Boeing 777X WH001 makes its first flight at Paine Field in Everett, Washington on January 25, 2020.
Boeing expects only 191 of the 309 777X currently listed as “unfilled orders” to be actually firm orders. In its revised order book status, the US airframer has taken out 118 aircraft, it said in an SEC filing on February 1. The filing details more about the program status after Boeing announced a reach-forward loss of $6.493 billion during its full-year 2020 results presentation on January 27. In a surprise announcement on February 9, Singapore Airlines said it will order eleven extra.
Despite many uncertainties over the 777X actual backlog since mid-2019, Boeing never changed the number of unfilled orders for its biggest twinjet. It was only modified after Lufthansa revised its options, which reduced the backlog from 326 in 2018 to 309 in 2019.
The SEC filing now amends this number to 191. The program accounting quantity stands at 350, which is fifty below the original number the 777X was likely to reach during its commercial life, CFO Greg Smith and CEO David Calhoun confirmed last week. That of the regular 777 has been increased by ten to 1.700.
Profitability subject to a number of factors
On the reach-forward loss, Boeing says in the SEC filing: “While the 777X program did not have a reach-forward loss as of the third quarter of 2020 based on our assessment of the probable range of initial accounting quantities and other factors at that time, we noted that future levels of 777X profitability would be subject to a number of factors, including continued market uncertainty, the impacts of COVID-19 on our production system as well as on our supply chain and customers, subsequent production rate reductions for both 777X and other commercial programs, and potential risks associated with the testing program and the timing of 777X certification.”
The filing says: “Our auditing procedures over the estimated revenues and costs for the 777X program accounting quantity included the following, among others:
We inquired of the Company’s management, including individuals responsible for sales and pricing, to evaluate the status of current sales campaigns, short and long-term market demand, and status of negotiations with individual sold firm customers.
We compared management’s estimate of market demand to external industry sources of expected demand.
We evaluated the appropriateness and consistency of management’s methods and significant assumptions used in developing its estimates related to the initial program accounting quantity and revenue for unsold units.
We evaluated management’s ability to estimate program revenue by comparison to historical estimates and actual results on similar programs.
We evaluated the appropriateness and consistency of management’s methods used in developing its cost estimates.
Performed inquiries of those directly involved with the certification of the aircraft to evaluate project status and challenges which may affect total estimated costs to certify the aircraft.
We tested the effectiveness of controls including those over the data used in developing the estimates, the mathematical extrapolation of such data, and management’s judgment regarding the range of possible outcomes relating to the specific estimates.”
Elsewhere it says: “During the fourth quarter of 2020 we determined that estimated costs to complete the 777X program plus costs already included in 777X inventory exceed estimated revenues from the program. The resulting reach-forward loss of $6.493 billion was recorded as a reduction to deferred production costs. As a result, 777X deferred production costs were immaterial at December 31, 2020.”
Redesign on actuator control electronics
The 777X started its flight test program with the first flight on January 25, 2020, with currently four test aircraft active. Calhoun said last week that after consultation with regulators, Boeing has decided to do a redesign on the firmware and hardware of the Actuator Control Electronics (ACE). This system translates analog control inputs into digital signals to the surface control systems and is provided by Japanese company Nabtesco. It’s unconfirmed if the issue is related too to the folding wing-tip mechanism, which seems to have a different actuator system.
As a result of the revised market situation and redesign, Boeing has deferred the delivery of the first 777-9 to “late 2023”, ten years after program launch. “The timing of the certification will ultimately be determined by the regulators, and further determinations with respect to anticipated certification requirements could result in additional delays in entry into service and/or additional cost increases.”
Emirates has 115 777X on order, but this number is expected to be reduced significantly. (Emirates)
Who will cancel?
Which are the 118 aircraft that Boeing has taken out from the backlog? The “unfilled orders” list doesn’t specify them yet, but it is no secret which is dubious:
– Emirates: in 2013, the airline from Dubai ordered 115 777-9s and 35 -8s. It later converted six 777s to 777X, bringing the total backlog to 156. At the 2019 Dubai Airshow, it revised this order by swapping thirty 777X for thirty 787-9s. With eleven aircraft to be confirmed, Emirates had 115 firm orders by 2020.
However, by August 2020 it became evident that the airline wished to reduce this number further and swap them for more 787-9s as this type was seen as more suitable for the (post) Covid-market. What Emirates will do hasn’t been confirmed yet, but expect a significant portion of its 777X backlog to disappear. With the future of the smaller 777-8 unconfirmed, all the 35 that were originally ordered will almost certainly be deleted.
– Etihad: the UAE’s national carrier was also one of the first customers to order 25 777X. As the airline reviewed its strategy in 2018/2019, it amended its backlog. At the 2019 Dubai Airshow, CEO Tony Douglas confirmed to Airinsight that his airline had an appetite for only six aircraft, but to this day Boeing has the original number in the book.
– Qatar Airways: after Emirates, Qatar is the biggest customer for the type, with sixty in the backlog. Originally, these were fifty firm and fifty options for the 777-9. Last September, CEO Akbar Al Baker confirmed his interest in the type. So unless Qatar has revised its plans – which sometimes happen in Doha – sixty seems a pretty solid number.
– Lufthansa: in 2013, the German flag carrier originally ordered 34 777X, but has revised this number to twenty in November 2019. As recently as last Autumn, the airline was expecting first the delivery in 2021 and had commenced preparations for training the cockpit crew. That slipped to 2022 first and now not before the end of 2023. This should better fit Lufthansa’s needs, which following the Covid-crisis has parked a big chunk of its big, long-haul jets and can do with fewer rather than more. So don’t be surprised if Lufthansa will reduce its order once more.
– All Nippon Airways: like Lufthansa, ANA is listed in Boeing’s backlog with twenty aircraft on order but actually they are only fourteen. The airline ordered them back in 2014 and had hoped to have them in 2019/2020, but that was before program delays changed the schedule. During last week’s Q3 FY2020 update, ANA hasn’t mentioned the status of the order. But with its international long-haul network expected to remain weak for the coming three to four years, the 777-9 is not the ideal aircraft to have in the fleet right now. Japanese media reported last year about a two-year deferral of the first delivery.
– Singapore Airlines: SIA joined the 777X family by placing an order for twenty in 2017, announcing it should become one of its flagships alongside the Airbus A380. But Covid has deeply affected SIA’s business model and it has been forced to store most of its fleet. The delayed first deliveries of the 777-9 play into the hands of Singapore Airlines. In2020, the carrier expressed its commitment to the type that should partially replace the 777-300ER.
In a surprise announcement on February 9, SIA said it will increase its order for the 777X to 31 -9s by converting a previous order for fourteen 787-10s. While it also has deferred deliveries to beyond FY25/26 to reduce short-term Capex, the order for eleven extra 777-9s is a vote of confidence in both the big twinjet as well as in the long-term recovery of long-haul traffic.
– Cathay Pacific: the same can be said for the 21 aircraft that Cathay Pacific has on order. The airline is one of those hit hardest by both the Covid-crisis as well as by political instability in Hong Kong, which has affected its results since late 2019. Cutting costs and expenditures is key, a reason why Cathay has deferred all 777-9 deliveries beyond 2025. But expect a few to go from the original number.
BA has been the most recent customer for the 777-9 by ordering eighteen in February 2019. (British Airways)
– British Airways: so far, BA remains the last carrier to order the 777-9, announcing an order for eighteen in February 2019 with first deliveries in 2022. They were set to replace the aging 747-400 fleet, but come Autumn 2020 and the airline has already retired all JumboJets. Long-haul traffic is suffering too with BA, with all A380s placed in storage and the A350-1000 now the biggest airliner in service. The 777-9s will have their own place under the sun at BA, but it will want to push deliveries out as far as possible.
– Undisclosed: then there are unidentified customers for ten 777X. Probably lessors, but they have been unwilling to identify themselves. Don’t count on the big ones, which have all have been unwilling to commit to this program and prefer to earn their money with short- and medium-haul jets.
There could be some surprises on the backlog as it will take big chunks to get down from 309 to 191 aircraft on firm orders, which would make the 777X even less successful than the Airbus A380 at 251 aircraft built when its production shuts down later this year. If the number of 191 already includes the additional aircraft from SIA is not clear.
Boeing itself isn’t ruling out more cuts as it said in the February 1 filing: “The level of profitability on the 777X program will be subject to a number of factors. These factors include continued market uncertainty, the impacts of COVID-19 on our production system as well as impacts on our supply chain and customers, further production rate adjustments for the 777X or other commercial aircraft programs, contraction of the accounting quantity, and potential risks associated with the testing program and the timing of aircraft certification. One or more of these factors could result in additional reach-forward losses on the 777X program in future periods.”
