Aircraft orders have slowed this year at Boeing (NYSE:BA), compared to the torrid pace of the past few years. There have still been a few big deals, though. Aircraft leasing giant AerCap placed a firm order for 100 737 MAX 8 jets, with a total list price of more than $10 billion. An order for 50 767 freighters from FedEx also carried a total list price of nearly $10 billion.
However, a much smaller sale was probably Boeing's best deal of 2015. In April, it reached an agreement with United Continental (NASDAQ:UAL) to swap out orders for 10 787 Dreamliners in favor of a new order for 10 777-300ERs, with deliveries scheduled for late 2016 and early 2017.
Not all orders are equal
So why was the United Continental deal -- which was a swap that didn't actually increase Boeing's backlog -- more important for Boeing than its pair of $10 billion aircraft sales? The reason is that aircraft orders are not all equal for Boeing.
For some models, Boeing has a massive backlog. It has over 4,000 firm orders for the 737 family -- more than seven years of production. It also has a firm backlog of nearly 800 Dreamliners -- more than five years of production.
By contrast, at the end of November, it had just 224 outstanding orders for the current-generation 777. That's equivalent to a little more than two years of production. An updated version of this popular model (the 777X) is coming in 2020 and has already secured more than 300 firm orders. However, Boeing probably needs to sell at least 250 more current-generation 777s to avoid a production cut in the meantime.
The 777 product family is a huge cash cow, so Boeing would like to maintain the current production rate if at all possible. It has set a goal of selling 40-60 current-generation 777s annually for the next few years. As a result, orders for current-generation 777s are a lot more valuable for Boeing right now than orders for its more popular models.
The Boeing-United deal was clever
Boeing's agreement with United Continental earlier this year was a win for both sides. Boeing got 10 more orders for its 777 backlog. It also opened up 10 near-term delivery slots for the highly sought-after 787 Dreamliner.
This may have helped it seal a deal announced in October to sell 19 Dreamliners to Norwegian Air Shuttle. Since 787 delivery slots in the next few years are extremely scarce, Norwegian Air Shuttle probably agreed to pay more than United was slated to pay for the same planes. That in turn made it possible for Boeing to offer United big discounts on the 777s it ordered.
For United Continental, the deal made sense because it wants to convert some of its current 777s to a high-density configuration for domestic service. The 777-300ER will replace these smaller 777-200s, allowing United to add seats in markets like its slot-constrained Newark hub. United could also potentially use some of the 777-300ERs to replace older 747s that are ripe for retirement.
Boeing needs more deals like this
Boeing has a massive order backlog today, but it is very unevenly distributed. Some of its aircraft families are essentially sold out through 2020, while other aircraft families are facing potential production cuts without an influx of new orders.
Boeing's deal with United Continental earlier this year took advantage of this quirk to shift orders from a heavily in-demand plane to a model with ample availability. Finding more airlines that would be willing to do similar trades -- in return for bigger discounts or other inducements -- could be critical to Boeing's efforts to maintain its 777 production rate.