$6 Billion Order Loss For Boeing?
Jun.18.2018 – Seeking Alpha -Dhierin Bechai
Etihad Airways has 8 x $394.8 million B777-8’s on order and 17 x $425.8m B777-9’s on order since November, 2013 when life was good for Etihad Airways, and ordering 25 new airliners valued at $US 10.38 billion (list price), probably more like $US 6.2 billion, did not seem like a big problem, but now it is.
The B777-8/9 has 326 orders so far (53 for the B777-8 and 273 for the B777-9), and Etihad’s order is just 6.7% of the total, it won’t hurt Boeing too much, but it may be a hard pill to swallow for Abu Dhabi, which once thought it could outdo neighbouring Dubai based Emirates.
Things change quickly in this business, and I can see the day when Emirates, flyDubai and Etihad will be under one Group, it makes sense, but some pride will have to be overcome in Abu Dhabi before that happens.
Recently news items have appeared that Abu Dhabi based Etihad Airways is looking to defer or scrap part of the widebody aircraft it has on order with Boeing (BA) and Airbus (OTCPK:EADSF/OTCPK:EADSY) as part of its renewed strategy.
The airline saw its investment strategy failing miserably as Air Berlin and Alitalia went into administration. This has resulted in the airline recognizing significant one-off charges in its 2016 results while in its 2017 results the airline has continued struggling with the failed strategy and saw fuel prices increasing, likely in excess to any demand increase in oil-related travel that tends to fill the premium classes of airlines. The airline improved its 2017 result by $430 million on a like-for-like basis, but still suffered a $1.52B loss.
As part of the global investment strategy, Etihad Airways bought aircraft that it could distribute among partner airlines. With that investment strategy going bust Etihad Airways has been left with many more orders than it needs to support its growth profile while some capacity requirements for feeding functions have been eliminated as well.
B777X in the old livery of Etihad, will it ever be in Etihad’s livery?
We previously marked the Boeing 787 and Airbus A350 to be in a more comfortable spot than the Boeing 777X. The reason for the Boeing 787 being in an extremely good spot is the fact that it is already active in the Etihad Airways fleet, while the Airbus A350 is a smaller aircraft compared to the Boeing 777X, which might be an aircraft better suitable as a replacement for Etihad for sustainable growth.
This does not mean that Etihad Airways will not be making changes to the delivery schedules for the Boeing 787 and Airbus A350, but we view these two types as less risky for the Etihad Airways fleet.
The Boeing 777X is a bet on continued demand for larger aircraft. So airlines that currently operate the Boeing 777-300ER and do require bigger aircraft can opt for the Boeing 777X. With Etihad’s turnaround plan deferring or even canceling the Boeing 777X would be one of the best opportunities to save money and increase yield.
The Boeing 777X is by far the most expensive aircraft the airline has on order on a per unit basis. Valued at $5B, the airline could save a good sum of money by deferring or canceling those deliveries.
The B777X is a huge improvement on the earlier B777
Analyzing the fleet, we found that Etihad Airways can easily replace the Boeing 777-300ERs with the Airbus A350-1000. As fuel prices continue increasing that would be a very efficient replacement, but it would mean that there is absolutely no need to absorb Boeing 777X aircraft in the coming years.
Etihad Airways currently operates 19 Boeing 777-300ERs and has stored 5 Boeing 777-200LRs which are being sold to another party. According to official Boeing data, The UAE airline has 25 Boeing 777X aircraft on order.
The 8 Boeing 777-8 aircraft, the long-range variant of the Boeing 777X family, could have replaced the Boeing 777-200LRs but with these aircraft now being sold to another party it remains questionable whether Etihad Airways really needs those aircraft while the 17 Boeing 777-300ERs could be replaced by the Airbus A350-1000.
The 10 aircraft ordered by an unidentified customer are rumored to be from Etihad Airways as well, which means that potentially up to 35 aircraft could be canceled or deferred valued over $6B.
Cancellation or deferral
What remains unknown is whether Etihad Airways will eliminate orders or simply alter the delivery schedule. The way we view it now, Etihad Airways does not need the Boeing 777X aircraft it ordered since the Airbus A350-1000 can replace the Boeing 777-300ER with similar capabilities.
At this moment accepting a cancellation fine does not sound too bad for an airline that has to reduce capital expenditures and keep capacity growth in hand. To reduce the pain somewhat for Boeing, the airline could commit to purchasing more Dreamliners and push those deliveries out in the future or possibly buy freighters instead though Etihad has a relatively small cargo fleet.
Of course, Etihad Airways could also keep its orders in place and stretch the deliveries since the first deliveries are still far out and could be deferred.
We view the order for the Boeing 777X as an order that made sense at the moment Etihad Airways committed to buying the aircraft, but with a failed investment strategy and years of strong capacity expansions the order has started to make less sense and is much more vulnerable to cancellations since the Boeing 777X gets parts of its competitiveness from added capacity, which is something the airline under current circumstances does not need.
For Boeing, a cancellation or deferral would be a blow but it should also be pointed out that Etihad could suit the pain somewhat by committing to other aircraft at a fitting delivery schedule.
Although we believe that existing orders from various customers for the Boeing 777X will be stretched out compared to the initial delivery schemes for more customer, if Etihad Airways cancels now it could be somewhat of an aid to Boeing selling the Boeing 777X to new customers being able to offer early slots.