by Vinay Bhaskara & Chris Sloan

SEATTLE – The last eighteen months have not been kind to the two dominant global aircraft manufacturers. Both Chicago-based, Boeing, and Toulouse-based, Airbus, have seen demand for their jets soften in the wake of an extended period of low fuel prices and worldwide economic malaise.

At the top end of the market, twin-aisled aircraft (widebodies) have been particularly hard hit. Even the newest, most economical planes, like the Boeing 787 and Airbus A350, have been hit with a spate of deferrals and cancellations.

One program that hasn’t seen an immediate impact is the Boeing 777X, a re-engining of Boeing’s most successful single generation widebody family.

Airways was present at Boeing’s pre-Paris Air Show briefing last week in Seattle, and heard a presentation from Eric Lindblad, VP & General Manager of the 777X program. Here were our major takeaways from the presentation:

777X development remains on track

According to Lindblad, 70% of the design work on the 777X is complete, and Boeing is progressing rapidly towards first delivery in late 2019 or early 2020.

Production of the first 777X frames will begin this year, with final assembly of the test (MSN 002) and static (MSN 001) planes occurring in 2018. These will support the first flight in 2019, building up to delivery to launch customer Lufthansa. There will be four flight test aircraft in all.

On the engine side, the first full engine to test (FETT) from General Electric (GE) has been built and tested to 105,000 pounds of thrust. The first GE9X will be flown at altitude on a 747 test-bed in the fourth quarter of 2017, marking an important milestone for the program.

Image Courtesy of Boeing
Image Courtesy of Boeing

“We want to enter flight test with an airplane with production level hardware so we can operate in flight test like the airplane is already in service,” said Lindblad. “This allows a higher in service reliability. We took this out of the 737 MAX playbook.”

Lindblad also took some time in his presentation to sing the praises of Boeing’s second-largest widebody aircraft, which the manufacturer claims offers 20% better fuel burn, and increased ride comfort.

The 777X borrows from many of the passenger experience, enhancing features implemented on the 787 including a 6,000-foot cabin altitude, larger windows, reduced cabin noise, and lighting improvements.

Image Courtesy of Boeing
Image Courtesy of Boeing

The 777X order book is robust numerically but faces systemic risk

At first glance, Boeing’s current order book of 340 purchase commitments from eight customers appears to be pretty strong for an aircraft two-plus years from EIS. But close to 70% of that order book is concentrated with a set of airlines whose fortunes may not be as bright as they once were.

The orders from Singapore Airlines, ANA, Cathay Pacific, and Lufthansa are all relatively secure, and the unidentified (UFO) order is to be determined. But even assuming that the UFO purchase comes from a relatively secure airline, that is only 105 of the 340 orders.

Image Courtesy of Boeing
Image Courtesy of Boeing

The vast majority, or 235, of the 777X’s orders, are from three carriers: Emirates (150), Qatar Airways (60), and Etihad Airways (25). Each of those three carriers is nowhere near as secure financially and operationally as either once was; the low price of fuel and geopolitical machinations by the new U.S. presidential administration have sapped demand for flights to and from the Middle East hubs of Dubai, Doha, and Abu Dhabi.

Of the three, Etihad’s order is the smallest and thus the least risky for Boeing, but Etihad’s strategy of investing in a cornucopia of carriers worldwide appears to have backfired. This is notable that it reduces future sources of feed for Etihad, making it harder to fill the 777X on the 15-20 routes required to utilize a fleet of 25 jets fully.

Emirates is the most financially secure of the three airlines, but it also has by far the smallest sovereign wealth fund backing its business. Even if in the long run Emirates certainly buys 150 777X jets, it may not do so on the same delivery schedule it is currently planning due to a general slowdown in demand and potential cash constraints.

Our view is that Emirates will likely defer some of its 2020-2022 deliveries further into the 2023-2025 period, affecting early production slots.

Qatar Airways is almost the linchpin here, as they have all of the economic concerns of the other two carriers, and (at the time of writing) are in the midst of a diplomatic crisis involving neighboring countries such as the United Arab Emirates (UAE), Saudi Arabia, Bahrain, and Egypt.

Those four countries have closed off their airspace to Qatar as a part of eliminating diplomatic ties, including canceling all flights between the two countries, ostensibly due to concerns related to terrorism.

Now there is every chance that this diplomatic spat is only temporary and will be resolved within the week. But if it persists, the effect could be massive on Qatar Airways, robbing it of feed from three of its biggest spoke markets and increasing operating costs due to lack of airspace flying in and out of Qatar.

If Qatar Airways were to operate in these conditions for a year or longer, it would likely look to defer and cancel substantial swaths of its 777X order book.

In all, between these three carriers, our view is that anywhere from 30-50 aircraft are at risk of outright cancellation, with another 80-100 at risk of deferral.

The road back to 8.3 aircraft per month is fraught with peril

Those numbers are sobering for the 777X program. Even if the impact is mostly deferrals (the current consensus), the 777X isn’t the 787 or A350 with a huge customer Rolodex eager for earlier delivery slots.

Boeing has already struggled to fill the production gap between the classic 777-300ER (and Freighter) and the 777X, cutting production steadily from 8.3 aircraft/month to 5/month, and now even 3.5/month to support 777X rollout.

Boeing’s stated plan has been to get back to 8.3 planes/month with the 777X once it fully ramps up, but a slew of deferrals from the Middle Eastern giants would render that impossible. And there aren’t many credible new customers left in the marketplace that are currently buying to help offset that.

For an aircraft that has experienced an incredibly smooth development process and that built tangible order momentum long before EIS, the 777X’s position today is remarkably precarious.