Boeing confirmed that the announced production cut in the 777 line from 8.3 per month to five per month will begin in August, 2017, and then drop to 3.5 per month in 2018. The company had earlier announced a production cut from 8.3 per month to 7 per month beginning in January, 2017. This reduction of 68% from current levels by 2018 reflects a lack of new for the aircraft, which is scheduled to be replaced by the upgraded 777-X series, with first deliveries scheduled for 2020.

The problem for Boeing is that the 777-300ER is one of Boeing’s cash cows and it’s most profitable aircraft, typically selling at about $160 million, with development costs long amortized. But with the not selling, Boeing cannot afford to produce “white tail” speculative aircraft waiting for a customer that may never appear.

The 777F, a freighter model, might have provided some interim relief, but the freight market continues to be depressed, and with low fuel prices, cargo carriers do not need to new aircraft to replace older models.

In addition, the 777-300ER is facing direct competition from the all new composite A350-900 and Boeing’s own upgrade, the 777-9. As a result, the few wide-body that are placed are going to the new technology models, the A350 and 787-10, while other wide-body aircraft, including the Airbus A380 and have not generated new orders. The Very Large Aircraft market is moribund, with the A380 and 747-8 suffering. The 777-9 has the same capacity as the -8, and is facing the same slowdown in demand for VLA.

While Boeing has secured an for 15 current model 777s and 15 777-X models from Iran, there is considerable doubt that approval for those sales will continue after the inauguration of the new administration. Congressman Peter Roskam (R-IL) said he “would aggressively fight this deal in the next congress.” So even this latest order looks somewhat shaky.

The Bottom Line

Boeing currently lacks the skyline to bridge the current 777-300ER to the 777-X, and may have to cut production even lower than the 42 per year planned for 2018 for 2019. And while the 777-X will generate additional from its current level of 321, competition from Airbus may keep that backlog lower than it peaked for the existing 777 program.

As a result, we expect a further drop in 777 production rates in 2019 to 2.5-3 per month before increasing with the new program, and do not expect the 777-X production levels to re-approach the 100 aircraft per year level of the original 777 program with the 777-X.

While a spike in fuel prices would be an impetus for new aircraft orders, such an occurrence is doubtful, given additional US capacity that can rapidly be brought on-line, keeping oil prices in a stable range.

Boeing has been generous in giving back to its shareholders and maintaining its stock price.  But losing the profitability of the 777 program, even for just a couple of years, could have a negative impact on share prices when combined with other factors. Boeing is currently facing large capital outlays to bring the 737MAX into production, and the continuing overhang of the $29 in 787 program costs that need to be amortized over many more airplanes for the program to turn profitable. This could result in an inability to continue to provide the same level of dividend and stock buyback support to shareholders by 2018, potentially negatively impacting Boeing’s stock price during the last quarter of the decade.

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