Boeing’s (BA, Financial) clean slate plane, the 787 Dreamliner, has been facing its share of problems right from its developmental stage that led to production delays. The plane entered into service in 2011, much after the originally scheduled date in 2008. In recent times, apart from the battery issue and other technical snags, the 787 Dreamliner has been facing the challenge of mounting deferred cost of production. Boeing affirms that, with improving efficiency in making the Dreamliner, it will be able to recover the deferred cost.
Boeing estimates that it needs to sell 1,300 Dreamliners to make up for the deferred cost. As such, the Chicago-based plane maker has been keen on ramping up the production rate of the Dreamliner. The company has been manufacturing the plane at 10 a month and recently achieved a milestone of delivering the first 787 at a ramped-up assembly rate of 12 aircraft a month to Japan Airlines (TSE:9201, Financial). Boeing is planning to boost production to 14 a month by the end of the decade. However, the plane maker is faced with another challenge – waning demand for wide-body jets.
Weakening demand for wide-bodies
Boeing has been considering the option of increasing the production rate to 14 a month keeping a timeframe of 2020. However, CEO Dennis Muilenburg said at a conference in New York that the company is yet to finalize on the production boost, depending on the response of the aircraft’s sales campaign.
The 787 Dreamliner is among Boeing’s most popular airplane programs. The long range wide-body aircraft is made of composite material that makes it lighter compared with other conventional aluminum planes and reduces fuel cost by as much as 20%. Fuel cost makes for a hefty portion, nearly 33%, of an airline's operating cost and evidently the Dreamliner’s fuel efficiency makes it a popular choice among them. However, the weakening demand of wide-bodies in recent times has raised doubts regarding Boeing’s plan of raising production rate. Analysts are wondering if at all Boeing is required to increase 787 production rate since growth in key markets including China has been sluggish. In addition, the secondary market indicates excess supply of wide-body planes with the advent of Airbus (EADSY, Financial) A350, A330neo, planes that compete with Boeing 787 Dreamliner.
Apart from this, AerCap Holdings (AER, Financial) CEO Aengus Kelly said, "Airlines are coming back to us and saying they would like to extend their leases for two or three years," which is a result of declining oil prices. This is also a threat to the demand for wide-body planes, at least in the short term. An aerospace analyst with Barclays PLC (BCS, Financial) said, “The risks of wide-body aircraft deliveries falling short of announced plans are more pronounced than some folks would appreciate. We think the prospects for the 787 getting to 14 per month from 12 per month are declining for sure.”
Boeing is confident about 787 prospects
Boeing is expected to get orders from Chinese airlines. China’s four biggest airlines are showing continued interest in the airplane despite falling oil prices. Meanwhile, the company has undertaken various steps to lower the plane's cost through gaining process efficiency, reducing the usage of titanium and cutting the workforce. Boeing says these steps have helped improve the cash flows. The 787 Dreamliner attained break-even late last year.
According to a Boeing spokesperson the company has a strong sales pipeline for the current year. So far through May, Boeing has bagged net orders for 239 planes, of which only 12 are for the 787 Dreamliner. Boeing has delivered 403 787s since its service entry in 2011 and has an unfilled order for 751 787s at present. Boeing has been delivering 120 planes per annum, and as such needs to win higher orders if it aims to sell as many as it dispatches.
As far as producing 14 787s a month is concerned, Muilenburg said that the company is aiming to further boost production. But the question remains: When is Boeing planning for the next production ramp up to 14 planes a month? Muilenburg said the timing would depend on how the company plans its monthly deliveries.
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