Boeing 7E7: If it flies, will airlines even buy it?
Now, at last, the company is set to proceed with its first all-new jet since 1989. Boeing's board of directors, meeting today and tomorrow in Chicago, is widely expected to give the 7E7 its thumbs up.
But that could hand Boeing executives an even harder job than designing the 7E7 — selling it.
Boeing's upbeat sales forecast for the 7E7 is counting on world airline traffic to grow and for airlines to accommodate the extra passengers by buying large numbers of medium-size jets such as the 7E7. If airlines instead grow by flying bigger planes, Airbus's 555-seat A380 could thrive at the 7E7's expense.
Another threat to the 7E7, for the next few years at least, is the mountains of debt U.S. airlines are saddled with after the worst slump in their history. For them to even think about buying, many in the industry say, Boeing must make the 7E7 financially irresistible, not only cheaper to operate than today's jets but cheaper to buy as well.
"You know why you still see people driving around in gas-guzzling clunkers? They can't afford new ones," explained Gordon Bethune, chairman of Continental Airlines. "A wholesale change in our fleet, or the fleet of other U.S. domestic carriers, is going to be driven by ... economics."
Bethune, former general manager of Boeing's 737 and 757 lines in Renton, is one of Boeing's best friends in the industry. So is Shinichiro Ito, senior vice president of marketing at Japan's All Nippon Airways, who voiced a similar view on the 7E7.
"Whether or not we're able to become a launch customer, we can't say," Ito said last month. "The main focus of our assessment into the 7E7 now is its efficiency and its economy on the short range."
A "no-brainer"?
Many Boeing watchers call the question of whether to spend billions on the 7E7 a "no-brainer."
Unless Boeing plans to leave the airplane business, they argue, it must have a new product to compete with Airbus, which is on pace to deliver more jets than Boeing this year for the first time.
Dropping the 7E7 after previously hyping, then shelving, the Sonic Cruiser and the 747X would also hammer Boeing's credibility.
"Backing away would be disastrous," said Michael Allen, chief operating officer of Back Aviation Solutions.
Boeing leaders have reinforced the sense of inevitability.
"We are ... looking forward to going forward with the airplane," Harry Stonecipher, Boeing's new chief executive, said earlier this month when he took over from Phil Condit.
Nonetheless, when Alan Mulally, Boeing Commercial Airplanes chief executive, and Mike Bair, senior vice president of the 7E7 program, appear before Boeing's board, their mission will not be to convince board members to build the plane in Puget Sound, but to build the 7E7, period.
Boeing's market view
Boeing's business case for the 7E7 is to make a plane so efficient that it would nudge airlines to retire their Boeing 767s, Airbus A300s and A310s and replace them with 7E7s rather than A330s.
Airlines today operate 1,439 jets in the 7E7's size category — referred to as the "middle of the market." That market, split with Airbus, probably wouldn't be enough to justify a new jet. So Boeing is counting on hefty growth.
Randy Baseler, Boeing's vice president of marketing, said the company expects the world's airlines to purchase 2,520 small widebodies over the next 20 years.
Boeing could capture the bulk of those sales if cost-obsessed airlines embrace a plane that can burn 20 percent less fuel than the A330-200, currently the best-selling small widebody.
"It depends on what Airbus does," Baseler said. "If they stay with the A330-200, we think we'll have a significant share. But we don't think they'll sit on the A330-200."
Airbus forecasts only 1,372 deliveries of small widebodies by 2022, as passenger growth is instead consumed by 1,138 planes with more than 500 seats. The A380 is the only plane of that size contemplated. Boeing expects just 320 deliveries of such mammoth jets.
Whether Boeing's forecast materializes will depend on wild cards such as China, where airline traffic is exploding.
Boeing is counting on airlines to handle the growth by increasing the number of cities they fly to nonstop, reducing connections through congested hub airports such as Chicago's O'Hare or Tokyo's Narita. Airbus's bet is just the opposite — that airlines will continue to funnel passengers through hubs, making heavier use of jumbo jets such as the A380.
"There are only 13 city pairs (connected cities) between China and North America today, and 80 percent of the frequencies are to the West Coast," Baseler said.
The 7E7 will enable a tripling of city-pairs between China and North America, Baseler predicted, because it will offer the range and speed of a 777 or 747 without requiring airlines to sell nearly as many seats.
To bolster his case, Baseler noted the evolution of flights between the U.S. and Europe.
In 1984, there was just one TWA 747 daily flight connecting Chicago and Europe. By 2001, thanks to deregulation and the introduction of the 767 and 777, United and American Airlines had 22 daily nonstops from Chicago to 12 European cities.
Boeing thinks a similar evolution is under way on routes connecting Europe and the U.S. to Asia, as well as inside Asia.
"As soon as you start opening up bilateral (agreements), and you have a new airplane with a smaller size that can fly the distance, it changes the whole game," Baseler said.
Asia holds key
Baseler's talk of Asia is no accident. It is the fastest-growing aviation market in the world, and air travel there has remained strong despite the outbreak of SARS earlier this year.
Breaking down 7E7 sales by region, Boeing expects a fairly even split of one-third to Asia, one-third to North America and one-third to Europe.
But Asia holds enhanced near-term importance because Boeing is counting on airlines there — and specifically in Japan — to be among the 7E7's launch customers.
Rumors have swirled for months that Japan Airlines (JAL) and All Nippon Airways (ANA) will place the first 7E7 orders.
A glance at their existing fleets reveals why. ANA flies 54 767s, including 34 767-300s that average 12 years old. JAL has 22 767s, along with 33 older Airbus A300s that it inherited when it merged with Japan Air Systems last year.
Boeing's October decision to pursue a lightweight version of the 7E7 with a maximum range of 3,500 nautical miles — less than half the 7,800 nautical miles of the baseline jet — was viewed as a nod to Japanese carriers who now fly 767s on short domestic flights.
Whether introduction of the short-range 7E7 sways ANA and JAL to the plane remains to be seen. "We certainly wouldn't have been interested in it if they didn't make a short-range version," ANA's Ito said.
Fumio Tsuchiya, executive officer for corporate planning at Japan Airlines, said the new variant 7E7 might help JAL grab more domestic Japanese travel from ANA.
Tsuchiya said last month that JAL had asked Boeing and Airbus for information on possible replacements for its oldest 767s and A300s, but no decision had been made about how many or when.
A key milestone is 2009, when a new runway opens at Tokyo's cramped Haneda Airport.
"If there are no limitations (on landing slots) at Haneda, what kind of service does the customer want? Maybe the passengers want more frequencies," he said.
JAL is already replacing 747s outfitted for nearly 570 passengers with smaller 777s and 767s on some routes where it wants to fly more often. The 7E7 could continue the trend.
Interest in Europe, too
The focus on ANA and JAL has drawn attention away from Boeing's pursuit of other airlines, but there is plenty of activity.
Germany's Lufthansa, which flies older A300s on domestic routes, and British Airways, which will need to replace 21 aging 767s-300s, have expressed interest.
"My goal is certainly to be part of the (7E7) launch team in the course of 2004," said Marlin Dailey, Boeing's vice president of European sales. "The issue is timing. Are they in a strong enough financial position?"
KLM, a longtime Boeing customer, is interested in the 7E7 for flights from Amsterdam to Asia and the Middle East.
Peter Hartmann, KLM's chief operating officer, said the carrier will begin replacing MD-11 widebodies in 2010, but KLM will not be a launch customer.
"You can't afford it anymore," Hartmann said, "because customers can immediately get a wrong perception of the aircraft. What you should do is buy it at the moment when it is completely reliable."
The U.S. market
Boeing has never started a plane without a U.S. launch customer, but Toby Bright, vice president of sales, conceded the 7E7 is likely to go without one because U.S. carriers have been in such dire condition since the terrorist attacks of Sept. 11, 2001.
Still, U.S. airlines own more than 40 percent of all 767s, and Boeing expects them to order around 800 7E7s by 2022.
"What all airlines, and especially U.S.-based airlines, are looking for is superior if not compelling economics above and beyond the current offerings," said John Burtz, general manager of aircraft acquisitions and sales at Delta. Consequently, Burtz said, a 20 percent improvement in fuel efficiency should be a minimum "rather than a stretch goal."
Delta will not need small widebodies until 2012 to 2015, so Burtz said Delta will not be a launch customer.
Bethune likewise ruled out Continental as a 7E7 launch customer, but he likes the airplane's size and said Continental could be a customer someday.
But he is adamant that Boeing must get not only the operating costs but the selling price of the airplane down. That means fewer options and more standard equipment, he said.
Boeing is also counting on reducing costs by having most of the 7E7 manufactured by its global partners, and relying on its final assembly site to put together a handful of huge pieces in as little as three days.
After an eight-month nationwide search, Boeing's 7E7 executive team has concluded Everett is the best choice to be that final assembly site. Workers and community leaders should find out in coming days whether the Boeing board agrees.
"It's going to be a struggle for Boeing to figure out how to make airplanes cost less," Bethune concluded. "I just know that if you ever want to sell a bunch of airplanes in a down economy, you better have some compelling advantage."
David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com
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