Revival of B767-300ER Production Would See Weak Residuals

Delay to B787-10 Again Improves Prospects for A350 Yet another delay to the B787 is creating serious problems for airlines and raises the prospect of Boeing restarting production of the B767-300ER, a type which may be in demand today but which will be less favored tomorrow. The problems announced by Boeing...

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Delay to B787-10 Again Improves Prospects for A350

Yet another delay to the B787 is creating serious problems for airlines and raises the prospect of Boeing restarting production of the B767-300ER, a type which may be in demand today but which will be less favored tomorrow.

The problems announced by Boeing on the B787 program features at least another six months delay to the service entry of the new aircraft. The first flight of the -8 is now set for the fourth quarter of this year instead of the second quarter; the first delivery is due to take place in the third quarter of 2009 instead of the first quarter. As expected, the flight test program has been extended from an unrealistic six to nine months. Boeing now expects that only 25 B787s will be delivered in 2009 versus the 109 originally planned. Full production in terms of achieving 10 per month will now not be achieved until 2012, just a few years short of the A350, assuming that there are no similar delays to the Airbus product. Boeing is now experiencing similar perceptions that surrounded Airbus after a series of delays were announced for the A380.

The delays to the B787 are serious. Instead of the new Boeing product being viewed merely as a replacement to an existing model, the B787 is more seen as a means of changing network patterns and establishing new routes. To fill the void until the arrival of the B787, with production of the passenger B767-300ER all but at an end, operators have either to retain existing equipment or move to the A330-200 as an interim solution. Qantas is already set to acquire six A330s as a stop-gap measure. With Boeing paying out millions in penalty payments, such monies will likely be used to fund the lease of other Airbus equipment, much to the delight of the European manufacturer. The problem for Boeing is exacerbated as delays to the B787 mean that the service entry of the A350 will that much closer to its own product, allowing customers more of a choice. There is a need for Boeing to seek ways of retaining customers until sufficient numbers of quality B787s can be produced.

One such means is to use the B767 production line now left open by the loss of the U.S. Air Force tanker contract. Restarting B767-300ER production would make sense for Boeing in terms of keeping customers somewhat happy and in providing revenue while ever more cash is being expended on the B787. In producing the B767 to date, all development costs have been fully amortized, allowing for considerable pricing flexibility, particularly when Airbus is having to combat the weakness of the dollar through potentially higher net sale prices. While the B767 would not offer the range or economics of the B787 it would be a means of recouping some of the penalty payments that will have to be paid. However, with the supplier network already fully stretched in so many ways, and in view of the lead time required to gear up production, there remain considerable hurdles in ensuring that new B767s arrive early enough to meet demand. Securing financing for new B767s may also be difficult, particularly in view of the current market conditions. Financial institutions may be less willing to invest in a revived model. Prices will have to be extremely competitive to make such deals attractive, perhaps less than $60 million, due to the rapid deterioration in residual value as operators will perceive the aircraft as being used for only a few years before being replaced. To overcome reluctance to finance, Boeing may have to participate directly in the leasing of the aircraft, as it did with the B717, or at the very least guarantee residual values as well as undertaking remarketing.

While existing B767-300ERs may be riding high owing to the problems of the B787 this has always been acknowledged as a temporary phenomenon. The influx of an additional number of new B767-300ERs would exacerbate the inevitable decline in values. Boeing would be seeking to place any B767s that it owns with B787 operators to act as stop gap measures, limiting the remarketing potential of independent lessors. Such an event, leading to weaker lease rentals, would not endear Boeing to the financial community. Even turning the nearly new B767s into freighters would not be seen as a positive if such a move displaced older -300ERs from the conversion process. Residual values of the -300ER are being partially bolstered by the expectation that the aircraft can be converted. However, a prior agreement with one of the small package companies to undertake conversion of the newly produced B767-300ERs, perhaps six years after initial delivery, would go some way to mitigating the effects of restarting production.

The B787-8 is not the only model to suffer from the latest delays to the program. While the B787-8 has secured the most orders, the -9 is considered to be the more attractive in terms of asset value retention. The larger size offers the promise of even better economics, particularly when seen in the context of increasing congestion. Unfortunately the -9 will now not appear until 2012 at the earliest, only a year or two before the A350. The A350 may be even more advanced than the B787 which may cause problems for the B787-9. Boeing is already seeking to reduce the weight of the -9 but when compared to a more advanced competitor this may not be enough. Residual values of the -9 may therefore have to be reassessed. The B787-10 is no longer in view which represents a problem for Boeing though it may yet help residual values of the already beleaguered B777-200ER. Any service entry of the B787-10 may now more closely match that of the A350 which would represent significant competition. The resources to be expended on ensuring the service entry of the B787-8 and -9 and their subsequent support appear to be increasing. The predicament of Boeing is severe and a reputation once lost is difficult to recover. The difficulties experienced by Airbus with the A380 and now Boeing with the B787, show the necessity of ensuring that the development of the A350 is trouble free.