At the Farnborough Air Show, the world's biggest owner of widebody jets explains why he's not buying any more current 777s, an analysis that has sobering near-term implications for Boeing's finances and the outlook for workers in Everett.
Boeing’s 777-300ER, widely admired as the most efficient and best large twin-engined jet available today, isn’t going to get a single new sale from the world’s biggest owner of widebody jets.
Aengus Kelly, chief executive of giant aircraft leasing company Aercap, owns 69 Boeing 777s and says “it’s a great airplane.”
But he isn’t interested in buying any more of those 365-seat jets from Boeing.
“You are going to lose money if you buy that airplane brand new,” Kelly said. “You’d be better off buying one that’s 10 or 12 years old.”
Kelly’s analysis has sobering near-term implications for Boeing’s finances and its Everett workforce over the next three years.
Of course, it’s to his advantage if an airline is persuaded to lease a used 777 from him rather than buy new from Boeing.
But for sure the sale of new current-model 777s has nose-dived since Boeing launched the new 777X variant in 2013. The new airplane on the way means the 777-300ER – great airplane as it is – is slipping toward the end of its production.
With sales drying up, empty 777 delivery slots yawn ahead in 2017 through 2019. Each empty slot is a plane scheduled to be built, but no buyer lined up for it.
Boeing needs to sell 4o to 60 each year if it is to bridge the gap to the 777X. It has sold just a dozen so far this year, with no new orders announced at the Farnborough Air Show.
Kelly’s reasoning gives a clue as to why.
He said Boeing could sell more of the current model 777s only if it dropped the price very significantly.
But it cannot do that for fear of cannibalizing 777X sales, he said. Buyers would say, “Why would I ever pay $200 million plus for a 777X?”
Boeing “would be borrowing… sales from the future,” Kelly said. “It would be an extremely expensive loan to take, to shore up the near term at the expense of the new program in the long term.”
“That’s the tension Airbus and Boeing always face when they launch a new product. Sure, I can sell the last of the (old model) line, but at what price? Does it mean I lose sales of the new airplane?” he said.
So while Boeing’s sales team is trying to fill the sales gap to the 777X, Kelly said “there’s a price where you don’t fill it. You just cut production.”
“They could certainly sell more if they wanted to. We’d buy them at the right price. But Boeing won’t sell at that price,” he added. “The reason they won’t is, it’ll damage sales of the X.”
In Kelly’s unsentimental leasing world, an airplane is above all a machine to make money for its operator.
With a new generation of even more efficient large widebody jets coming — the Airbus A350-1000 in 2017 and the 777X in 2020 — he doesn’t believe a current 777-300ER, bought new today, will still be flying in 25 years time, which is the jet’s anticipated lifetime for valuation purposes.
Boeing vice president of marketing Randy Tinseth disagreed.
“It’s hard for me to imagine that the best-selling airplane in widebody history would not hold its value,” Tinseth said. “We have customers who have large fleets of 777s who could fit -300ERs into their operations seamlessly and fly them very profitably for many years ahead.”
“We’re focused on filling our production in the back half of 2017 and in 2018,” Tinseth added.
If Kelly is right and Boeing fails to fill those holes, it will have to cut production. That means job losses in Everett, though pending rate increases on the 787 and 767 lines will take up some of the slack.
The 777 has been a cash cow for Boeing and is produced at a rate of 8.3 per month, or 100 per year.
Executives have already said they’ll cut the production flow rate to 7 per month next year, with the number of jets actually built running lower than that as gaps are inserted in the line to accommodate slower work on the first 777Xs.
Kelly’s thinking, and the very slow sales this year, suggest further orders will be hard to come by.