MIAMI — Boeing announced yet another cut in the 747-8’s production earlier this week, with production to drop to 1.3 aircraft per month beginning in September 15. The 747-8 is currently produced at a rate of 1.5 aircraft per month (18 aircraft per year), but has a backlog of just 39 aircraft out of 119 total firm orders. Under program accounting block rules, Boeing will soon be required to take a substantial one-time charge, which would hamper financial results in 2015. Boeing’s announcement mirrored recent commentary from Airbus, which has signaled its own struggles in the very large aircraft (VLA) market.
Sales Dry Up
The 747-8’s sales record has been poor and future prospects are grim. Its current backlog of 39 aircraft is composed of 26 passenger 747-8 Intercontinentals (747-8i – including one VIP aircraft), and 13 freighters. Boeing had previously cut production in 2013 from two aircraft per month to 1.75 and then 1.5 aircraft per month, where it settled until the announcement of the latest cut. And despite Boeing’s protestations, its unclear where additional orders will come from, especially on the passenger side.
Our sources indicate that Boeing has a major sales push in place for six VIP 747-8is in the Middle East, but beyond that, there is nothing on the radar. Many of the intended customers for the 747-8i have already opted for the A380, A350-1000, or Boeing’s own 777X, and the number of airlines that need a VLA or VLA sized aircraft (seating more than 400 passengers) without having already placed such an order is dwindling. There is (hypothetically) a potential order for five-10 VLA frames from Turkish Airlines, but we view Turkish Airlines as most likely to opt for the 777X as its interim VLA solution. Beyond that Boeing can maybe pitch El Al or Saudia amongst 747-400 operators without a direct replacement yet. And of course there is some potential for top-up orders from existing customers Korean Air, Transaero (rumored around the 787 cancellation), Lufthansa and Air China. But overall, Boeing cannot reasonably expect more than 20-30 further orders for the passenger variant without a major shift in airline strategy.
The VLA market is smaller than Airbus (and Boeing’s) projections
In their most recent current market projections for the period between 2014-2033, Airbus projected a VLA market of 1,228 passenger aircraft, whereas Boeing projected a market of 500 aircraft. Both of these numbers appear overly optimistic, given a combined backlog between the two programs of just 210 aircraft (a number which includes close to 50 A380 orders which we view as uncertain [and 30 that are outright doubtful]) extending over the next 10 years. Our view is that the market is smaller than Airbus’ projections and will settle at around 400-450 additional airframes (treating the 777X as outside the VLA sphere). Airbus is likely to soak up the majority of that demand with an A380neo if it chooses to launch the aircraft type, but otherwise it will be captured by the 777X and a hypothetical A350-1100 stretch.
Indeed the 777-9 may be the biggest culprit for the 747-8i’s sales weakness. Our economic analysis shows that the 777-9 at 10-abreast seating holds a substantial advantage over the 747-8 in terms of operating costs at today’s fuel prices, let alone at the $80-100 per barrel prices that persisted over much of the last five years. The 747-8 counters with added performance (especially at hot and high airport) and some extra revenue potential, but it’s not enough to compensate for the higher cost of operations.
No Help Is Coming From the Freighter Market
When Boeing launched the 747-8F, a significant portion of the business case rested on the new-build freighter market, which Boeing projected to boom in line with generally bullish projections about the air cargo market as a whole and expectations of high fuel prices. The last five years have instead been extremely choppy for the air freight market, with economic uncertainty and growth slowdowns in several emerging markets pressuring cargo space utilization and yields. Moreover, belly cargo is playing a larger and larger role in the long-haul freight market, as the passenger widebody fleet booms in size.
The 747-8F is the best and only new build freighter in its class. But there’s nobody left that has a true need for it. The shift to belly cargo has tamped down demand for medium and large widebody freighters, and amongst airlines that actually need or could use an aircraft of that size, there are still 263 Boeing 747-400 passenger aircraft available for passenger to freight (P2F) conversions available at a small fraction of the purchase price of new build 747-8Fs. At reasonable fuel prices, those 747-400s may approach similar operating costs (including the cost of capital) to the 747-8F, especially when the larger 747-8F is harder to fill. There may yet be top up orders from a few existing customers, but overall, we see Boeing selling no more than 15-20 additional 747-8 freighters in an optimistic scenario. Between the lack of additional passenger and freighter orders, we think Boeing will be forced to cut production even further, to one aircraft per month in 2016.
Holding Out for Air Force One
Recent rumblings in the defense industry indicate that the US Air Force (USAF) is fast tracking the acquisition of the next generation of Air Force One presidential transport aircraft. According to defense industry newsletter Inside Defense, the USAF has moved forward the timeline to acquire new aircraft in 2018, after previously indicating that a purchase would not occur before 2021. Under the new timeline, a request for proposals (RFP) for new-build aircraft to replace the 747-200 based VC-25s that currently service as presidential transport aircraft would be issued next year, with the purchase decision made in 2016 and delivery occurring two years later.
The Air Force One contract is a prestigious one for Boeing, which also supplied the 707 and 747-200 that made up the base for previous iterations, and Boeing can be expected to compete vigorously for the new contract. And while building Air Force One, with its secretive materials and interior on the same line as the commercially produced 747-8 may prove challenging, other defense aircraft are built on the same production lines as commercial ones, having the production line open is critical to enable Boeing to produce the new Air Force One, a public relations bonanza, at reasonable cost. And for that reason alone, we expect Boeing to try and hold out producing the 747-8 until 2018, when the Queen of the Skies will be allowed to die a dignified death.