Boeing (BA +2.06%) is officially building a new, next-generation freighter to replace its strong-selling 777F.
On Monday, the company confirmed that it will build a freighter based on the 777-8, the smaller version of its 777X family. Qatar Airways will serve as the launch customer. The Middle Eastern airline giant also plans to order dozens of additional Boeing jets. Let's take a look at what this means for the U.S. aerospace giant.
Responding to the A350F -- and environmental mandates
Last year, Airbus (EADSY +5.19%) announced that it would build a new freighter based on its A350 widebody jet. This marked its strongest challenge yet to Boeing's historical dominance in the dedicated freighter market. Airbus says that the A350F will beat Boeing's 777F on volume, payload, and economics. So far, Airbus has announced firm orders for 11 A350Fs from two customers, along with a letter of intent for seven A350Fs (plus five options) from Singapore Airlines.
Adding to the pressure on Boeing, none of its in-production freighters meet the future emissions standards mandated by the International Civil Aviation Organization. As a result, Boeing must discontinue production of the 767-300F and 777F by the beginning of 2028.
Upon entering service -- in 2027, barring schedule delays -- the 777-8 freighter will help Boeing counter both threats. Boeing claims that the new plane "will be the largest, longest-range and most capable twin-engine freighter in the industry," leapfrogging the A350F.
Image source: Boeing.
Airbus might dispute some of the performance details, but the 777-8 freighter clearly represents a credible next-generation competitor to the A350F. And since Boeing jets account for the vast majority of the global cargo fleet today, the 777-8 freighter will have the advantage of incumbency, as customers are already comfortable operating Boeing equipment. That should pave the way for solid sales.
Qatar Airways bites first
As expected, Qatar Airways became the first customer for Boeing's new model, placing a firm order for 34 777-8 freighters, with options for 16 more. Officially speaking, the deal would be worth over $20 billion at list prices if all of the options are exercised.
The actual value of this order is much lower, though. First, there's no guarantee that Qatar Airways will exercise any of the options. Second, Qatar Airways is converting 20 of its existing 777X orders to the new 777-8 freighter. Thus, only 14 of the 34 firm orders are actually new. Third, major airlines typically acquire jets well below list price. That puts the real-world incremental sales from this contract somewhere between $2 billion and $3 billion.
In conjunction with this deal announcement, Qatar Airways also ordered two current-generation 777Fs. And in a surprise twist, it signed a memorandum of understanding for Boeing's 737 MAX 10. It plans to place a firm order for 25 units with 25 additional purchase rights.
Image source: Boeing.
One key piece of context
It's encouraging to see Boeing's next-generation freighter start strong with a sizable launch order. Qatar Airways' new interest in the 737 MAX 10 is a nice bonus, too, as Boeing needs to diversify its 737 MAX customer base.
That said, Qatar Airways and Airbus are in the middle of a bitter feud. Qatar's aviation regulator has grounded many of Qatar Airways' A350 passenger jets due to safety concerns related to surface flaws. Airbus contends that the surface flaws don't pose a safety issue and notes that no other aviation regulator has grounded the A350. Instead, it alleges that the airline pressured its local regulator to ground the A350s so that Qatar Airways could claim compensation from Airbus.
This spat with Airbus made it a no-brainer for Qatar Airways to select Boeing's next-generation freighter. Furthermore, Airbus recently escalated the feud by unilaterally canceling Qatar Airways' order for 50 A321neos. That is forcing the airline to turn to the 737 MAX 10, which is the closest available substitute.
In short, the icy relationship between Airbus and Qatar Airways made it easy for Boeing to swoop in and win some new business. However, investors shouldn't expect Boeing to have such an easy time in the future. Airbus will be a more formidable opponent in the cargo market going forward, and the 737 MAX is likely to remain a distant second behind the A320neo family in the narrow-body jet market.
