A Boeing 767 freighter with an Amazon.com “Prime Air” livery flies over Lake Washington in 2016 as part of the Boeing Seafair Air Show. (AP Photo/Ted Warren)

A Boeing 767 freighter with an Amazon.com “Prime Air” livery flies over Lake Washington in 2016 as part of the Boeing Seafair Air Show. (AP Photo/Ted Warren)

Boeing plans increase in 767 production, bullish on outlook

Puget Sound-area factories look set to remain very busy even as 777 production dips.

By Dominic Gates / The Seattle Times

SEATTLE — Seeing a strong recovery in the worldwide cargo aircraft market following a prolonged slump, Boeing on Wednesday said it plans a 20 percent production increase for the 767 freighter jet in 2020.

Added to already-planned rate increases for the 787 Dreamliner in Everett next year and for the 737 in Renton this year, the three rate hikes should maintain Seattle-area assembly line jobs at Boeing, offsetting the downturn in 777 production through 2020 as that program transitions to the forthcoming 777X model.

In a teleconference call to discuss Boeing’s strong first-quarter earnings, Chief Executive Dennis Muilenburg offered a bullish business outlook for all the commercial jet programs.

Rosy view of tanker

On the defense side, he offered a much rosier picture of the KC-46 tanker program than the Air Force, which now expects delivery of its initial batch of 18 tankers to be delayed until May of 2019.

And he played down fears that the Trump administration could start a damaging trade war, specifically with China, a key market that takes a quarter of all Boeing’s production output.

“We’ve heard from the leadership in both countries that both are seeking to find negotiated positions,” Muilenburg said. “We’re hopeful for a positive outcome from the discussions between the U.S. and China.”

He added that the aerospace industry is important to both countries and said Boeing’s 737 completion center in Zhoushan, China — which will paint and install cabin interiors on 737s destined for the Chinese market — is under construction and should be operational by year end.

Boeing’s Puget Sound-area factories look set to remain very busy even as 777 production dips.

767 rate increase

Most encouraging is the news of the 767 rate increase from 2.5 to 3 jets per month beginning in 2020.

The continued commercial demand for the 767 is entirely in the freighter market, where Boeing currently enjoys a monopoly in mid-size and large cargo aircraft with its 767, 777 and 747 freighter jets.

Airbus focuses on passenger planes almost exclusively and offers no competition for any of those Boeing planes.

After years of stagnation following the global financial crisis of 2008, the air freight market finally grew last year at a strong rate of 9 percent and is continuing to boom this year with a growth rate of 7.7 percent through February.

FedEx currently has 56 unfilled orders for the freighter version of the 767, UPS has four and another unidentified customer has three.

The growth of e-commerce is a big factor in the surging air cargo market, and Amazon is another potential 767 customer.

The tech giant’s Prime Air unit already has a fleet of 40 used 767s but has been negotiating with Boeing about a potential large order of new freighters.

Bainbridge Island-based aviation analyst Scott Hamilton said Wednesday Boeing’s rate hike “portends potentially big orders and this rate increase may be only the first to come.”

New Dreamliner orders

For the 787 Dreamliner, Boeing had a rush of new orders in the first quarter, including 25 by Turkish Airlines, 47 by American Airlines and 10 by Hawaian.

Muilenburg said the 787 program is in much better shape financially now that all the expensive early-build jets have been sold off and the assembly lines are producing more of the higher-margin 787-9 and -10 models.

In addition, he said Boeing has reached signficant “step-down” pricing agreements with the major 787 suppliers, including Spirit, Leonardo of Italy, and Mitusbishi, Kawasaki and Subaru of Japan.

He said Boeing is on track to go from 12 to 14 Dreamliners a month next year.

In the first quarter, profits on the 34 Dreamliners built in the quarter lowered by $668 million, or $19.6 million per airplane delivered, the total of past 787 production costs that still have to be recouped.

That’s a sharply accelerated reduction in the future cost overhang. Last quarter, Boeing recouped only $16.4 million of deferred costs per airplane.

The total of deferred production plus tooling and other non-recurring 787 costs previously sunk into the program and still to be recovered now stands at $27.7 billion, down from $28.5 billlion at the end of 2017.

In a note to investors, Doug Harned of Bernstein Research, one of Wall Street’s most positive analysts on Boeing, said he expects “steadily rising free cash flow, with improving cash performance on the 787 a big piece.”

777 deliveries slow

For the 777 program, Boeing has has already slowed the delivery rate way down to 3.5 planes per month to create time to build the first 777Xs. The fuselage of the first ground test 777X is currently being assembled.

Despite that slowdown, Boeing still hasn’t filled all the delivery positions on the current 777. However, while Muilenburg conceded that “we still have more work to do to fill the remaining 777 production slots” in 2019 and 2020, he doesn’t foresee a need to lower the production rate further.

And Muilenburg offered assurance that this outlook won’t be affected if politics prevents Iran from taking the 15 Boeing 777s it has ordered.

He said that 777 deliveries planned for Iran this year “have been deferred in line with the U.S. government process.”

“The (777) production plan we have in place is not dependent on the Iranian order,” Muilenburg said.

MAX doing well

For the 737, Muilenburg said the introduction of the MAX into the Renton assembly lines has gone well and that the in-service reliability of the fleet of more than 100 MAXs already delivered to airlines is “very high.”

Although Spirit AeroSystems stumbled in delivering some 737 fuselages late and CFM International is struggling to deliver LEAP engines for the MAX on time, Muilenburg said Boeing is “on top of the challenges” and has not delayed any deliveries.

Muilenburg reiterated the plan to boost 737 production from 47 jets per month now to 52 per month later this year and to 57 per month next year. He also said that demand remains so strong that there’s pressure on Boeing to go even higher.

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