May 14 2014, 12:52pm CDT | by Forbes
Sustained weakness in global cargo markets and lower than anticipated demand for large commercial airplanes is weighing on sales of Boeing‘s largest commercial airplane – the 747-8. The passenger version of this airplane, 747-8 Intercontinental, which seats 467 passengers in a three-class seating configuration, has received no orders from airlines so far this year. While its freighter version, 747-8F, has received order for just one airplane this year through the first week of May.
In our view, the depressed order volume for 747′s passenger version is reflective of the fact that currently there isn’t healthy growth in the number of routes worldwide where such large aircraft can be deployed by airlines. These airplanes were initially conceived with the anticipation that sustained growth in demand for air travel and constraints in airport infrastructure will compel airlines to increasingly adopt larger airplanes. That anticipation hasn’t been realized uptill now as airlines see few routes globally where they can fill over 450 seats on every departure. At the same time, sustained weakness in global air cargo markets has weighed on orders for 747′s freighter version. We figure these low order volumes for Boeing’s 747s will in the near term weigh on its growth from its better performing airplane models like the 737 and 787 Dreamliner.
We currently have a stock price estimate of $142 for Boeing, around 5% ahead of its current market price.
Boeing Lowered Its 747 Production Rate Due To Weak Order Volumes
Since their launch, Boeing has received orders for 120, 747-8s. 69 of these have been for its freighter version while the remaining 51 have been for its passenger version. The company has delivered 69 747-8s against these orders through April, so it currently has a backlog of around 51 747-8s. Additionally, many airlines which ordered these airplanes do not have their deliveries scheduled in the near future. As a result, Boeing has many unsold 747 production positions on its hands. Faced with manufacturing and stocking unsold airplanes, the company in February, lowered its 747 production rate to 1.5 airplanes per month from 2 airplanes per month.Additionally, it plans to maintain these lowered production rates through 2015 and has indicated that it is working to get additional orders for the 747. However, we figure the pressure to generate higher order volumes for the 747 will likely create pricing pressure which will weigh on the company’s margins under the 747 program. In addition, priced at approximately $355 million a piece, the cost impact from manufacturing and stocking an unsold 747 will be significant.
In comparison, Boeing has received strong orders for its relatively smaller airplane models such as the narrow body 737, which seats 110-180 passengers in a two-class cabin configuration, and 787 Dreamliner, which seats around 240-320 passengers in a three-class seating arrangement. Driven by strong order volumes for these two airplanes, the company has over the last few years posted strong growth in its results. Looking ahead, for the foreseeable future we figure Boeing’s 747 program will temper its growth from the 737 and 787 programs.
777X Could Impact A Portion Of 747′s Demand
Another factor we figure is likely weighing on demand for the 747 is Boeing’s 777X airplane which is scheduled to enter service with airlines around the end of this decade. The larger version of the 777X – 777-9X – is being designed to seat around 410 passengers in a three-class seating arrangement. We figure in a two-class seating arrangement this plane could like the current generation 777-300ER seat up to 450 passengers. It will thus seat nearly as many passengers as the 747 seats in a three-class seating arrangement. Coupled with much higher fuel efficiency and a similar range, it is possible that the larger 777X is cannibalizing a portion of 747 sales. Having said this we figure demand for the 747 freighter version will remain due to its distinctive cargo loading and unloading through the airplane nose door, which allows for transport of oddly-shaped, large-sized items.
Orders For Airbus A380 Have Also Remained Below Expectations
The weak global demand for large commercial airplanes has also weighed on sales of Airbus A380, which is the largest commercial airplane in the world. This airplane, which seats around 550 passengers in a three-class seating arrangement, has received orders for 20 airplanes through April this year. It has done better than Boeing’s 747 in terms of orders, but even its order volumes are below expectations. However, despite the weak order volumes for these large commercial airplanes we do not write-off the Boeing 747-8 and Airbus A380 as airplane model successes are determined over many years.
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