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FedEx Mulling Extra Freighters: What Does It Mean for Boeing?

By Adam Levine-Weinberg - Jul 22, 2015 at 9:05AM

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FedEx might buy another 25 Boeing 767 Freighters, helping Boeing maintain a steady production rate well into the future.

Package delivery giant FedEx (FDX 1.10%) is thinking about buying about 25 extra 767 Freighters from Boeing (BA 0.28%), according to multiple reports last week.

This isn't as big a potential order as what Leeham News and Comment suggested earlier this month, when it reported that FedEx might buy up to 50 767 Freighters, as well as up to 10 larger 777 Freighters. However, it would still be an important win for Boeing if FedEx goes through with this order.

Still chugging along
Boeing's 767 has been in production since 1981, which is an incredibly long time for an aircraft program. Over the past decade, demand for the 767 has fallen off. That's not too surprising, because Boeing's 787 Dreamliner is pretty much a direct replacement for the 767, and it offers huge efficiency benefits compared to its predecessor.

Nevertheless, Boeing has continued building the 767 -- slowly -- and it fills a key niche in the freighter market, because Boeing has not offered a cargo version of the 787 thus far. Boeing currently has 35 unfilled orders for the 767 from commercial customers, all of which are freighters bound for FedEx.

Boeing's new 787 isn't available as a freighter -- at least not yet.

Yet the 767 program is going to be around for quite a while. That's because it is the basis for a $35 billion military contract Boeing won for the KC-46 aerial refueling tanker. Boeing is slated to deliver 179 KC-46 tankers to the U.S. Air Force between 2017 and 2027.

The Air Force could potentially place additional orders in the future, as it has more than 400 aging KC-135 tankers in its fleet today. Boeing may also have opportunities to sell KC-46 refueling tankers to foreign militaries in the future. In any case, it's almost certain that the 767 production line will keep running for more than a decade.

Filling in production gaps
As of next year, Boeing plans to produce 767s at the rate of two per month, and according to industry publication Flightglobal, Boeing actually has the capacity to build 2.5 aircraft per month on the Boeing 767 line. However, the Air Force contract calls for Boeing to build an average of about 15 aircraft per year through 2027.

This is why getting an order for even 25 additional 767s from FedEx would be an important achievement for Boeing. To maximize its efficiency, Boeing needs to fully utilize its production capacity. This means finding customers for all of the extra production slots not committed to the U.S. Air Force up to at least 24 aircraft per year -- and perhaps as many as 30.

FedEx has been aggressively replacing older, inefficient aircraft.

For the next few years, Boeing can keep the 767 line busy fulfilling the remaining firm orders from FedEx while ramping up KC-46 production. But by 2019 at the latest, Boeing will need additional orders to keep the line running at its planned speed.

Nobody but FedEx has seemed very interested in ordering the 767 lately. But the aircraft serves an important purpose for FedEx as a replacement for its aging MD-10s. The 767 also looks like a prime candidate to replace FedEx's Airbus 300s when they begin to exit its fleet later in the decade.

It's not just about the big names
Popular aircraft families like the 737 and the 787 tend to get the bulk of investors' attention as they are more frequently in the news. And these aircraft programs make bigger contributions to Boeing's financial performance than the aging 767 program.

However, each individual 737 or 787 order is less impactful, because both aircraft have long order backlogs and lots of airlines are anxious to buy them. As a result, if Boeing loses out on one potential order, it's no big deal, because there will be plenty of others.

By contrast, orders for less in-demand models like the 747, 767, and 777 are critical for Boeing. With those programs, Boeing must work hard to make enough sales to keep production lines humming. And in the aircraft industry, where scale is critical to profitability, investors should cheer any big orders that allow Boeing to maintain steady or rising production rates.

Adam Levine-Weinberg owns shares of The Boeing Company. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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