The biennial Paris Air Show always features plenty of big aircraft orders. Boeing (NYSE:BA) and Airbus are both known for holding off order announcements so they can make a big splash at the major trade shows.
But perhaps the biggest surprise of the 2015 Paris Air Show was Boeing's announcement that it had signed a Memorandum of Understanding to sell 20 Boeing 747-8 Freighters to Volga-Dnepr Group. This order could help prolong the life of Boeing's iconic -- but embattled -- jumbo jet.
Orders drying up
As I explained earlier this year, sales of the Boeing 747 and the rival Airbus A380 have shriveled up in recent years. The rise in oil prices beginning around 10 years ago gave twin-engine widebodies a big advantage over fuel-guzzling four-engine planes like the 747 and A380.
The largest twin-engine widebodies are not that much smaller than jumbo-jets -- particularly the 747 -- in passenger capacity. To the extent that airlines have wanted to add seating capacity on popular routes, they have simply crammed more seats onto twin-engine widebodies rather than upgrading to a costlier 747 or A380.
While Airbus' A380 sales have been nothing to write home about, Boeing 747 sales have been downright ugly. From 2008 to 2014, Boeing booked just 16 orders for the 747, net of cancellations: an average of a little more than two per year.
Boeing gets a big 747 commitment
In this context, selling twenty 747s in one go is a huge accomplishment for Boeing. (To be fair, these are not firm sales contracts yet.) Boeing had also booked four other 747 sales earlier this year. Additionally, the U.S. Air Force announced in January that it will replace its two aging Air Force One planes with new Boeing 747-8s.
The order from Vogla-Dnepr Group emphasizes how the 747-8's future is increasingly tied to the air cargo market. Even before this order, Boeing's 747 orders have tilted in favor of the freighter version, 71 to 51. This is unusual: For most aircraft models, passenger versions far outsell freighters.
Other cargo operators also remain interested in buying the 747 freighter. Cargolux has taken delivery of 12 of the 14 747-8 Freighters it has ordered, but it wants Boeing to keep producing them because of their unique capabilities. (Boeing 747 cargo planes can be loaded from the nose, whereas most planes can only be loaded from the side.)
Meanwhile, Atlas Air has stated that it eventually plans to buy more 747-8 Freighters. It has previously purchased nine of the type from Boeing.
Why it matters
Boeing expects to deliver 750-755 commercial aircraft this year, of which fewer than 20 will be 747s. At the new 747 production rate of 1.3 per month that goes into effect this fall, Boeing will only be building around 16 annually. Thus, the Boeing 747 is not a big contributor to the company's overall profitability.
That said, Boeing is still making a profit -- however modest -- on these sales. Furthermore, Boeing has warned of a $1 billion charge in the event that it has to shut down 747 production, according to Reuters.
Assuming the Volga-Dnepr order is eventually confirmed, it will add more than a year of production to Boeing's 747 backlog. As of the end of May, Boeing had 32 unfilled orders for the 747, equal to two years of production.
Between this big new order, the expected Air Force order, and the known interest in the 747-8 Freighter among other cargo airlines, there's a good chance that Boeing will be able to keep the 747 production line going until at least 2020.
That will allow the 747 to continue making a modest contribution to Boeing's bottom line for several more years. It will also give Boeing the flexibility to ramp up production again if market conditions change and bring jumbo jets like the 747 back into favor.