Boeing’s 40-year-old 747 Jumbo Gets Kiss of Life

Planemaker likely to bag order at least 10 747 freighters

The Boeing Company (NYSE: BA) is in advanced talks with Russia’s AirBridgeCargo Airlines and its Moscow-based parent, Volga-Dnepr Group, for a $4 billion deal that could give a fresh lease of life to Boeing’s iconic, hump-nosed 747 jumbo freighter jet, as reported by Bloomberg on June 20th, 2016. The 747 freighter is valued for its hinged nose that allows large cargo to be loaded at the front. AirBridgeCargo, which currently has 14 Boeing 747s in its fleet, is likely to place firm orders for at least 10 747-8 freighters if talks go through. The 747 freighter is Boeing’s second-most expensive commercial jet with a list price of $379.1 million. The agreement could be announced at the Farnborough Airshow in England in July 2016. Read more to find important details of the potential Boeing deal.

Source: Company's Website
Source: Company’s Website

Boeing’s deal would provide a crucial lifeline for the 747 freighter at a time when four-engine aircraft have witnessed a slump in demand. Boeing has so far tried to keep production of the 747 freighter going until the air-cargo market recovers or shipping companies start to replace their aging fleets.

What is noteworthy as well is the fact that Volga-Dnepr is not just another Boeing customer; it is also Boeing’s logistics partner to transport large aircraft segments of Boeing’s 787 Dreamliner from suppliers to the planemaker’s factories in the U.S. At the Paris Air Show in June 2015, Volga-Dnepr signed a memorandum of understanding with Boeing to buy 20 747-8 freighters. Hence, Boeing is looking to change those commitments to firm orders and thereby start the process of allocating manufacturing resources and production slots to build these planes. The potential deal is seen to strengthen relations between the two firms, with Boeing offering attractive financing rates for the jets as well as a steady workflow for Volga-Dnepr for ferrying parts between Boeing factories.

747s ousted by 777s

In recent years, sales have dwindled for Boeing’s four-engine 747 as airlines have shifted long-range travel to more fuel-efficient two-engine models like Boeing’s 777. Moreover, the 40-year-old 747 has lost its appeal to changing market dynamics and new technologies. Customers are now opting for more efficient, smaller planes for flying various destinations rather than a single, wide-bodied plane like the 747 that can only fly to larger markets.

B2Given this scenario, Boeing had 22 unfilled orders for the 747 jet through May 2016. As a result, the planemaker halved annual output of its 747 to six planes in January 2016 owing to dwindling sales. Beginning March 2016, Boeing will cut the production rate on the 747 to one per month and plans to cut it further to 0.5 planes per month in September 2016. Boeing is trying to keep production going until older 747-400 freighters begin to age and cargo firms seek replacements beginning sometime around 2019.

Drop in air freight revenues

Apart from dwindling sales for its four-engine 747, Boeing is also faced with challenges in the form of a drop in air freight revenues. According to the International Air Transport Association, air freight revenues dropped from $67 billion in 2011 to $52.8 billion in 2015. As a result, cargo carrier load factors dropped to 47.4% in 2015 compared to a passenger carrier load factor of more than 80%. For Boeing, this could translate into less demand for its commercial freighters.

Flying high with firm orders

Despite facing headwinds, Boeing has been garnering solid orders for its more successful 737 jets. In May 2016, Boeing won an order for 100 jets from VietJet Aviation valued at $11.3 billion at list price. VietJet is Vietnam’s only private airline and a leading low-cost carrier. Boeing will deliver the 737 Max 200 planes from 2019 to 2023. Boeing has also bagged orders from many low-cost airlines in the Asia Pacific region for smaller jets. The Company recently bagged an order from Iran for about 100 aircraft that includes 737s, 777s, and 787s.

Stock Performance

B3Boeing’s stock stood at $131.52 at the close on Tuesday, June 21st, 2016, having reached an intraday high of $133.28 and a low of $131.49 during the session. The stock’s trading volume was at 2,772,615 for the day. The Company’s market cap was at $87.57 billion as of Tuesday’s close.

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