Premium #219 – Boeing’s 787 – Breaking through Headwinds

News reports out last week suggested that Boeing’s 787 sales have slowed, and the company may be facing more financial headwinds as a result. But before you buy into doom and gloom headlines, let’s take a look at some data points underlying the program. The 787 program is already in its 12th year. The aircraft has sold at a faster rate than any previous widebody – so it is already a sales success. The overall market took a major dip in 1Q16, and the market regularly moves up and down cyclically. Any dips are cyclical and not attributable to the aircraft program itself. Plus, with a strong backlog, airlines that would have to wait six to seven years for a delivery may prefer to wait until backlog comes down before placing orders. While it took Boeing seven years to deliver the first airplane after its first order, and the program survived a safety grounding, it did eat a lot of cash. While this is a sensitive issue for Boeing and not exactly a badge of honor, the relevant questions are: have they recovered with the market (yes, they have) and can the program become profitable (yes, if they sell enough aircraft)? Take a look at the recent order and delivery history. The order chart shows how Boeing’s -9 model is rapidly taking the lead as the most popular model, confirmed by deliveries. When the -10 starts being delivered, it too can be expected to see more orders, because it will be an ideal replacement for aging 777-200s. The small -8 model has given way to the larger -9, which is both more expensive and more profitable. In terms of deliveries, Boeing has started to deliver the aircraft at an amazing pace, especially given its slow start. The backlog for the 787, which set a record before EIS, has been an issue that Boeing has now started to solve. With production rates finally making a dent in the backlog and late deliveries, Boeing has turned the corner with the 787 program. A key question is how many deliveries will be required for the program to achieve profitability, after a $30 billion program investment? We fully expect that 787 orders will continue to grow, and that orders could exceed 2,000 aircraft over the life of the program. That means that $12m would need to be recovered per aircraft to repay the $30Bn expense. Boeing should be able to achieve that, given its market position. The 787 is now a mainstay at Boeing. The next charts show orders and deliveries by aircraft type for Boeing from 2004 through 2015. Clearly the 737 has the highest volume of orders relative to other models overall, while the 787 has been prominent and remains the most popular widebody.. Looking at deliveries, the 787 production ramp-up has been significant and the aircraft is now the second-most delivered model at Boeing. The 787 may have had a long gestation, but it is delivering at a fast pace now. Boeing has 63 customers (we count “Unidentified” as one customer) for the 787. Of these, only six have had their orders completely filled (China Southern, Hainan, Kenya, Xiamen, Azerbaijan and PrivatAir). Of the 1,154 (through April 2016) orders for 787, only 403 or 35% have been delivered. At this writing, 23 customers are still awaiting their first delivery. The top 20 customers account for 69% of orders. Of these, 14 customers are leading brand names in the commercial aviation business. Boeing can count its customers as among the best airlines and leasing firms – which is no small achievement. These customers have the resources to undertake the most rigorous evaluation. If they are happy to wait for their 787s, there must be very good reasons. Additionally, 27 out the total 63 customers have placed follow on orders, and 12 have placed a third or fourth follow on order. One important repeat customer, Norwegian has already said it will order more aircraft as soon as it gains additional access to the US market. Repeat buying speaks volumes. While it is true 787 orders have slowed, this is not necessarily a long term concern. The aircraft has not lost its attractiveness.. It is fair to say that Airbus' A330, and follow on A330neo, may be having a price impact on Boeing’s 787 orders. But as the next chart shows, since the 787 program started, the A330 (ceo & neo) has not outsold the 787. The A330 almost certainly has been a spoiler, and some 787 orders may have been lost during the initial production delays. But the airlines that have been buying the A330ceo have been buying an aircraft that will be less competitive in a decade, compared with the 787 that will remain state of the art for a longer period. An A330ceo win today is most likely driven by low capital costs. That is not to denigrate the A330, which Airbus has continually improved to become its best-selling widebody. The concerns people have expressed about the 787 come down to this: Boeing cannot recoup $30Bn invested in the 787. This is a fair point. Boeing says it can recover the investment which is based on a block of 1,300 aircraft. We think Boeing will sell many more 787s and will exceed the 1,300 number. 787 sales are drying up. As we can see above, orders wax and wane with the business cycle. A current slowdown means nothing. The next up cycle is coming, just as the next downturn is also coming. Low fuel prices make the 787 less attractive. Low fuel prices are a recent event, and also subject to market variances. We do not think oil prices are going to go as high as they were two years ago for a long time. But the 787 story is about much more than low fuel burn. The aircraft has a unique payload and range capability for its size. Airlines have not been attracted by the 787’s "hub busting" capabilities. This is only partly true. There are exceptions – British Airways, ANA and Japan Airlines have all been doing this very successfully. Ethiopian is going that way now, with its first nonstop service the US. Another operator exploiting the unique range/payload capabilities of the 787 is Thomson/TUI, which replacing 767s with 787s. As 787 operators become more experienced with the aircraft, they will push it to its limits – as United is doing serving secondary markets in China. Norwegian is disrupting the North Atlantic market by using the 787 as the lowest cost competitor in its markets and lowering yields. US airlines are trying desperately to stop Norwegian's success. The 787 is Norwegian's trump card. Every success by a 787 operator will force a competitor flying a less capable aircraft to rethink their strategy. Airlines that wanted the 787 have already bought the aircraft. This is plainly an exaggeration. The 787 was developed to replace the 767. There were 887 767s still in operation as of the end of 1Q16. Many, and perhaps most, will eventually be replaced by 787s. When one adds, say, 500 of these 767s to the 1,154 ordered to date, the total of 1,654 is comfortably over the 1,300 block in place today. And that assumes no market growth, which a very bleak scenario. The Bottom Line High risk often results in high rewards. Boeing took on substantial risk with the 787 program, combining technology risk with a modified supply chain, resulting in significant startup costs. The result, once sorted out, is a strong aircraft program that is proving to be reliable with industry leading economics. It is premature to consider the program in trouble, and analyses that Boeing can never make money with the 787 may be way off the mark.

No results