Boeing 787-10: The Biggest Dream

| About: The Boeing (BA)

Summary

Boeing 787-10 adds value to airlines, lessors, and jet makers.

Boeing could achieve margins that it currently is unlikely to be seeing on any other aircraft program.

Boeing 787-10 production is accretive to Boeing's margins.

With the roll-out of the first factory-new Boeing (BA) 787-10 for Singapore Airlines, there has been a renewed interest from readers in the capabilities and potential of Boeing's biggest Dreamliner variant. In this article, I want to have a brief look at the sales that Boeing has booked for the Boeing 787-10 so far, the value for airlines as well as the value to Boeing itself.

Value to airlines

The Boeing 787-10 is the biggest member of the Boeing 787 aircraft family, and it offers 40 more seats compared to the Boeing 787-9, four in business class and 36 in economy class. The -10 trades range for payload, which makes it a good alternative over the Boeing 787-9 when the aircraft's full range capacity is not required but higher capacity is desired.

The aircraft can be seen as a Boeing 777-200ER replacement, having 17 more seats, but can also be considered a replacement to the Airbus A330, A340, and competitor to the Airbus A350-900.

Compared to the Boeing 777-200ER, I estimated that the revenue potential is lower due to the Boeing 787-10 using roughly 10% of its capacity for business class, whereas the Boeing 777-200ER uses 15%. Per seat, the revenues would be 20% higher for the Boeing 777-200ER, but the fuel bill would be roughly 25% lower, with fuel accounting for roughly 60% of the costs at a gallon price of $2.50 (note that current fuel prices are lower). Per seat, I estimated the revenues to be 20% higher for the Boeing 777-200ER, but its costs would be as much as 40% higher, leading to profitability per seat of the Boeing 787-10 potentially being roughly 10% lower and the total profit potential being roughly 6% lower. This might not seem appealing, but if we change the class mix of the Boeing 787-10 to match that of the Boeing 777-200ER, we find that, due to lower cash costs, the profits of the Boeing 787-10 could boost profits by as much as 40%, and that makes it worth to consider the Boeing 787-10 as a Boeing 777-200ER replacement despite potentially higher leasing rates or depreciation costs. Now, it has to be pointed out that there are a lot of moving parts that determine the profitability of a certain flight that I do not consider here in depth, but the potential of the Boeing 787-10 as an efficient solution here is clear in my opinion.

Compared to the Boeing 787-9 most of the value of the -10 to airlines would come from the increased capacity, which increases the revenue potential by 10-15% and is likely to increase the profitability of the airframe by roughly the same percentage.

To me, the value of the Boeing 787-10 is clear. Just like the Airbus A350-900, the aircraft's operating costs should be considerably less compared to the Boeing 777-200ER. How the A350-900 stacks against the Boeing 787-10 is a bit more complex, since the aircraft are quite close to each other in terms of capacity and efficiency drivers, but one would be inclined to say that the Boeing 787-10 might have a slight advantage if we factor in load factors and the expected lower empty weight for the aircraft.

Value to Lessors

The Boeing 787-10 has been ordered by 10 customers. In comparison, both of the smaller Boeing 787 members have been ordered over 40 customers. So, with appeal as a replacement for several aircraft types and the customer base for the smaller Boeing 787 members, I think there is a lot of potential for the Boeing 787-10 especially, if demand for air travel continues to grow at robust levels, the extra seats the Boeing 787-10 offers will come in handy.

So far, Boeing has accumulated 177 orders for the Boeing 787-10. What we see is a mix of European, Asian, and Middle Eastern companies, which is an appreciable geographical mix that reduces the risk of the order book. Additionally, we see that two lessors (GECASE, part of (GE) and Air Lease Corporation (AL)) have ordered the Boeing 787-10, which is a good sign for the Boeing 787-10 since lessors tend to look for aircraft that retain value, and in order for that to happen, there should be strong demand in the foreseeable future. AerCap (AER) has not yet ordered any -10s, but this could happen once the Boeing 787-10 gains traction among airlines.

Value to Boeing

The Boeing 787-10 seems to offer value not only to airlines but also to lessors. That is the reason for Boeing to build the Boeing 787-10, but of course, it would not have decided to build a stretch if the jet maker could not benefit from the advantages of a stretch itself. Part commonality is often quoted as an advantage for airlines, but it certainly also is an important advantage for jet makers in the production process. The Boeing 787-9 and Boeing 787-10 achieved a part commonality of 95% where the designers aimed for 90%, which makes the Boeing 787-10 a relatively inexpensive stretch.

The Boeing 787 has a sticker price of $312.8 million. The rule of thumb is that by dividing the sticker price by 2, you get an approximate value of the actual price paid by airlines. In case of the -10, that would be $156.4 million. I think that this rule of thumb works quite well, but for the Boeing 787-10, we should take into account that there is some competitive pressure that reduces the sales prices as well.

For Boeing, the current backlog is valued $55.4B at list prices, but the actual revenues from the current Boeing 787-10 would likely be in the $25-30B range.

With the high percentage commonality between the -9 and the -10, the production costs are likely going to be very similar despite the Boeing 787-10 being a bigger aircraft. So, the pricing differential is directly going to bolster Boeing's bottom line, and I would expect Boeing 787-10 profits to be above the 20-25% that the current well-established programs such as Boeing 737 and Boeing 777 are seeing.

Conclusion

The Boeing 787-10 is an aircraft that adds value not only to airlines and lessors but also to Boeing. The jet maker currently has a -10 backlog valued $55.4B at list prices, and I am expecting that Boeing will be able to harvest several billions of dollars in profits from the production of the biggest Dreamliner, which would make it one of the most profitable products on a unit basis for Boeing and would support Boeing's goal to achieve operating margins of mid-teens in the coming years.

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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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