The Boeing 787 is one of two aircraft (the other being the Airbus A380) that attracts media attention every time there is an “event”, be it positive or negative.  Should anything unusual happen during a flight by a 787, it will likely be the focus of media coverage.  While both are special in their own way, this newsletter will focus on the 787, its ramp-up, decline and recovery.

It is interesting to compare the 787 with Boeing’s other recent prominent programs by looking at their first decade from initial order.  The chart below illustrates cumulative orders for the first ten years for key Boeing programs.  The 737 took more than a decade to excite the airline industry, yet it went on to become the world’s best-selling airliner.  The 747 had a great start as the first jumbo, but then settled into  a rate of under 50 orders per year through its first decade. The 757 started off with 38 orders but had no orders in its second year, and as the program’s third year began, customer interest came back and settled into a steady stream of orders.  The 767 order history closely follows that of the 757.  The 777 also had a patchy start; no orders in year five and then a strong sixth year followed by a period of settling in. Yet the 777 has become an excellent product for Boeing with more than 1,000 produced.

It is readily apparent when one looks at this chart that the 787 order book is special.  Airlines adored the from the start, and orders were received in droves.  Never before has Boeing sold an aircraft that so captured acceptance.  One might argue that circumstances, like the state of the economy and travel demand, vary for each aircraft, making comparisons unfair.  However, in the case of the 787, Boeing got its timing right for generating orders.   Unfortunately, that timing did not extend to deliveries nor to early dispatch reliability problems.

1.835f0b5

The 787 program has had its share of well known, “ups and downs”.  The next chart illustrates the timing of critical events, and how they relate with the flattening of orders  between years six through nine.  These appear to be the most difficult years for the program, which is recovering with new orders for the upgraded -9 and -10 models.

In 2004 the started to place orders for the 787.  The smaller -8 was the most popular, and Boeing decided to drop the even smaller -3.  The -9 attracted some interest. By April 2005, the -8 started to attract a lot of interest from customers.

The program entered phase one – what we call the Buzz.  The peak of this was the roll-out in July 2007.  It was two months later in September when the first delay was announced. As the chart below indicates there were six delays in total.

This engendered the period we call Phase 2 – Doubt.  Boeing even stopped its quarterly program updates as they had become quite troublesome – there were pointed questions for the Boeing team on these calls for which they did not have satisfactory answers, as anyone who listened can testify.

Boeing worked feverishly to regain its momentum; it moved people from the 747-8 program to bolster the 787. This of course led to the 747-8 having its own delays.  But given the role of the 747-8 as much smaller bet of corporate capital, it was deemed acceptable.  Boeing’s 787 first flight came on a cold day but there was genuine joy when it took to the air.  As the first chart clearly showed, the 787 had developed a following and a fan club.  People wanted the airplane to succeed, and a lot of money had been bet on the airplane delivering on its promises.

2.9

It is interesting to note that after first flight, the -8 model that flew did not receive a spike in orders, but the larger -9 model experienced a bump.  While the -8 led the way in gross orders, at the end of 2011 a significant change emerged; the -9 was seen as the airplane to focus on by customers.  In January 2013 when the 787 was grounded with battery problems, Boeing began to see orders for the -10, which it formally launched at the Paris show.   Phase 3, the recovery, was underway, driven by the newest models.  The following chart illustrates this more graphically.

The 787-8 accounted for 66% of the orders at the start of the program, by the time the -10 orders started to come in, the -8 was already under 60%.  Through the end of 2013, -9 and -10 orders pushed the -8 to under 50% of cumulative orders for the program.

3.5

Our view is that while the -8 has been improving and will have a serviceable future with Boeing’s customers, it will always been seen as the model that had a difficult start and was initially quite flawed.  Boeing has trumpeted the -9 as being close to its promised specifications at first flight.  The message was clear; Boeing had moved well down the learning curve and the -9 (and by extension the -10) are going to be much better airplanes.

To reinforce this view, Norwegian, which has experienced numerous, and very public, disruptions with its -8s, recently announced an order for four -9s.  The airline describes the -9 as “more fuel and environmentally friendly than the 787-8”.  United also broke of its plans for the -9s it ordered.  The airline plans non-stop service from Los Angeles to Melbourne, Australia.

We expect to see not only a transition to the larger models in upcoming orders; we would not be surprised to see switches among current orders from the -8 to the -9.   Our projections of long-term residual values for these show a significantly stronger performance for the 787-9 and -10 over the 787-8, particularly for early production numbers below 100.  We believe the A350-900 and 787-9 will provide a better return for aircraft investors than the 787-8, which may have “peaked early” in terms of orders and disappointed in dispatch reliability.

Look for Boeing and lessors to focus on the 787-9 and 787-10, which should be the stronger performers, given their better seat-mile economics, in the 787 family.

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