Insight Monday 27 January 2020: The 777X: Some good news for Boeing

News After twice being delayed by poor weather, Boeing completed the successful first flight of the 777-9 on Saturday. The aircraft, which was launched at the Dubai Air Show in 2013 was scheduled to enter service last year, but has been delayed - the latest delay due to an issue with the GE9X engines from General Electric. This is a positive development and a morale boost for Boeing, which has been battered by a seeming unending drama of bad news regarding the 737 MAX. Nonetheless, the 777X will be an important test for Boeing’s strained relationship with the FAA, which has stripped the company of its organizational authority temporarily. After the 737 MAX debacle, the 777X will likely be the testbed for new certification processes and procedures that will likely include additional FAA oversight. The key question to be answered is whether this will have any schedule impact on delivery of the 777-9 to its launch customers. Analysis The 777X introduction at Dubai in 2013 generated interest from several customer when the aircraft was launched. However, since launch, sales of the 777X have not been robust, totaling only 309 aircraft to 9 customers to date. The first flight comes at a time when wide-body aircraft sales have not been robust, and Boeing is considering an additional production cut for the 787 series. Boeing’s orders for the 777X are concentrated in the Middle East, which accounts for 200 of the 309 total orders, as shown in the table below: At a production rate of 5 per month, the aircraft has a five year backlog, but the political risk of a heavy concentration of orders in the Middle East represents a risk. Given current sales trends towards smaller aircraft, it is doubtful that the 777X will achieve the 8.67 production rate of its predecessor during its lifetime. The current unknown with respect to the aircraft is the degree that FAA oversight will change during the certification process. After the FAA was embarrassed by the 737 MAX certification process, in which Boeing was deceitful, expectations are the this certification will be much more rigorous and difficult. The key question is how that will translate into additional resources and whether the timeframe for certification will be extended. Our expectation is that the process could delay market entry by six months at a cost of an addirional hundred million dollars to Boeing Insight With the demise of the A380, the 777X has become the largest aircraft in the market, just when the trend is away from large aircraft. While we expect the 777X to be successful technically, unless we see an upturn in orders for the aircraft, it will be unlikely to perform at the same level at it predecessor. We are seeing a trend towards smaller aircraft and limited capacity as route dispersion offers routes from smaller cities to smaller cities for trans-Atlantic operations that are using aircraft like the A321XLR. The question is whether the 777X can capture all of the replacement market for the 777-300ER, and when those aircraft will be replaced. The following chart shows historic 777 deliveries by type, split into -300ER, freighter, and other models. If we assume a replacement cycle at 20-25 years, additional orders may not be generated for delivery before the 2025 time frame, which could make the initial years for the aircraft difficult, as most of the 777-300ERs and 777Fs remain young aircraft, and fuel prices have remained moderate. The 777X will be ready just in time for a challenging market for wide-body airliners. While the airplane has enough orders to bridge the time until the 777-300ER replacement cycle begins, our expectations are for a more modest level of success than the original 777 models, given that it is a derivative. Nonetheless, we do expect the 777X to be successful over the life of the program, with 800 - 900 deliveries.

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