EVERETT — As the calendar closes out on 2014, the Boeing Co.’s top salesman is as optimistic as ever about being able to keep 777 production going at its current rate at least until airlines start flying its successor, the 777X, early next decade.
To keep the Everett plant’s 777 assembly line humming, Boeing has a short amount of time to get a lot of orders for big airplanes that have declining relative value for customers.
The company needs to get 40 to 60 orders a year to close the production gap, said Randy Tinseth, vice-president of marketing at Boeing Commercial Airplanes.
Boeing got about 60 777 orders this year.
“We’re pretty much where we’d like to be for the year,” he said.
But many aerospace analysts say that Boeing can’t sustain the current 777 production rate of 8.3 airplanes a month — about 100 a year.
The 777 has for many years dominated long-haul air routes virtually unopposed, and Boeing has charged a premium for the airplane.
But that is changing.
Airbus on Monday delivered the first A350 to Qatar Airways. The airplane will compete more with Boeing’s 787 Dreamliner, but its largest version, the A350-1000, could grab a slice of the current 777 market share. For that matter, even Boeing’s own 787-10 could take some of that same market. Other competitors include Airbus’ A330-300.
And the 777 classic faces market competition from its own replacement, the 777X. The first variant, the 777-9X, is slated to be delivered in 2020.
Why should airlines and airplane leasing companies buy the last of a current generation airplane when they can wait a few years and get a next generation airplane?
“This is an airplane that continues to perform well,” Tinseth said.
This year, several customers — including China Southern Airlines, China Eastern Airlines, Air Lease Corporation and China Airlines — took delivery of their first 777-300ERs.
But those orders were placed several years ago. And while Boeing has landed plenty of new 777 orders this year, the Chicago-based airplane maker also had some turbulence.
In November, Airbus won an order from Delta Air Lines for 50 widebody jets. Boeing’s bid included five 777-200ERs to tide Delta over until 787 production slots opened up.
And in December, Air France-KLM deferred its orders for 10 777 airplanes that it was supposed to take in 2015 and 2016.
Putting off orders is not usually a big deal for airplane makers, but with the 777 line almost certainly winding down in the next decade, Boeing doesn’t have much room to work with.
Boeing can only keep the line running at current rate if it continues to book 40 to 60 orders a year, and no customers change or cancel their standing orders or commitments.
“That almost never happens,” said Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Virginia.
Most industry analysts say Boeing will have to lower 777 production, perhaps as soon as next year and certainly by 2018.
“The longer they wait, the bigger the adjustment” to the production rate, Aboulafia said.
The price of jet fuel is a major variable influencing demand.
Right now, it’s down around $2 a gallon, which is lower than it has been in many years.
Lower oil prices are making Boeing’s task tougher, according to David Strauss, an analyst for UBS who follows Boeing.
A new 777 is only marginally cheaper to operate than an earlier version. With jet fuel prices down at around $2 a gallon — compared to about $3 a year ago — those savings are likely overshadowed by the costs of buying a new airplane, Strauss explained in a Dec. 17 aerospace research note.
Airlines could consider delaying “current generation aircraft on order if fuel remains at these lower levels for six to 12 months,” Strauss said.
Among airplane makers, “the risk is more significant for Boeing than Airbus, as Boeing has a much larger gap to try to bridge to its next generation models,” he said.
Tinseth said he isn’t too worried about the current low oil prices.
Boeing expects it will be higher, “probably in the $80 to $100 range” per barrel, which is more than double what it is now, he said.
At that level, it makes more sense for an airline company to replace a less efficient older airplane with a new 777-300ER.
Growth in the air cargo market will also generate demand for 777 freighters, he said. “For every 1 percent growth in the cargo market, it equates to about 10 widebody orders.”
Boeing forecasts air cargo growing by about 5 percent a year.
The Chicago-based airplane maker has a few options to get orders: price discounts and coupling orders.
“As we get toward the end of the transition” from the 777 classic to the 777X, we will probably see some pricing pressure,” Tinseth said.
But cutting the sticker price on a 777 will likely hurt Boeing’s cash flow, said Scott Hamilton, an aerospace analyst and owner of Issaquah-based Leeham Co.
Sales of the 777 and the single-aisle 737 make up about 60 percent of Boeing Commercial Airplane’s cash flow. Boeing makes money on 737 sales by volume, churning out dozens each month. Until now, Boeing has been able to charge a premium for the 777, so it has margin to cut.
According to industry sources, Boeing is already offering huge discounts, as much as $204 million off 777 list prices, but with little success, Hamilton said on his company’s website, Leeham News and Comment.
The “broad consensus today is that Boeing will have to reduce the rate — the only questions remaining is by how much and how soon,” he said.
Earlier this month, Airbus indicated to investors that it plans to reduce A330 production down to six a month and increase it once the A330neo is added to the assembly line.
Airbus and Boeing have been making airplanes for decades. Both have phased out older models for newer ones. And both have armies of analysts to get the timing right, said Tom Captain, an aerospace analyst for Deloitte. “They don’t do it too soon or too late,” he said.
Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.
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