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The Boeing 747 Is Flying Away at United Continental

By Adam Levine-Weinberg - Mar 9, 2016 at 11:25AM

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United Continental is just the latest airline moving to an all-twin engine fleet.

Two weeks ago, Bloomberg reported that United Continental (UAL -3.30%) was thinking about accelerating the retirement schedule for its fleet of 22 Boeing (BA -2.84%) 747s.

The carrier is past the thinking stage now. On Tuesday, as part of a broader fleet plan update, United announced that it will retire all of its 747s by the end of 2018. This was good news for Boeing, as it enabled the plane maker to sell another four 777-300ERs to one of its most reliable customers.

Curtains for the 747
The iconic Boeing 747 is revered by aviation enthusiasts both for its distinctive shape and its transformative impact on air travel since the first version entered service in 1970. However, the 747 has lost its appeal among airlines, as it is less fuel-efficient and more expensive to maintain than twin-engine planes.

Many airlines are retiring their older Boeing 747s.

Furthermore, as other airlines have moved aggressively to retire their 747s, it has become more difficult for United to do maintenance work away from its own hubs. If 747 spare parts aren't readily available when they are needed, it can cause unnecessary delays and cancellations, inconveniencing customers.

How United will replace its 747 fleet
Until relatively recently, United Continental had planned to keep most of its 747 fleet in service until around 2020. To replace its 747s and support future growth, it ordered 35 A350-1000s, with deliveries beginning in 2018.

Based on United's new 747 retirement schedule, most of the A350s will arrive too late to be direct 747 replacements. United can still use its A350s arriving in 2018 and early 2019 to replace the Boeing 747s retiring in 2018. However, it will also need to use Boeing's 777-300ER as a near-term 747 replacement.

United already has 10 firm orders for 777-300ERs scheduled for delivery in late 2016 and early 2017. These planes were originally ordered to provide some capacity growth on long-haul routes from United's Newark Airport hub that are currently served by 777-200s. (The 777-200s will be reconfigured for use on high-density domestic routes.)

Instead, most of these 10 777-300ERs will probably be used as 747 replacements. With airlines facing weak unit revenue trends on international routes recently, it's not an opportune moment to introduce larger planes on long-haul routes anyway.

United also converted another four of its Dreamliner orders scheduled for delivery in 2020 and beyond to 777-300ER orders scheduled for delivery within the next two years. That will allow it to complete its 747 replacement initiative.

United is converting four of its 787 orders to the larger 777-300ER.

As for the A350s on order, they will allow United to replace smaller and less fuel-efficient widebody planes in 2019 and thereafter. Hopefully, international air travel demand will have fully recovered by then.

Slow but steady progress for Boeing
In the past year or two, a growing chorus of Wall Street analysts have raised concerns about whether Boeing will be able to sell enough current-generation 777s to ensure a smooth transition to the next-generation 777X, which arrives in 2020. To be sure, demand for the 777 is starting to sag, given the availability (and impending arrival) of more advanced alternatives.

Nevertheless, Boeing continues to sell current-generation 777s at an adequate pace. CEO Dennis Muilenberg has stated that the company needs to sell 40 current-generation 777s annually for the next few years to complete the production bridge to the 777X.

Back in January, Boeing sold six 777-300ERs to Air China. Including the four that United plans to order, Boeing is now a quarter of the way to its goal of selling 40 777s this year. As long as it can continue cobbling together small orders like these at a steady pace, Boeing should be able to fill its open 777 delivery slots.

Adam Levine-Weinberg owns shares of The Boeing Company and United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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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The Boeing Company Stock Quote
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United Airlines Holdings, Inc.
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