It’s a Bad Time to Be a Big Jet
For the better part of a decade, the skies have grown increasingly hostile to jumbo jets such as Boeing Co.’s 747 and Airbus SE’s A380. Now the fuel-efficient planes intended to replace those behemoths are also encountering resistance. Interest in Boeing’s 777X, a revamped version of its biggest wide-body set to begin deliveries in 2020, is flagging. And in recent weeks, United Airlines and Cathay Pacific Airways Ltd. together have scratched 41 orders for the Airbus A350-1000, a twin-aisle plane designed to carry about 370 passengers, leaving Airbus with only 171 orders for the model. “We’re seeing sluggish demand” for the biggest planes, Steven Udvar-Házy, chairman of U.S jet-financing giant Air Lease Corp., said on a conference call in August. “So we’re staying away from that segment of the market.”
The problem is that jet fuel is cheap—$550 per metric ton, down 40 percent from 2014. At that price, it’s profitable for an airline to continue operating older wide-body models that launched in the 1990s, such as the Airbus A330 and Boeing’s original 777, and delay purchases of more efficient planes like the A350—which has a fuselage and wings made from lightweight carbon fiber. Even if crude prices rebound, sales of the big jets might not fully recover, says Nick Cunningham, an analyst at Agency Partners LLC in London. That’s because airlines are shifting from channeling traffic through megahubs toward nonstop routes between second-tier cities using smaller twin-aisle planes. “As the market evolves to favor direct flights and higher frequencies, it could be that the A350-1000 and 777X are needed in smaller numbers,” Cunningham says.
Boeing’s 777X, the company’s biggest two-engine plane, featuring a newly designed wing made from composites, can seat as many as 425 passengers. The deluge of deals when the model was introduced in 2013 has slowed to a trickle, with only 20 of the 326 orders coming since 2015. While no carrier has scrapped 777X contracts, Deutsche Lufthansa AG Chief Executive Officer Carsten Spohr has said his company’s 20-plane deal may be too big and he might delay some deliveries.
For now, the move away from the A350 has given a lift to the A350-900, a slightly smaller variant designed to carry 325 passengers. While about 80 deliveries of that plane have been delayed this year, Airbus has 679 firm orders, or about four times what it’s received for the larger version. The company says its assembly line can easily shift between the two models. United switched from 35 A350-1000s to 45 of the smaller plane—worth $1.4 billion extra at list prices, though airlines always get a discount. United has said it may replace 55 777s with the A350-900.
Despite airlines’ wariness, neither Boeing nor Airbus wants to risk ceding sales of the largest wide-bodies to the other. Until Airbus came out with the A380 double-decker, Boeing’s 747 had ruled the market for jumbos. In the slightly smaller wide-body category, the 777 was long the winner, with the 787 Dreamliner—the first composite jet—slotting in below it. Airbus responded with the A350 and an upgrade of the aging A330. Smaller twin-aisle planes got a further boost Thursday when Turkish Airlines said it had agreed to buy 40 787s, a deal valued at almost $11 billion at list prices. The carrier had considered 747s or A380s, but decided those models were too big.
A potential bright spot for both plane makers is China, where jet travel is growing fast and airlines don’t have many large twin-aisle planes. Boeing predicts major carriers such as Air China, China Eastern, and China Southern will place substantial orders for its biggest planes after the country’s next five-year plan is put in place. “The prospects for the 777X in China are tremendous,” says Ihssane Mounir, Boeing’s commercial sales boss.
Of greater concern is the Middle East. The leading buyers of big wide-bodies are Persian Gulf operators, and they’re under pressure from sputtering economies, political strife, and U.S. antiterrorism rules. Qatar Airways, Dubai-based Emirates, and Abu Dhabi’s Etihad Airways together account for nearly three-quarters of Boeing’s total backlog for the 777X, and almost half of the contracts for the A350-1000 come from the region. Qatar Air—the No. 1 buyer of the bigger A350, with 37 jets to be delivered starting this year—has been hobbled by a prolonged faceoff between its government and Saudi Arabia. Etihad, due to take 22 of the planes, is reviewing its business after a $1.9 billion loss last year. Iran Air, the No. 5 buyer of the A350-1000, could see its purchase blocked by the White House.
While Boeing hasn’t yet seen any pushback, the company would have a harder time reallocating 777Xs given the small customer base, Credit Suisse Group AG reports. “Risks to the wide-body segment are at their highest since the 2009 financial crisis,” analyst Robert Spingarn wrote in July. For new orders, “there is no pickup in sight.”