Boeing Trims 777 Jetliner Output, Announces Job Cuts

Production of the 777 will slow to just 5 aircraft per month starting August 2017

b1The Boeing Company (NYSE: BA) announced that it would slow down production of its largest twin-engine 777 jetliner, the company’s second-largest source of income behind its narrow-body 737 aircraft, as reported by Bloomberg on December 13th, 2016. Production of the 777 will come down to just 5 aircraft per month starting August 2017. The latest cut comes after a previously announced slowdown to a monthly pace of 7 jets from January 2017. Boeing currently makes the wide-body planes at an 8.3-jet monthly pace. Consequently, the rate adjustment would have a modest impact on Boeing’s FY16 results.

By 2018, 777 deliveries will drop further to just 3.5 jets per month, as Boeing introduces blank positions in the assembly line before and after each of the first six 777X models it builds, to allow extra time for assembly of that new airplane. Those six 777Xs are flight test planes and will be delivered after 2020. The further cut to 3.5 jets per month would imply that 2018 production will be more than halved from 100 jets per year to 42 jets per year. Such a steep cut would have a significant impact on Boeing’s revenue from these expensive wide-body aircraft, which typically sell for about $160 million each.

The Chicago, Illinois-based aerospace firm, however, tempered the bad news by announcing a 30% dividend hike to $1.42 a share, which exceeded the $1.25 average of analysts’ estimates. Boeing’s board also authorized $14 billion in share buybacks, replacing a previous program of the same size. b2The company said it had repurchased $7 billion of its shares so far in 2016.

Weak orders

Boeing’s announcement to slow down its 777 production comes after the company notched only 17 net orders for the 777 this year, according to its website, woefully short of the 50 to 60 annual sales that it needs to keep its assembly line in Everett, Washington, operating at optimal efficiency until a revamped version of the jet debuts in 2020. Moreover, Boeing’s recent order to sell 10 of the 777s to Qatar Airways has not made any impact to the production cuts. Industry data compiled by aviation-analysis firm FlightGlobal shows Boeing still has only 29 deliveries of the jetliner to customers scheduled for 2018 and just 9 deliveries for 2019. Sales of current model 777s have dwindled from 194 sales five years ago to just 16 sales so far this year.

Demand for twin-aisle jets has plunged due to a surplus of used Boeing 777 and Airbus Group’s A330 models being used by airlines. Cheap oil and economic uncertainty globally have made airlines wary of replacing aging models with new fuel-efficient ones. For the 777 specifically, a major cause of the slowdown in orders is due to competition from Airbus’s new all-composite and more efficient A350-900 and by the new 777X in 2020.

With the production slowdown, Boeing needs to sell only a handful more planes to close out its delivery schedule over the next two years. However, it will have to scout for about 25 new orders over the next year or two to fill empty production slots in 2019 and 2020.

In the meantime, Boeing is readying the 737 Max for market debut in 2017. It is also developing the first new 777X aircraft to be launched in 2020. The company also expects to begin marketing the 737 Max 10X, a stretched version of the plane, and possibly a new “7M7,” a nickname for its proposed mid-sized jet family.

b3Boeing set to trim workforce

The production slowdown would inevitably mean job cuts among the 777 workforce. A Washington state study commissioned in 2013 estimated that about 20,000 people at Boeing worked directly or indirectly on the 777 program, with more than 9,000 additional jobs at 777 suppliers. The assembly-line mechanics and machinists, who build the airplane, as well as workers at suppliers, are the most vulnerable to layoffs if production falls. Roughly 3,400 mechanics work directly on assembling the 777 in the Everett factory, and hundreds more work on fabricating the jet’s tail and wing components in Frederickson.

If production of the current 777 falls, engineering employment in Everett will likely remain high, buoyed by development work on the forthcoming 777X.

Boeing seals $17-billion deal with Iran

Boeing announced on December 12th, 2016, that it has clinched a deal to sell 80 jetliners to Iran’s national carrier, IranAir, outdoing its European rival Airbus Group. US officials cleared the way for Airbus and Boeing to start contract talks in September 2016.

The Boeing deal is valued at $16.6 billion, based on the company’s list price, and covers 15 of the company’s 777-300ER long-haul jets and 15 of the newer 777X widebody aircraft under development, as well as 50 737 Max single-aisle jets.

b4Outlook for FY16

During Q3 FY16, Boeing’s total revenue fell 8% Y-o-Y to $23.90 billion from $25.85 billion in the year-ago same period, as revenue from commercial airplanes declined 4% Y-o-Y to $17 billion, on lower planned delivery volume of 188 planes compared to 199 for the same period last year. Deliveries were down nearly 6% Y-o-Y, reflecting slower production of the profitable 777 and 737 models. Its Commercial Airplanes segment’s Q3 FY16 revenue fell 4% to $17.0 billion on 6% lower planned delivery volume of aircraft. Operating margins came in lower at 9.4% during Q3 FY16 versus 10% in the year-ago comparable period, reflecting delivery volume and mix, partially offset by lower period costs.

Based on the 2016 market outlook, Boeing raised its target for jetliner deliveries for FY16 to between 745 and 750 from 740 to 745, and kept its operating cash flow target of more than $10 billion unchanged. The additional planes will boost revenue by $500 million, prompting the company to raise its year-end revenue target to between $93.5 billion and $95.5 billion.

Stock Performance

b5Boeing’s stock stood at $156.66, slipping 0.32%, at the close on Tuesday, December 13th, 2016, having vacillated between an intraday high of $160.07 and a low of $154.88 during the session. The stock’s trading volume was at 5,605,970 for the day. The Company’s market cap was at $99.12 billion as of Tuesday’s close.

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