Think (Part 2)

| About: The Boeing (BA)
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Summary

Boeing 777X timing is good.

Low oil prices delay phase-outs.

Production rates were not sustainable, and this already was apparent years ago.

In a previous article, I had a look at some of the factors that complicate matters for the Boeing (NYSE:BA) 777. The full analysis can be found here. These factors were:

  • Oil prices
  • Industry crises and economic downturn
  • Competition

In this article, I will have a look at the other factors to add some more depth to the analysis. These factors are:

  • Aircraft age
  • Production rate

The aim of this article series is to make investors aware of the challenging market the 777 had to operate in and to show that management decisions are not just a matter of adjusting production and pricing up or down.

Replacing older aircraft

Figure 1: Boeing 777-300 and -300ER deliveries (Source: www.AeroAnalysis.net)

Next to growth, one of the things that determines demand is the need to replace the airframe. Currently, the Boeing 777-200 and Boeing 777-200ER find a replacement in the Boeing 787. This means that the only 777 members the Boeing 777-300ER can replace are the Boeing 777-300 and Boeing 777-300ER.

Figure 1 shows one of the problems Boeing is facing with the Boeing 777-300ER. Airplanes usually are in service for 20-25 years. This basically means that the Boeing 777-300 and Boeing 777-300ER have not reached their end of economical viable life yet. Airlines such as Emirates have a more aggressive fleet retirement program, but their average retirement age of 15.7 years is well below the industry standard.

The oldest Boeing 777-300ER might need replacement by 2024, while production of the current generation Boeing 777 will likely end by 2025. This shows that the timing of the Boeing 777X coincides with the retirement of the oldest Boeing 777-300ERs.

The oldest Boeing 777-300 aircraft might need replacement by 2018, so these older airframes could actually be of help in Boeing's task to fill up the order gap. The question that remains is how many Boeing 777-300s have already been replaced and how many still need replacement. In total 60 Boeing 777-300s have been produced, 55 of which are still in service.

Cathay Pacific (OTCPK:CPCAY) which operates 12 Boeing 777-300s is not planning on retiring any of their 777s until 2025. In case they decide to retire the Boeing 777-300s earlier, these will likely be replaced by the Airbus A350. So it seems there is nothing to win for Boeing there, other than the high discount play it can do with any airline.

Emirates operates 12 Boeing 777-300s and is the largest Boeing 777-300ER operator. The airline already started retiring its Boeing 777-300s and its older Boeing 777-300ERs. Emirates' aggressive fleet retirement program could open up some opportunities for Boeing.

All Nippon Airways operates 7 Boeing 777-300s, 2 of which will be retired and while 5 will be converted to international configuration. It seems ANA does not require a replacement for the 2 aircraft that are to be retired.

Japan Airlines (OTCPK:JAPSY) also has 7 Boeing 777-300s on order, but with the Airbus A350, it seems the airline already has a replacement on order.

Singapore Airlines (OTCPK:SINGY) also operates 7 Boeing 777-300s, but has enough aircraft on order to replace the airframe. The same counts for Thai Airways.

Korean Air operates 4 Boeing 777-300s for the Korean government since 2016, making replacement of the airframe unlikely.

Table 1: Retirement plan Boeing 777-300

Table 1 gives a quick overview on how various airlines have things planned out for the Boeing 777-300. It seems there is very little for Boeing to win here.

Likewise, for the Boeing 747-400 replacement aircraft already have been ordered. Some airlines also are not planning on removing the Boeing 747-400 and Airbus A340-600 from their fleet yet.

So most of the current Boeing 777s, Boeing 747-400s and Airbus A340-600 in service don't need replacement yet, while a lot of airlines already have replacement aircraft on order.

Orders, Deliveries and Production Rate

Figure 2: Orders and Deliveries Boeing 777 Classic (Source: AeroAnalysis)

Figure 2 shows that in most years the Boeing 777 Classic deliveries exceeded the order inflow. This already is a sign that in the long term, production rates might not be sustainable.

Figure 3: Backlog growth Boeing 777 Classic (Source: AeroAnalysis)

Now looking at the backlog growth per year and the accumulated background since 2000, it can be seen that every few years there was a spike in order inflow. However, this spike has remained absent in recent years.

Since 2011, Boeing has increased the output from 5 aircraft per month to 7 to 8.3. However, as can be seen in the chart, these production rates were not sustainable.

One can question why Boeing would increase 777 output to these levels in the first place. The answer to this question lies within Boeing's financial performance. The Boeing 787, which entered service in 2011, had a dilutive impact on financial results. In order to counter this, Boeing decided in an early stage to increase 777 output, which would simultaneously lead to a higher efficiency on the Boeing 777 program.

Conclusion

In Part 1, I looked at the influence of oil prices, industry crises, economic downturns and competition on the order inflow for the Boeing 777.

In Part 2, I had a look at the influence of aircraft age as a driver for orders and concluded that most airplanes have not reach their end of economically viable life yet. The ones that have reached that age are either not yet being replaced with the eye on capital efficiency and low oil prices or find their replacement in the Airbus A350.

In that light, one could say that the Boeing 777X is late. Indeed, as a Boeing 777-300 replacement, the Boeing 777X is late. However, the Boeing 777X is a vastly different aircraft compared to the -300.

In my view, the Boeing 777X is not late, the problem Boeing is facing is that it had a production rate that was not sustainable. The jet maker increased production rate in order to boost the financial performance and partly cover up the highly dilutive impact the Boeing 787 had on earnings. The rate increase was in no way related to any backlog growth for the Boeing 777.

All with all, I do not think Boeing management made a mistake here that can directly be related to the Boeing 777 or Boeing 777X. The main problem in my view is the Boeing 787 program on which Boeing made a lot of mistakes and the company needed the Boeing 777 success to cover that up.

Boeing chose to increase 777 production to boost performance. If this would not have happened, Boeing shares would likely not be trading anywhere near the current levels and the company's share buyback and dividend hikes would be nowhere close to the current levels.

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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.