- Qatar Airways Sticks With Boeing 777X, though we have doubts on the size of the role in a post-pandemic world and the timing of the service entry.
- Boeing 777-300ER to be phased out by 2025 as part of green initiative.
- Qatar Airways still sees a spot for Boeing 777X, but its role might be smaller than envisioned.
- Analysis of the fleet suggests that 50% of the Boeing 777X could see a very long deferral eventually leading to a delay of the entire program.
- This idea was discussed in more depth with members of my private investing community, The Aerospace Forum. Get started today »
In a recent report, I discussed Qatar Airways threatening Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) to exclude either jet maker from future aircraft procurements if the jet makers would not be willing to cooperate with the Gulf carrier on delaying aircraft deliveries. The airline has a $17.7B identified backlog with Boeing and $7.5B with Airbus using actual market values (not list prices) sourced from our Boeing and Airbus backlog monitors, interactive dashboards available to subscribers of The Aerospace Forum.
What we found is that even though, Boeing has a significantly bigger exposure to Qatar Airways than Airbus, the words of Akbar Al Baker should be taken with a grain of salt. There are various reasons for that. The first one is that in the coming years, even with the travel market being depressed now, Boeing and Airbus will be the biggest players on the market. That is not expected to change for another 10-15 years at least. So, even if Al Baker ceases doing business with one… it will leave the airline as an exclusive customer to the other. Might be good news for Boeing or Airbus it seems, but we analyzed the Qatar Airways fleet and concluded that the airline leverages the existing duopoly to balance its fleet perfectly between Boeing and Airbus. Airbus exclusively provides the single aisle aircraft of the fleet, Boeing dominates in the freighter fleet and in the passenger wide body fleet there is a 45-55 division in Boeing’s advantage. That all leads to a 50:50 distribution between Boeing and Airbus in the fleet of Qatar Airways and clearly demonstrates the company’s purchasing practice.
It’s unlikely that Qatar Airways truly intends to stop doing business with either jet maker. The airline simply knows that near-term demand for new aircraft is virtually zero while it has aircraft on order for a clear growth scenario. That growth path ahead for which Qatar Airways has committed with original equipment manufacturers does not exist today and due to the blockade of Qatar that growth was already trimmed. By threatening both airlines in the media, Al Baker simply is trying to increase pressure on both jet makers to honor his requests for deferring aircraft deliveries. When doing this in the media, you simply can force both jet makers at the same time and if one jet maker bends to honor the request, the other will do so too. That is a simple negotiation practice often applied in an industry that veils itself in secrecy.
In this analysis, we will have a look at what recent words from Al Baker on the Boeing 777 retirement from the Qatar Airways fleet would mean for the Boeing 777X, which I consider Boeing’s most risky wide body jet development at this time.
Qatar Airways sticks to Boeing 777 retirement
Early in June, Qatar Airways made headlines as it threatened to no longer do business with Boeing or Airbus if they would not work with the airline’s plan on pushing out deliveries by 2 years. That would mean that, apart from some already finished jets, Qatar Airways is not willing to accept deliveries in 2020 and 2021 while existing orders will be spread out over a longer timeframe.
Figure 1: Mid-life point Qatar Airways Boeing 777 and Airbus A380 passenger fleet (Source: AeroAnalysis)
At the same time, the airline intends to retire the Boeing 777 fleet, the backbone of the fleet, by 2025 while the Airbus A380 fleet count will come down once the aircraft reaches the 10-year mark. In Figure 1, we plotted the years in which each Boeing 777-200LR and Boeing 777-300ER reach the 12-year mark, which marks the mid-life of the aircraft and the 10-year mark for the Airbus A380. What we are actually seeing is that Qatar Airways’ plans don’t really have a clear connection with the fleet age of the aircraft. Qatar Airways does have 9 Boeing 777-200LRs and 48 Boeing 777-300ER aircraft in the fleet which matches the unfilled order for 10 Boeing 777-8s and 50 Boeing 777-9s, but in the timeline there seems to be a mismatch. Part of the mismatch stems from the delay on the Boeing 777X program. Years ago, Boeing was silently aiming for a 2019 entry-into-service but kept an official 2020 service-entry target which slipped towards 2021 as the engine program and ultimate load tests suffered setbacks. On customer requests the EIS has not been postponed to 2022. So, the first Boeing 777-300ER aircraft that reached the 12-year mark in 2019 are still in the fleet while a Boeing 777-8 EIS initially scheduled for 2022 has been pushed back. If you add to that the company won’t take delivery of jets through the remainder of 2020 and 2021, you end up with 13 jets that will cross the 12-year mark without a replacing delivery scheduled. There is a couple of things that could happen, Qatar Airways could retire these aircraft without replacement in a “shrink before we grow” scenario or keep them in the fleet and schedule their replacement for 2022, the year in which Qatar Airways hosts the FIFA World Cup but that is likely the least problematic when assessing the mismatch.
The bigger problem would be that a total of 24 Boeing 777 aircraft will reach the 12-year mark beyond 2025. By that time, the Boeing 777 should already be phased out. If you add all that up with the constraints in mind, there are 60 Boeing 777X aircraft on order while just 20 Boeing 777s and 6 Airbus A380 aircraft reach the mid-life or phase out age between 2022 and 2025.
Thirteen aircraft from the 2019-2021 timeframe could be retired without a replacement or they will be pushed into the 2022-2025 frame for a total of 33 Boeing 777s to be replaced and 6 Airbus A380s. How an efficient replacement of the other 24 aircraft can be achieved is unclear as these aircraft will still be young by the time Qatar Airways plans the phase out of the Boeing 777.
The role of the Boeing 777X
Currently the Airbus A380s will be leaving the fleet one by one once the aircraft reach the 10-year mark and by 2025 the Boeing 777s will be removed from passenger service. The big question is: Where does this leave the Boeing 777X? Production for the Boeing 777 will come down from 5 aircraft per month to 2 aircraft per month in 2021. That does not come as a surprise, as the actual delivery rate has been low for some time now and we were skeptical of demand for the Boeing 777X picking up such that it would support a production level of 60 aircraft per year (5 aircraft per month) and that was a concern that we have prior to COVID-19 being at thing. The production rate of 2 aircraft per month for the entire program would leave around 6-12 Boeing 777X deliveries annually. If Qatar Airways wants to have all 60 Boeing 777 removed by 2025 then the production levels for the Boeing 777X are a big indication that the Boeing 777X will no longer be a straightforward Boeing 777 replacement as the production capacity between 2022 and 2025 is just 20 to 50 aircraft. That production pool is not exclusive to Qatar Airways as it needs to be shared with other players such as Emirates, Cathay Pacific (OTCPK:CPCAY) and Lufthansa (OTCQX:DLAKF). That is not to say these companies are lining up to take delivery of their ordered aircraft, but the current production plans for the Boeing 777 program simply don’t allow a lot of space for one-on-one replacement of the entire Boeing 777 fleet by 2025.
Figure 2: Possible path Boeing 777 and Airbus A380 phase out (Source: AeroAnalysis)
One possibility seems to be that 8 Boeing 777-300ERs replacements will be delivered in 2022 and 2023, which would bring the number of potential Boeing 777X deliveries in the 2022-2025 frame to 34 aircraft. As the Boeing 777-8 development has been delayed, Qatar Airways has been contemplating converting some of the orders for the -8 to the -9. This would bring the potential to roughly 40 aircraft in the 2022-2025 timeframe.
Another possibility would be that some of the Boeing 777-300ER and Boeing 777-200LRs will be temporarily replaced by the Boeing 787-9s of which 7 have been delivered. In a lower demand environment like we will see in the coming 2 years, at least, those aircraft would make sense to serve as replacement for the first batch of Boeing 777s that reach the 12-year mark or have already reached it. That would bring the delivery potential for the Boeing 777X in a replacement setting to 32 units, roughly half of the order units.
More problematic are the 24 Triple Seven aircraft that will reach the 12-year mark beyond 2025. For the 4 Airbus A380s, we can see the Boeing 777-9 as a suitable. The 24 Boeing 777-300ERs for which Qatar Airways already ordered replacement aircraft are the bigger problem. These are aircraft that Qatar Airways now plans to phase out after just 6-7 years of service that is extremely early for wide body jets and more common for single aisle jets. Such an early phase out would make sense if there would be a strong demand in the second hand market, but that market simply does not exist today and you could really ask yourself whether that market will exist in 5 years from now. Even for conversion to freighter aircraft, these aircraft might still not be the most attractive because being younger they also have a higher capital cost than older frames typically used for freighter conversion. So it seems that with the retirement plans in mind, Qatar Airways overordered big time when it ordered 60 Boeing 777X jets. Surely it does make sense when you consider there is 60 Boeing 777 aircraft in the fleet, but it certainly doesn’t make sense when we consider the blockade on Qatar that started in 2017 and a changed market environment for second hand aircraft for Qatar Airways due to COVID-19.
Figure 3: Initial Qatar Airways Boeing 777X delivery stream (Source: AeroAnalysis)
Initially, Qatar Airways expected 16 aircraft per year from 2020 through 2023 and 12 aircraft in 2024. would have positioned the airline for growth, leaving space to grow the Boeing 777X fleet by 3-12 depending on the year. Even when we take into consideration the shifted timeline due to delays on the Boeing 777X program, we would be left with quite a number of planned deliveries in excess of replacement, so to support growth as shown in Figure 3. It seems that no matter what way you slice the numbers, Qatar Airways did overorder when it ordered 60 Boeing 777X aircraft to be delivered in the coming years.
There are two ways in which you could view the order:
- Very high growth: A high growth market that could have absorb additional Boeing 777X aircraft on top of the deliveries for replacement purposes. In this setting the airline would operate the Boeing 777X and Boeing 777-300ER in parallel until the demand profile allows for replacement of the younger aircraft.
- High growth: For every one replacement of the Boeing 777-300ER, one Boeing 777X would be delivered for growth.
- Moderate growth: A growing market in which Qatar Airways would easily find customers for their relatively young Boeing 777-300ER and replace those aircraft with the Boeing 777X.
Obviously, the growth element is gone for now and that leaves Qatar Airways in an overordered position. In 2023, we might be seeing demand being at the same levels as in 2019. That means that up until 2023-2024, Qatar Airways ordered 23 Boeing 777X aircraft for growth that it does not need and to that you can add 7 Dreamliners that are delivered but haven’t entered service yet. To catch up with the trendline fueling demand for aircraft to support “new growth” we will need to wait until 2025. So again, no matter how you slice it you will again and up with roughly 30 Boeing 777X on order that the airline does not need for years to come as shown in Figure 3.
So, the question “Where does it leave the Boeing 777X?”. In an uncertain demand spot is the realistic answer. On paper, the order quantities do seem to fit under a set of assumptions that is no longer valid and you could really ask yourself in what places does demand exist and where is it lacking and on what timeline? Qatar Airways want to phase out part of the Boeing 777 fleet extremely early. To me it makes extremely little sense to dispose 24 Boeing 777-300ER on a secondhand market that hasn’t really shown strong appetite for the Boeing 777-300ER in recent years, apart from some interest from Russian carriers.
Reasonably, demand could exist for around half of the number of aircraft Qatar Airways ordered. While there seemingly is a one-on-one match it is also true that the Qatar Airways order matches one aircraft ordered for supporting growth for every aircraft it orders for the replacement cycle. That is also the reason why the airline ordered 60 aircraft all to be delivered by 2025. Beyond 2025, Qatar Airways would start firming its purchase rights of which it has 50 for the Boeing 777X to replace the remaining Boeing 777-300ER aircraft.
For the Boeing 777X the position is unclear for a variety of reasons; The Boeing 777X can without doubt replace the higher capacity Boeing 777-300ER aircraft of which Qatar Airways operates 12 which will hit the refreshment age in 2023-2025 and there is 10 Airbus A380 aircraft that need to replaced by 2024-2028 and 9 Boeing 777-200LRs. So you end up with roughly 30 Boeing 777X aircraft (once again). Where things become tough for the Boeing 777X is that the Airbus A350-1000 has been evolving more and more into an aircraft that can replace the Airbus A380 on thinner routes and it could even go as far as replacing the Boeing 777-300ER and Boeing 777-200LR, while at the lower side of the Boeing 777-300ER market there is a very remote opportunity for the Boeing 787-9 and Airbus A350-900. The Boeing 777 is the backbone of the fleet and having the Boeing 777X as the replacement does seem to be straightforward, but over time the Airbus A350-1000 has become a more capable aircraft after incremental improvements from Airbus while currently we simply don’t know how robust demand is going to be in the coming years for the high-end of the Boeing 777-300ER and the higher end of the Airbus A380 segment. So the Boeing 777-300ER and Airbus A380 pie potentially has to be divided between the Boeing 777X, Boeing 787 and Airbus A350.
Putting it all together, Qatar Airways has overcommitted on the Boeing 777X order. A blockade hasn’t done the growth prospects of the airline any good and the position of the Boeing 777X itself is being challenged as trends might converge to smaller aircraft leaving the Boeing 777X in a niche spot. Even if we assume that is not the case, the timeline of the scheduled deliveries and the retirement do not match quite match. While an early phase out of the young Boeing 777-300ER might have been something Qatar Airways might have considered my best guess is that Qatar Airways anticipated to grow the fleet by 1 unit for every one Boeing 777X aircraft it ordered and it never truly was the intention to have the existing order cover the replacement of all Boeing 777 jets.
The 2025 target for removing the Boeing 777-300ER is either one with a very strong commitment to reducing the footprint on the environment, a sharp reduction in fleet size or a scenario in which the Boeing 777X no longer is the prime replacement for the Boeing 777-300ER fleet which will definitely feel like a loss to Boeing. To me it seems like the Boeing 777X is no longer in pole position as the Boeing 777-300ER replacement as the Boeing 787 and Airbus A350 do provide compelling alternatives. So, there is a role for the X, but likely smaller than initially envisioned and you could ask yourself whether the 50 purchase rights will ever be firmed as Qatar airways will likely defer deliveries for 30 Boeing 777X aircraft through 2030. It seems that part of the near-term deliveries that Qatar Airways envisioned for the Boeing 777X has become part of a very long-term growth story as the aircraft that are no longer needed for today to support growth are actually also no longer needed to replace the Boeing 777 beyond 2025 as the aircraft will already be phased out.
Qatar Airways’s CEO Al Baker is known for his sharp tongue in negotiations as well as the media, but he is considered a man with a strong business sense… with that in mind I truly do wonder whether phasing out the Boeing 777-300ER by 2025 years ahead of a typical schedule is something that he believes makes business sense or it will become one of the many things that has led to the extravagant Al Baker being given the infamous name “U-Turn Al Baker”. What rests is an uncertain future for the Boeing 777X, one that can come in handy in negotiations with Boeing and could eventually trigger a program delay to achieve better market alignment.
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This article was written by
Dhierin-Perkash Bechai is an aerospace, defense and airline analyst.Dhierin runs the investing group The Aerospace Forum, whose goal is to discover investment opportunities in the aerospace, defense and airline industry. With a background in aerospace engineering, he provides analysis of a complex industry with significant growth prospects, and offers context to developments as they occur, describing how they might affect investment theses. His investing ideas are driven by data informed analysis. The investing group also provides direct access to data analytics monitors. Learn more.
Analyst’s Disclosure: I am/we are long BA, EADSF. 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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