Last week, in the lead-up to the biennial Dubai Airshow, rumors circulated that Middle Eastern airline giant Emirates was closing in on a repeat order for Airbus' (NASDAQOTH: EADSY) A380 jumbo jet.
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Instead, Boeing (NYSE: BA) was the big winner on the first day of the Dubai Airshow, as Emirates committed to buy Boeing's largest Dreamliner model: the 787-10. Meanwhile, Airbus came up empty, as Emirates is demanding a guarantee that A380 production will continue for at least 10 more years as a precondition of placing a new order.
Emirates finally picks the Dreamliner
Three years ago, Emirates canceled an order for 70 Airbus A350s. At the time, it said that the A350-1000 model's specifications had changed. Emirates' fleet requirements had also shifted somewhat since it had placed the original A350 order.
There has been rampant speculation about Emirates ordering Boeing's 787 Dreamliner ever since, but the timeline has shifted repeatedly. Originally, a decision was expected in time for the 2015 Dubai Airshow. Later, a decision was expected in 2016, but that didn't pan out, either.
Until this week, it seemed like 2017 could come and go with no deal for Emirates to buy the 787 (or the A350). After all, a weak pricing environment has put pressure on the carrier's profitability recently. However, on Sunday, Boeing and Emirates shocked observers -- especially the Airbus delegation -- by announcing a commitment for Emirates to buy 40 787-10s.
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This deal is worth slightly more than $15 billion at list prices. After discounts, Emirates will probably pay less than half of that amount. Nevertheless, the deal should be quite profitable for Boeing, as the 787-10 is expected to carry the highest profit margin of any 787 variant. The first delivery to Emirates is scheduled for 2022.
A comeback year for the 787
The Dreamliner has experienced a bit of a renaissance this year. As of Nov. 7, Boeing had secured 96 net firm orders for the 787 family during 2017. It also announced a firm order for five additional 787-8s from Azerbaijan Airlines on Sunday.
Meanwhile, the Emirates agreement is the second major Dreamliner commitment that Boeing has signed in the Middle East in recent months. Back in September, Turkish Airlines announced plans to order 40 787-9s. Selling the 787 to growing carriers like Emirates and Turkish Airlines is particularly beneficial because it puts Boeing in position to win follow-on orders in the future.
The backlog is relatively healthy
Boeing has recently been building 12 787s per month. However, in September, the company announced that it will increase output to 14 per month in 2019. To many observers, that seemed like an overly aggressive move. As of the end of October, Boeing had 670 unfilled orders for the 787 family, representing less than five years of production at the current rate of 12 per month.
This isn't an unusually high backlog, and it would not normally justify a production increase. Yet Boeing would benefit from higher production if a sustained upswing in Dreamliner order activity is just beginning. Thus, assuming the Emirates and Turkish Airlines deals eventually become firm orders, they would help justify the recent decision to boost 787 production.
Indeed, if Boeing were to finalize both agreements by year-end, it would reach roughly 180 firm orders for the 787 family this year, exceeding the planned future production rate of 14 per month (or 168 per year). Furthermore, it still has seven weeks before year-end to capture more orders.
Looking ahead, Boeing has consistently stated that it expects an uptick in widebody replacement activity in the early 2020s. If this replacement cycle occurs as expected, Boeing may be able to sustain a Dreamliner production rate of 14 per month well into the 2020s.
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