Last week, Boeing (NYSE:BA) announced that it has completed the firm configuration for the 777-9 plane: the larger version of its new 777X aircraft family. This means that the basic design of the airplane has been determined, allowing Boeing to finalize the design of individual components.
More broadly, this milestone indicates that the development of this critical new plane remains on track for it to enter production in 2017, with the first delivery in 2020. That is important because demand for the current-generation 777 has been slowing. Boeing needs to have the Boeing 777X ready on time to ensure a smooth product transition.
A big improvement
Boeing's current-generation 777-300ER is the biggest twin-engine jet flying today. While there are larger jumbo-jets like the Boeing 747 and the Airbus A380, both of those planes have four engines. As a result, they burn more fuel and have significantly higher maintenance costs. This has made jumbo-jets unpopular with most airlines.
The Boeing 777-9 is unique because it is even larger than the 777-300ER and is designed to seat more than 400 passengers in a standard configuration. That puts it roughly on par with the 747-400 -- by far the best-selling jumbo jet in history -- in terms of passenger capacity.
Because it offers jumbo-jet like capacity with a twin-engine design, the 777-9 is likely to be the most fuel- and cost-efficient widebody aircraft ever in per-seat terms. Boeing claims that its operating cost per seat will be 10% lower than the competing A350-1000, a new twin-engine widebody currently being developed by Airbus.
Looking for a smooth transition
Boeing has already bagged 306 firm orders for the Boeing 777X. That represents more than three years of production at the current 777 line rate of 8.3 per month. This is pretty impressive for a plane that won't be ready for delivery until 2020 -- although more than two-thirds of the orders came from two airlines (Emirates with 150 orders and Qatar Airways with 60 orders).
As the 777X's introduction into service nears, more and more airlines will begin thinking about their post-2020 fleet plans. Due to the plane's revolutionary ability to replace older jumbo-jets and offer similar capacity at a dramatically lower cost, the 777X is likely to find plenty of takers.
The same can't be said for the current-generation 777. At the end of August, the 777 backlog was down to 246 planes, equal to about 2.5 years of production. The 777 is more or less sold out through the end of 2016 and Boeing has sold about half of the 2017 delivery positions, but most of the 2018-2020 delivery slots are still available.
Year to date, Boeing has received firm orders for 34 current-generation 777s, plus another 10 commitments. Boeing has stated that it needs to generate 40-60 orders per year for the next few years to complete the production bridge to the 777X. It's on track for now, but the pace of orders for the outgoing model is likely to slow with each passing year.
This is why it's so important for Boeing to stay on schedule with the 777X. The sooner Boeing can get the 777X into service, the fewer current-generation 777s it will need to sell. That in turn would lower the risk of Boeing needing to cut the 777 line's production rate, which would damage its earnings and cash flow.
Once the 777X enters service in 2020, Boeing will have relatively new products for all of its high-volume commercial jet categories: narrowbodies (the 737 MAX), small widebodies (the 787), and large widebodies (the 777X). That will put the company in great position for strong sustained profitability and free cash flow.