New airplane technology almost always trumps the old. The planes that are built today burn less fuel and need less maintenance than their predecessors. If you manufacture airplanes, however, this truism presents a tricky problem: How do you keep selling an older model after you announce its successor (PDF) as the latest and greatest thing to ever have reached the skies?
Boeing (BA) faces that issue with its 777, a jumbo jet that has become a well-liked staple of global airline fleets over the past 15 years. The 777 sales problem drew a fresh spotlight this week, when Delta Air Lines (DAL)announced an order for 50 twin-aisle jets from Airbus (AIR:FP), split between the A350 and A330neo models, to replace Delta’s aged 747 and 767-300 fleets.
With a list price of $330 million, the 777-300ER accounts for virtually all of the remaining 777 order book—making it a key component of Boeing’s profitability. “The good news is that the 777-300ER has had really strong pricing, so that gives you some cushion” for discounting, says Teal Group analyst Richard Aboulafia. “The bad news is: I have no idea where any demand would come from.”
The Delta deal is driven in no small part by the lower prices and faster delivery speeds Airbus was able to offer the airline. But the older 777s Boeing pitched for use at Delta’s Seattle hub and on its trans-Atlantic routes were a big factor, and Delta’s decision underscores the market’s lack of interest in a plane that is awaiting replacement. “It’s just reached the end of its life,” says Scott Hamilton, editor of the aviation website Leeham News and Comment. “Why would you buy an airplane that you might take delivery of in 2017 or 2018 or 2019 when you have the brand-new model coming in 2020?”
Boeing says it can bridge the production gap from the old 777 to the 777X, its next-generation replacement, by netting as few as 40 orders per year. So far this year Boeing has taken 55 orders for the 777, including a deal announced on Thursday to sell 10 to Kuwait Airways. The new order is worth $3.3 billion at list price, but Kuwait Airways probably negotiated a discount in excess of 50 percent, given both Boeing’s need to move 777s and the price breaks manufacturers typically offer customers. In July, All Nippon Airways (9202:JP) finalized an order for six of the older planes.
Boeing clearly believes it can meet its goal. “We expect demand for the 777 to remain healthy through the end of this decade,” Boeing Chief Executive Officer Jim McNerney said last month during an earnings call.
There are two likely ways Boeing could try to fill the interval until the new aircraft arrives: turn out fewer than eight 777s each month and offer steep discounts to buyers. The company vows to continue the current pace of making 100 777s per year, although many observers are skeptical. “There is nobody in the marketplace that I have talked to who believes that posture and frankly, if you talk privately to anybody inside Boeing,” says Hamilton, “they don’t believe it either.”
Discounting, on the other hand, is almost certainly on the table for the 777 sales team. The big question is whether Boeing will be able to cobble together enough small orders, even with strategic price cuts, to keep the 777 viable for an additional five years.
(Bloomberg Businessweek)
