Sunday, January 8, 2017

Boeing 787 Has Sold Like Hotcakes, But Expert Says Demand Could Drop After 2020

Falling airline profits are reducing demand for aircraft, particularly wide-body aircraft --- and potentially even for the 787, which remains the world’s most glamorous aircraft after five years of operation and 500 deliveries.

Aerospace consultant Scott Hamilton recently raised the possibility of diminished Dreamliner demand.

“Despite a rosy picture painted by Boeing about the future of the 787 and the ability to recover more than $29bn in deferred production and tooling costs, there are signs that cause concerns over the next 3-5 years,” Hamilton wrote last week in his online publication, Leeham News & Comment.

Concerns include customer quality and the incoming U.S. president.

“Boeing likes to boast of its customer quality compared with Airbus,” Hamilton wrote. “Generally, it has a point. But the 787 customer list has quality issues.”

Boeing has 700 outstanding 787 orders, the company said Friday. Hamilton cited concerns regarding about a dozen customers with 189 orders.

Etihad has 61 outstanding 787 orders, the highest total for any carrier. Etihad has been investing heavily in other airlines, which have continued to lose money. “We hear the ‘D-word’ (deferral) surfacing with Etihad’s order for 787s,” Hamilton writes.

The second and third biggest customers are Aeroflot with 22 orders and Norwegian with 19. Hamilton says Aeroflot raises questions and Norwegian is engaged in very rapid expansion and some other customers are from troubled areas of the world.

“And then there’s Trump,” Hamilton wrote. “The bizarre personality and tendencies of President-elect Donald Trump create a real risk for Boeing.

“He threatens to impose a 35% tariff on Chinese goods imported to the U.S,” Hamilton said. “China is not shy about using Boeing (or Airbus orders) as rewards or punishments for its political pique. There are 66 787s or order by Chinese carriers that LNC has identified; there may be more {among unidentified orders}.”

It is worth mentioning that in December, Delta cancelled an order for 18 Dreamliners. The carrier inherited the order in its 2008 merger with Northwest, but over the ensuing eight years it never displayed the slightest indication that it would take delivery, so the cancellation was not viewed as meaningful for 787 demand.

In fact, it’s not unreasonable to say that so far, the 787 has been selling like hotcakes.

Delivery of the 500th Dreamliner to Avianca in December came just five years and three months after the delivery of the first 787 to Japan’s ANA.

The previous record for the 500th delivery of a wide-body aircraft involved the 777, which waited nine years.

The 787 hit another landmark in February 2016, when the 100th Dreamliner made at the North Charleston, S.C. plant was delivered to American Airlines, which operates a Charlotte N.C. hub and has the biggest airline presence in the Carolinas. It was American’s 14th 787-8.

Also, in June, in Everett, Boeing rolled out its first 787 at the twelve-a-month rate, up from 10 previously. The 787-9 was delivered to JAL.

On Friday, Boeing reported 2016 orders and deliveries. These included orders for 58 Dreamliners and deliveries of 137, below the gold standard of a 1:1 book to bill ratio, but not troubling given the backlog of 700 aircraft.

If there is to be a slowdown, Hamilton says, it is at least three years off.

“The near-term production outlook for the 787, currently at 12/monthly, appears solid,” Hamilton wrote. “Production through 2019 is full. {However}, there is emerging weakness in 2020 and a big drop in 2021. Deliveries fall off the proverbial cliff in 2022.

“True, four and five years in the future is a lifetime in commercial aviation,” he said. “It’s plenty of time to get orders and fill delivery slots. But remember: Boeing officials said they don’t expect recovery in wide-body sales until the start of the next decade.”

Boeing’s view is that 787 demand remains strong and that it retains the ability to adjust production if demand lessens, particularly in regard to the timing of a planned ramp to 14 aircraft a month.

“On the 787 program, we have more time to further assess the implementation of the next production rate increase that is currency scheduled to ramp up to 14 per month at the end of the decade,” CEO Dennis Muilenburg said on Boeing’s third quarter earnings call in October.

Muilenburg acknowledged that, “In the wide body segment we continue to see some near-term hesitation in certain regions and the order activity has been more measured.”

He noted, however, that in October Qatar Airways ordered thirty 787-9s and China Southern ordered twelve 787-9s. “The recent orders for 42 aircraft from Qatar Airways and China Southern improves our position,” he said.

"Securing additional orders to solidify the 14 per month production rate at the end of the decade remains a priority,” Muilenburg said.

(Tim Reed - Forbes)

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