Boeing needs no introduction. The aerospace giant has been supplying airplanes for both commercial and defense purposes for a very long time. The company's market penetration is by far the largest in its line of business. The company is known for its innovation and its revolutionizing aircrafts.
Recently, though, the company has seemed to put this in question. For a company known to develop the latest and most up-to-date aircraft and related technologies, sticking to supplying the same old model of 777 aircraft after having announced its successor seems strange. This has more to do with the fact that planes that are built today burn less fuel and need less maintenance than their predecessors.
Boeing faces that issue with its 777, a jumbo jet that has become a well-liked staple of global airline fleets over the past 15 years. The 777 sales problem drew a fresh spotlight this week, when Delta Air Lines announced an order for 50 twin-aisle jets from Airbus, split between the A350 and A330neo models, to replace Delta's aged 747 and 767-300 fleets. Boeing's focus on the 777 is understandable.
With a list price of $330 million, the 777-300ER accounts for virtually all of the remaining 777 order book-making it a key component of Boeing's profitability. The Delta deal is driven in no small part by the lower prices and faster delivery speeds Airbus was able to offer the airline.
But the older 777s Boeing pitched for use at Delta's Seattle hub and on its trans-Atlantic routes was a big factor, and Delta's decision underscores the market's lack of interest in a plane that is awaiting replacement.
The Production Gap Issue:
Boeing has promised to bridge the production gap from the old 777 to the 777X, its next-generation replacement, by netting as few as 40 orders per year. The order scenario so far this year is that Boeing has taken 55 orders for the 777, including a deal announced on Thursday to sell 10 to Kuwait Airways.
The new order is worth $3.3 billion at list price, but Kuwait Airways probably negotiated a discount in excess of 50 percent, given both Boeing's need to move 777s and the price breaks manufacturers typically offer customers.
The industry experts feel that the aero-giant can fulfill the gap requirement either by turning out fewer than eight 777s each month or by offering steep discounts to buyers. The current rat of 100 crafts a year has the analysts skeptical about the company's promise.
Available Options:
The company's ground-breaking 787 Dreamliner, which recently clocked over 490,000 hours in service with 21 airline operators since its service entry in November 2011, is another option the company has. The company's fixation with 777 seems pretty irrational when the option of 787 is available.
The analysts feel if the company replaces the production of 777 with 787 for a year, there might be an unbelievable surge in the company's profits. The long-range, midsized, wide-body jet consumes at least 20% lesser fuel compared with similar jets.
With seat capacity ranging between 242 and 323 across the three models -- 787-8, 787-9, and 787-10 -- Boeing claims the plane offers about 10% lower cash seat mile cost. The craze of this plane was such that it attracted a highest bid of $34,000 for a seat in the maiden commercial flight in October 2011.
Now, would someone show the company reason to give up its fixation with the 777? The company badly needs a reality check.
In October 2013, Boeing had lifted its 787 deferred cost projection from $20 billion to $25 billion on account of increased spending to launch the 787-10 and related plans to augment capacity at its factory in North Charleston in 2014 and 2015.
However, in the latest quarter, Boeing reported that the Dreamliner's deferred cost has shot up by $947 million and gone past $25 billion to $25.2 billion. In spite of the ongoing problems, the company's order book remained strong for the quarter.
The pay-out too has been decent. It waits to be seen though, how the company goes about fulfilling its promise. As for the investors, they can always expect good returns from the company.
(GuruFocus)
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