Boeing still upbeat about 777 production

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.

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

Yansi De La Cruz molds a cheese mixture into bone shapes at Himalayan Dog Chew on Thursday, Sept. 21, 2023 in Arlington, Washington. (Olivia Vanni / The Herald)
Give a dog a bone? How about a hard cheese chew from Arlington instead!

Launched from a kitchen table in 2003, Himalayan Pet Supply now employs 160 workers at its new Arlington factory.

Inside the new Boeing 737 simulator at Simulation Flight in Mukilteo, Washington on Wednesday, Sept. 20, 2023. (Annie Barker / The Herald)
New Boeing 737 simulator takes ‘flight’ in Mukilteo

Pilots can test their flying skills or up their game at Simulation Flight in Mukilteo.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.