Impact Of The Slowdown In Wide-Body Jet Segment On Boeing

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The Boeing Company

Boeing’s (NYSE:BA) wide-body jets that coming off leases are expected to create a glut in the aircraft market. The excess supply of wide-body jets is creating a bubble in the industry. While the wide-body aircraft accounts for 25% of the deliveries worldwide, they constitute around 43% of the revenues. Despite decreasing demand and deliveries of wide-body jets, they still generate a major portion of the aircraft manufacturers’ revenues. Additionally, Boeing’s wide-body 777 is priced at $320 million, which is in the range of 3.7x – 6.2x the list price of Boeing 737 narrow-body jet. Boeing’s wide-body aircraft comprised 33% of its total aircraft delivered in 2014, while it accounted for around 78% of revenues. This means a 10% slowdown in Boeing’s wide-body jet deliveries would mean a loss of $2.1 billion in revenues as compared to our current forecast, implying a slight 3% downside to the share price.

Recently, Singapore Airlines retired some of its Boeing 777s coming off lease. [1] Similarly, Delta Airline’s CEO Richard Anderson recently mentioned that the carrier will cancel its agreement worth $4.0 billion with Boeing for 737-900ER aircraft and used Embraer E190 aircraft following its pilots’ rejection of a tentative agreement. [2] Around the same time, Aeroflot PJSC, Russia’s largest carrier reportedly scrapped an order for 22 Boeing 787 jets worth $4.8 billion. [3] With aircraft coming off lease and cancellation of contracts, the market may be approaching saturation, resulting in excess supply over time. In the future, this glut might spread to the narrow-body jet segment as well. The two aircraft majors are going all out to seize a greater share in the slumping wide-body jet market. Delta has recently been approached by both Airbus and Boeing to sell or lease its used wide-body jets coming off lease. Delta is now looking to replace its current fleet and weighing its options between Boeing and Airbus.

See our complete analysis of Boeing here

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The Wide-Body Jets Backlog Is Growing

Boeing has been increasingly adding to its already significant backlog. The current aircraft backlog is the highest in the company’s history and is expected to trend further upward with the continuous adding of contracts. In FY 2014, Boeing reported a record high contractual backlog of $487,092, growing at a CAGR of 13% between 2010 and 2014. During the same period, the company’s total revenue only increased by 9%. Boeing’s total contractual backlog is growing four percentage points faster than the revenue growth, suggesting that orders may well be outpacing future need. If so, future cancellations may well rise.

backlogRevenue

Shift To Narrow-Body Jets Is Fueling The Supply Glut In Wide Body Segment

Over the next two decades, the narrow-body, single aisle type aircraft are expected to form 70% of new deliveries. [4] Twin aisle or wide-body jets will represent only about a quarter of all new deliveries. Through 2015-2034, the aircraft manufacturing market is predicted to see around 32,600 new aircraft deliveries, of which Asia-pacific, Europe and North America is expected to be the largest consumers. Nearly 14,000 passenger aircraft are expected to retire or convert to freighter, to be replaced with new, fuel efficient, next generation aircraft.

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In response to Delta’s CEO’s speculation, Boeing has released a statement announcing the intent of EVA Airways, a Taiwanese international airline, to purchase up to 26 Boeing 787-10 newly launched Dreamliner (wide-body) aircraft. This purchase has been valued at an approximate $8.0 billion going by current list price. [5] The deal is yet to be finalized. So it remains to be seen whether this deal or launch helps change market dynamics by balancing the industry demand-supply situation.

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Notes:
  1. Singapore Airlines retired Boeing 777s, Bloomberg, October 14, 2015 []
  2. Delta reported to cancel $4.0 billion aircraft order, Aviation Blog, July 15, 2015 []
  3. Aeroflot seeks to exit deal for 22 Boeing Dreamliner 787s, Bloomberg, October 14, 2015 []
  4. Airbus Global Market Forecast 2015-2034, Airbus []
  5. Boeing Statement on EVA Deal, Boeing, October 15, 2015 []