Last fall, Boeing (NYSE:BA) seemed to be seriously considering restarting production of the 767-300ER medium-range widebody. While the 767's technology is nearly half a century old, it's a proven model with low production costs and no direct competition.
U.S. airline giant United Continental (NASDAQ:UAL) was interested in placing a large order, according to The Wall Street Journal and other sources. However, a prominent Boeing executive recently slammed the door on the prospect of building more 767 passenger jets. This may indicate growing confidence that Boeing will be able to launch a new "middle-of-the-market" 797 jet later this year.
An interesting idea
For the past couple of years, Boeing has been working to develop a viable business case for a middle-of-the-market jet to fill the gap between the largest single-aisle planes and the smallest widebodies. It has made a lot of progress toward defining the capabilities it would target in a new model. Still, even if management gets the "go-ahead" from Boeing's board this year, the 797 wouldn't be ready until 2024 at best (and more likely 2025).
However, Boeing doesn't want to lose potential customers to archrival Airbus because of product availability issues. Restarting 767-300ER production would have allowed that model to serve as a stopgap until the introduction of a brand-new 797 aircraft family.
For airlines like United Continental that are focused on controlling capex, rock-bottom pricing for the 767-300ER could have potentially made up for its technological disadvantages. Additionally, Boeing still builds the freighter version of the 767, which would simplify the process of restarting production of the passenger variant.
Serious drawbacks, though
In late 2017, Boeing didn't try to refute the rumors that it might bring back the 767-300ER. However, Boeing vice president Randy Tinseth pretty much rejected the idea out of hand on a conference call earlier this week. There are probably two factors behind the apparent decision not to proceed with a 767-300ER revival.
First, at its current production rate of 2.5 per month, the 767 production line is sold out for many years with orders for freighters and military tankers. Boeing would have to make investments in its Everett, Washington, factory to support increased production. If the higher production rate could only be sustained for a few years, it would be hard to recoup that investment while keeping prices extremely low.
Second, by delivering a bunch of deeply discounted 767-300ERs to the likes of United over the next few years, Boeing would probably be cannibalizing future 797 sales. That's not a good idea, as one of the biggest challenges to closing the 797 business case is ensuring that there will be enough demand to cover development costs.
There are better alternatives
Fortunately, Boeing may not need to restart 767-300ER production to keep customers away from Airbus. The company has recently shown more of a willingness to discount the larger, longer-range 787 Dreamliner. It can afford to do so because production costs have now fallen to less than $90 million for the 787-9, according to trade publication Leeham News and Comment.
Dreamliner production costs will continue to fall in the next few years thanks to scheduled step-downs in supplier pricing and efficiency gains from a looming production increase. This may allow Boeing to offer even bigger discounts on the 787 in the future.
Additionally, used 767s remain a viable alternative. Indeed, United Continental recently decided to acquire three used 767-300ERs. Even including the expense of reconfiguring used 767s, the capital costs would be much lower than for buying new ones. For airlines such as United, used 767s can span the gap between the retirement of older aircraft and the potential availability of the 797.
Reviving the 767-300ER was worth considering, given airlines' need to replace many older 767s in the next few years. But as long as Boeing can promise that the 797 will be ready by the mid-2020s, there are better stopgap measures available for both Boeing and its customers.