With the troubled 787 Dreamliner program finally starting to turn a profit, Boeing's (NYSE:BA) most pressing challenge now is filling its open delivery slots for the current-generation 777 over the next few years. In the past two years, order activity for the 777 has slowed dramatically.
Boeing's management has admitted that it will be hard for the company to meet its order goals for the 777. However, Boeing isn't conceding yet. Let's take a look at whether it has a realistic chance of getting the orders it needs to avoid another deep production cut.
Order activity grinds to a halt
Since the beginning of 2015, a combination of low oil prices, currency volatility, and subpar global growth has taken a big bite out of the wide-body market. For example, Boeing only won 38 firm orders for the current-generation 777 in 2015, compared to a goal of 40 to 60.
As a result, Boeing admitted last year that it might have to reduce 777 production to seven per month from the current rate of 8.3 per month. In early 2016, it confirmed that it would cut production to that level at the beginning of 2017. Moreover, Boeing plans to deliver just 5.5 units per month in 2018 and 2019, as it will start building some 777Xs on the same production line by then.
Yet as 2016 progressed, analysts started to doubt that even this reduced target was achievable. As of the end of September, Boeing had just six new net orders for the 777 this year. Last week, Boeing CEO Dennis Muilenberg acknowledged that Boeing may have to reduce deliveries to as little as 3.5 per month in 2018 and 2019.
Based on Muilenberg's comments, there are about 40 open slots for the current-generation 777 in the 2017-2018 period, assuming no further production cuts. In addition, Boeing would probably need another 100 orders for 2019 and beyond.
A year-end order flurry?
Still, there have been some hopeful signs. Earlier this month, Qatar Airways ordered 10 more 777-300ERs. Just this week, SWISS ordered a single additional 777-300ER. That brings the year-to-date order total to 17.
More orders could potentially be finalized soon. Saudi Arabian Airlines (Saudia) announced last month that it plans to add 15 more 777-300ERs to its fleet. Boeing hasn't reported an order from Saudia yet, so it's not clear whether these are all new orders.
Iran Air also hopes to acquire 15 new 777-300ERs. It reached a tentative agreement with Boeing earlier this year and the U.S. government has now approved the sale. However, lining up financing remains a major obstacle due to ongoing financial sanctions against Iran. There's also a lot of political opposition within the U.S. to doing business with Iran, so the deal could potentially be torpedoed at any moment.
Time to replace those 747s!
Aside from these already-rumored potential sales, Boeing could look to current operators of the 747-400 for new 777 orders. The in-service fleet of 747s has been shrinking rapidly. Rising maintenance costs and declining availability of spare parts could encourage airlines to accelerate their 747 retirements.
Many of the top operators of passenger 747s have already ordered enough planes to replace their 747 fleets. But some -- such as KLM, China Airlines, and Thai Airways -- might need to order a few more planes to replace the last of their 747s.
There are also a lot of active 747-400 freighters, and many of their operators haven't planned for their replacement yet. The 747 offers some unique advantages over the 777 as a freighter, due to its nose-loading capabilities. Moreover, fuel efficiency is less of a concern for cargo airlines. Nevertheless, Boeing could potentially pick up a few 777F orders as 747 replacements, especially if fuel prices rise in the next year or two.
Will Emirates order more 777s?
Middle Eastern airline giant Emirates is by far the largest 777 customer in the world, accounting for more than 10% of all orders for the current-generation models. As of last year, it was looking at ordering up to 15 additional current-generation 777s, but it hasn't pulled the trigger yet.
If Emirates sees incremental growth opportunities in the next year or two, it could order more 777s for delivery in 2018 or 2019. It could even replace some of its older 777s just to keep its fleet age young. This year, it is retiring nine 777s.
A fleet refresh could be aided by the growing market for secondhand 777-300ERs. For example, British Airways is interested in acquiring some used 777-300ERs to help replace its aging 747 fleet, rather than buying any more new 777s.
FedEx could be another source of incremental orders for Boeing's 777F in the coming years. In fact, the company plans to buy at least 7 777Fs that are not in Boeing's firm order book yet. It could order even more if rising fuel prices or maintenance costs make it advisable to accelerate the retirement of its older three-engine MD-10s and MD-11s.
Boeing could also nab some orders in emerging markets if air travel demand grows faster than expected, as the 777 is one of the few wide-body models available on relatively short notice.
The bottom line is that aside from potential orders of about 15 planes each from Iran Air, Saudia, and Emirates, there aren't many prospects for big 777 orders out there. There are a large number of potential sale opportunities, but they are mostly for deals of a few airplanes each -- or even just one, as in the case of the recent SWISS order.
Unless Boeing has an amazing success rate in closing these deals, it's not going to get enough orders to maintain the current production plan. That said, if it can seal the relatively large Iran Air and Saudia deals in the next few months, Boeing should at least be able to avoid the worst-case scenario of reducing deliveries all the way to 3.5 per month in 2018 and 2019.