Tuesday, August 9, 2016

Boeing's Weak Dreamliner Orders Don't Tell the Whole Story

Boeing hasn't brought in many new Dreamliner orders this year -- but that's no reason for investors to panic.

It's no secret that Boeing hasn't sold many Dreamliners recently. Year to date, it has brought in just 19 net orders for the 787 aircraft family.

Even including a commitment for five 787s announced last month but not yet finalized, order activity has dramatically lagged the new 787 production rate of 12 per month. Thus, Boeing's 787 backlog is on pace to decline for a third straight year in 2016. (Net orders for the 787 totaled just 41 in 2014 and 71 in 2015.)

However, this slow order activity doesn't mean that Boeing's 787 program is doomed. Aircraft orders historically occur in cycles. Right now, airlines are holding off on ordering wide-bodies. But as long as the world doesn't tilt into a deep recession, 787 orders are likely to bounce back in the next few years.

Blame it on the backlog

Ironically, the Dreamliner's popularity is a key cause of the recent order slowdown. Even after several years of modest order activity, Boeing still has a backlog of more than 700 787 orders to fill. That represents about five years of production at the current rate of 12 per month.

Indeed, Boeing CEO Dennis Muilenberg recently stated that Boeing is sold out of 787 delivery slots through 2018. Even in 2019 and 2020, Boeing appears to have filled at least 75% of its available slots at the 12 per month production rate. (If higher demand materializes, Boeing could increase production to 14 per month.)

Generally speaking, there's no reason for airlines to order new airplanes many years in advance if they have a choice. That's particularly true in the current unsettled economic environment.

A few years ago, airlines were forced into ordering planes for delivery five years or more in the future. With fuel prices rising and order backlogs swelling at Boeing and Airbus, it was important to reserve a place in line to get the latest fuel-efficient technology.

At today's lower fuel prices, airlines feel less urgency to order new planes. This has driven a vicious cycle: With plenty of 787 delivery slots available after 2020, airlines can afford to wait a couple of years before placing orders for their post-2020 fleet plans.

The key takeaway is that as Dreamliner availability within normal airline planning cycles improves, order activity should pick up again. Even with low fuel prices, aging airplanes eventually need to retire and new planes are needed to meet demand growth.

Orders don't match long-term demand

United Continental's Dreamliner order history shows just how far order activity can diverge from underlying demand. United Continental is one of the biggest customers for the 787 and had ordered as many as 65 Dreamliners as of mid-2013.

However, since the beginning of 2015, United Continental has exchanged 14 of its Dreamliner orders for the larger 777-300ER. As a result, United has whittled down its Dreamliner order book to just 51 787s, according to the company. (Boeing's statistics differ slightly, indicating a total of 49 787 orders from United.)

Yet this doesn't mean that United sees less of a need for the 787 in its route network. Most of the orders it has converted in the past year and a half were due for delivery in 2020 and beyond. Since there is ample Dreamliner availability after 2020, United doesn't need to lock itself into a specific delivery schedule now.

In fact, United's need for 787-sized aircraft is about to take off. The company has 51 Boeing 767s left in its fleet. The oldest of these are already 25 years old and are thus approaching retirement age. But more than half of United's 767s were built between 1997 and 2002 and still have five to 10 years of life left.

United Continental also has 55 Boeing 777-200ERs in its fleet, of which 51 were built between 1997 and 2002. These planes also have plenty of life left but will be ripe for retirement by the mid-2020s. The 787-9 and 787-10 would be ideal replacements.

Thus, United's need for Dreamliner-sized aircraft will increase significantly after 2020. However, based on Boeing's current 787 backlog, United can afford to wait a few more years to place those orders. That's why it has allowed its 787 order book to shrink.

Boeing -- and investors -- may have to be patient

Boeing still has one big potential Dreamliner order on the near-term horizon. Middle Eastern airline giant Emirates is looking to order about 70 wide-bodies by year's end and is choosing between the 787 and Airbus' A350.

However, most airlines are in "wait-and-see" mode for now. That's not a big problem for Boeing, which has already locked in virtually all of its 787 production through the end of 2018 and has filled most of its 2019 and 2020 delivery slots as well.

Boeing will just have to be patient for the time being. There are plenty of airlines aside from United that will need to replace aging 767s and 777s after 2020. Even more airlines will need to buy new wide-bodies to meet demand growth on long-haul routes. As these carriers start to finalize their post-2020 fleet plans in the next few years, 787 order activity is likely to rebound.

(Adam Levine-Weinberg - The Motley Fool)

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