Weakness in international air cargo markets and lower-than-expected demand for large commercial passenger jets are impacting orders for Boeing‘s (NYSE:BA) largest commercial airplane family – the 747 series. This airplane family has two models under production – the 747-8 passenger airplane version, which can seat around 467 passengers in a three-class cabin configuration and the 747-8F freighter airplane version, which is one of the largest cargo airplanes ever built.  Demand for the 747-8 passenger airplane has been hit by the weak global economic growth, which has made it difficult for airlines to fill the large number of seats on these planes on every departure while demand for the 747-8F cargo plane has been impacted by a decline in the global air cargo markets.
In the current year through April 2013, the 747 family has received orders for only three airplanes, which has been more than offset by cancellation of a prior order of five 747s.  Additionally, this weak global demand for large commercial jets is impacting not only the 747’s order volumes, but also its pricing. On the bright side, beginning 2014, Boeing sees a gradual recovery in the global air cargo markets which should improve order volumes for the 747-8F.
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747 Will Weigh On Boeing’s Profit Growth In The Near Term
In April, driven by the low order volume for the 747s, Boeing announced that it was reducing the production rate of these airplanes to 1.75 units per month from 2 units per month at present.  As of March 31, 2013, the company had undelivered firm orders for 64 747s, which included 26 of the passenger version and 38 of the cargo version. 
Additionally, in its first quarter earnings filing, Boeing mentioned that it has several unsold production positions for 747s, 2014 onward. Thus, if the company is unable to obtain multiple orders for 747s in the remainder of 2013, which is likely in the current environment, then it will have to cut 747 production rates further and incur additional costs from production inefficiencies or take the risk of manufacturing and stocking unsold aircraft. It is also worthy to note here that both the passenger and cargo versions of the 747 cost over $350 million a piece, thus, the cost impact from manufacturing and stocking an unsold 747 will be significant. 
In the near term, the weak demand and lower production rates of the 747 will weigh on Boeing’s profit growth. However, for the next two decades, Boeing is sticking to its global demand forecast of 790 large commercial airplanes. 
777X Could Impact A Portion Of 747’s Demand
At the same time, Boeing is also developing an upgraded version of the 777, dubbed as 777X, which is expected to enter service by the end of the decade. The 777X will seat around 35 more passengers compared to the 777-300ER, which seats around 386 passengers in a three-class seating arrangement.   Thus, it is likely that this upgraded version could cannibalize a certain portion of 747’s sales, especially as it will offer similar range capabilities with higher fuel efficiency standards. Having said this, the demand for the larger 747 will also continue to exist due to its distinctive cargo loading and unloading through the airplane nose door, which allows for transport of large-sized items.Notes:
- Boeing’s 747 specifications, May 8 2013, www.wikipedia.com [↩]
- Order and deliveries for Boeing, May 8 2013, www.boeing.com [↩]
- Boeing adjusts 747-8 production rates, April 19 2013, www.boeing.com [↩]
- Boeing 747-8’s model summary, May 8 2013, www.wikipedia.com [↩]
- Boeing’s commercial jet prices, May 8 2013, www.boeing.com [↩]
- Boeing’s long-term market forecast, May 8 2013, www.boeing.com [↩]
- How the Boeing 747 got left behind, April 29 2013, online.wsj.com [↩]
- Boeing 777 specifications, May 8 2013, www.wikipedia.com [↩]