MIAMI — Boeing announced yesterday a further reduction in the production rate of the 777 to five aircraft per month from the current rate of 7 beginning in August of 2017. The cut was announced in an email to Boeing employees by Vice President and General Manager Elizabeth Lund, who noted that the reduction will drive a reduction in headcount but will not have a material impact on 2017 financials.
The content of the email is as follows:
After lengthy discussions about current market demand, we have decided to reduce the 777 production rate to 5 airplanes a month, beginning in August 2017.
Market demand drives production rates both to the upside and the downside. And the market is signaling near-term hesitation in some regions. Despite tireless work by the Sales team, orders have slowed. This is due in part to several ongoing twin-aisle campaigns that haven’t concluded in time to keep the rate steady. Therefore we must adjust accordingly to ensure we are running a healthy business and the production line remains stable.
Yesterday’s contractual agreement with Iran Air for 15 777-300ERs and 15 777Xs is good news, and our plan is to start 777-300ER deliveries to Iran Air in 2018. The decision to reduce rate, however, already factored this agreement into our assessment of the near term market landscape. Our sales team will continue their tireless work to fill existing openings in our skyline at the five airplanes per month production rate.
The 777 program does expect some impact on employment next year. While the exact number of affected positions has not been determined, we will do our best to lessen the impact.
We have an opportunity to assist in offsetting these current market realities by continuing to work aggressively to reduce costs across our program. We can do this by accelerating efforts around the Keys to Winning to drive first-time quality, improve safety, reduce waste and work with our supply chain. Every initiative and project to drive down the cost to produce this great airplane will help. Being competitive will allow us to bridge sales to the 777X – both near term and in the out years.
The 777 is the flagship of the world’s elite carriers and continues to be a great investment for our customers. We remain committed to the changes we’ve introduced into the production system in preparation for building the first 777X in 2017, including the new wing assembly line, fuselage automated upright build (FAUB) and mid-bodies future build.
I’m optimistic about the 777 team’s ability to adapt to challenges and rise to the occasion. Each one of us, regardless of which part of the airplane we build or are responsible for, can actively identify opportunities to do our work better. This is a key part of the Winning Together Principles.
Please have conversations with your team and with your manager about today’s news, and continue to push your great ideas forward. Thank you for all you do every day.
Party Like It’s 2010
The rate cut comes after Boeing had already reduced production of the 777 to 7 airplanes per month beginning this month from the original rate of 8.3 aircraft per month or 100 aircraft per year. With the drop to 5 aircraft per month next August, Boeing’s production of the 777 will fall back to levels not seen since 2010, when Boeing initially announced the plans to increase 777 production to 7 aircraft per month by mid-2011 and 8.3 per month by early 2013. While Boeing executed those production rate increases successfully, it has been forced to pull back soon after cresting.
A further cut to a low point of 3.5 aircraft per month is coming in 2018, when Boeing will begin production of the re-engined 777-9 for flight testing. The temporary cut will occur as Boeing inserts blank positions in the assembly line before and after each of the first 6 777-9s produced, and will temporarily drop 777 production to a near-15 year low of 42 aircraft per year.
Is 60 aircraft per year the right production rate for the 777?
At this point, Boeing should have just enough orders left in the tank to maintain the rate of five aircraft per month through the entry into service (EIS) of the 777X in 2020, but the more interesting question is whether Boeing might end up keeping the 777X at the same production rate as the 777 Classic, even after production ramps up. While the 777X has sold well relative to the A350-1000 and the A380 since its launch, it is still an airplane with a backlog of just 321 airplanes across a mere seven or eight customers.
More worryingly, before the Iran Air order for 15 777-9 planes was finalized this weekend, Boeing hadn’t won a 777-9 order in nearly a year and a half. The last substantial order for the 777X was from ANA back in 2014, and the market conditions to support 777X sales just aren’t there. By virtue of the Airbus A350-1000’s existence, the replacement market for the 777-300ER was always going to be split at least in half (if not tilt towards Airbus). There are plenty of 777 customers amongst the largest buyers of the A350, and even if some (like Cathay Pacific and Qatar Airways) have ordered both types in large volumes, at least a portion of the A350’s customer base like British Airways and LATAM will eschew the 777X in favor of the A350 family.
There are still some potential 777X customers out there, including Air France-KLM, American Airlines, Singapore Airlines, Saudia, Korean Air, and the Chinese carriers to name a few. Other natural customers like Thai Airways and Turkish Airlines are currently held back by economic concerns, but will likely buy the plane eventually if their situations permit it. But it’s hard to see an order momentum building enough between now and 2020 to justify 84 airplanes per year (7 per month) let alone 100.
Unfortunately for the 777 program and Boeing, it would appear that the dual bite of the A350-1000’s improvements and the drop in fuel prices have sapped the order momentum that the 777X appeared to have in 2013 and 2014. In a low fuel price environment, with revenues flat and profits falling in many cases, the urgency around large orders for new generation airplanes falls. Meanwhile the market for air freight is extremely soft thanks to the rise of belly cargo and economic uncertainty, which has sapped sales of the 777F.
Add in other uncertainty like the future of Export-Import Bank (Ex-Im) financing and the potentially onerous trade policies espoused by President-Elect Trump and its no surprise that airlines aren’t exactly backing up a brink truck to Boeing’s door to buy a bunch of 777-9Xs. The slowdown in orders also probably puts the kibosh on a hypothetical stretched 777-10X, even as Singapore Airlines sniffs around at that type. Boeing probably could have bridged the 777-300ER to the 777-9X without too many issues if fuel hadn’t taken a dive, but a macroeconomic boon (oil prices) that has added billions to profits for airlines around the world is nothing but a curse for the world’s largest commercial airplane manufacturer (by deliveries).