Boeing announced EVA Airways’ intent to purchase up to 24 787-10s and two additional 777-300ERs, which is valued at more than $8bn at current list prices. This is a nice piece of business from a good customer in a growing market.
However, given Delta’s CEO comment about a 777 bubble, the proportions in the order are not so reassuring. Boeing has to work hard to back-fill the 777 line prior to the 777X.
A frequently mentioned view is that Boeing’s 777 program will see a production rate slowdown. For example, JP Morgan reported “For BA, the potentially negative implication of DAL’s comments is that it is building too many aircraft, which is pushing down values, and this will eventually require production cuts to establish a new equilibrium.”
Ken Herbert at CANACCORD Genuity noted: “We believe Delta’s comments were also somewhat self-serving.” As he points out, Delta is a buyer and knocking the market serves a purpose. They conclude: “We believe that a rate cut on the 777 to 5-6/month is coming, but we do not believe the WB weakness will spread to the NB market, and we remain bullish on BA stock.”
Wells Fargo’s Sam Perlstein has this view: “While we agree with Delta Air Lines’ comments that wide-body (777/A330) demand is soft, we believe the magnitude of that pressure – particularly with respect to mid-life 777-200 values – was grossly overstated.” He went to point out: “We find the $10M figure hard to believe, as the sum-of-the-parts alone – i.e., two average-condition engines + airframe scrap value – is in the $25M-$30M range. We believe aircraft investors that specialize in end-of-life part-outs would happily pay 2x Delta’s appraisal for this asset type. The only scenarios where the $10M figure is arguably credible (in our view) would be where the engines have been run down to the point of essentially no value and major maintenance/upgrades are needed. Still, the buyer would have to invest significant capital (say, >$20M) in the engines to utilize the aircraft.”
Even if Delta believes it can acquire used 777s for ~$10m, one has to ask about mechanical upgrades. And then what about cabin fixtures? This has to be worth at least another $10m. It would seem a used 777 really could end up being more like a $30m investment to have at the gate ready to earn revenue. And this low capital cost will be matched by higher MRO expenses as the aircraft will need more maintenance attention than newer models.
Perhaps Delta’s message caused some market overreaction.
“I used to roll the dice, feel the fear in my enemies’ eyes” – Typical self-serving Richard Anderson, “… never an honest word, that was when I ruled the world.” (lyrics from Viva la Vida)
Maybe the production rate will come down somewhat (from a very high level), but nevertheless 777-300ER frames are tremendously valuable for any airline that sees a demand for long-haul travel. Until A35K’s can be produced in significant numbers, say five-ten years from now, “the ER” will be the standard of its market segment.
The triple-seven production rate affects Boeing’s cash-flow, which investors and analysts are monitoring closely, but from an industry point of view a production rate of 6/mo is still a very high rate of production. And the values of aviation assets will not all of a sudden evaporate.