The company’s widebody plane has seen a slowdown in orders ahead of the 2020 debut of the 777X. Output will be cut in August from 7 planes per month to 5, and in 2018 the rate will drop further to 3.5 planes per month.
The worst-case scenario Boeing outlined just six weeks ago for cutting production of the large 777 jetliner in Everett has become the reality.
The company said Monday it doesn’t have enough orders to maintain the current 777 widebody jet-program production rate of seven planes per month and will cut production in Everett to five per month beginning in August.
During an earnings teleconference in October, Boeing Chairman and CEO Dennis Muilenburg had projected that outcome if further sales failed to materialize within a couple of months.
Boeing 777by the numbers
$160 million
What the jet typically sells for
7
Number of 777s per month Boeing builds starting this month, down from 8.3
3.5
Number of 777s per month Boeing expects to build by 2018
Zero 777 sales have been booked since. (The Iran sales announced Sunday aren’t finalized yet.)
Furthermore, the outlook is worse than the above figures indicate.
In 2018, 777 deliveries will drop further to just 3.5 jets per month, as Boeing introduces blank positions in the assembly line before and after each of the first six 777X models it builds, to allow extra time for assembly of that new airplane.
Those six 777Xs are flight-test planes, and no 777X jets will be delivered until after 2020.
This year, Boeing was making 777s at a rate of 8.3 per month, or 100 per year. In January, the company announced a cut to seven jets per month, which has been implemented this month.
The further cut to five per month and then to 3.5 jets per month means 2018 production will be more than halved from 100 jets per year to 42 jets per year.
Such a steep cut will slash Boeing’s revenue from these expensive widebody aircraft, which typically sell for about $160 million each.
It will also inevitably mean job cuts among the 777 workforce. A 2012 economic study conducted for the state by consultancy CAI estimated that at that time more than 12,000 Boeing employees worked directly on the jet program.
Muilenburg in October assured Wall Street analysts in a teleconference that if the rate were cut this much, Boeing will make “the necessary adjustments to maximize profitability.”
In a message to employees Monday, Elizabeth Lund, vice president responsible for the 777 program, said Boeing expects jobs to be cut in Everett next year.
“The exact number of affected positions has not yet been determined,” she wrote. “We will do our best to lessen the impact.”
The most vulnerable to layoffs are the machinists who build the airplane. Roughly 3,400 mechanics work directly on assembling the 777 in the Everett factory, and hundreds more work on fabricating the jet’s tail and wing components in Frederickson.
Jon Holden, District 751 president of the International Association of Machinists (IAM), said the union has been concerned for some time that this news was coming and will discuss with management the potential for reducing the workforce through voluntary buyouts rather than forced layoffs.
“We also will monitor other Boeing job moves during this time,” Holden said. “We have great concern about the number of jobs leaving our facilities in Puget Sound for new locations.”
Lund said Boeing made the decision to cut production after lengthy discussions about current market demand.
A downturn in sales of large widebody jets affecting not only the 777 but also the 747 and the Airbus A380 has deepened as the year has progressed.
For the 777 specifically, a major cause of the slowdown is that it’s now competing with Airbus’ new all-composite and more efficient A350-900 and will be superseded in 2020 by the 777X.
“Despite tireless work by the sales team, orders have slowed,” Lund said. “The market is signaling near-term hesitation in some regions.”
The move comes despite an agreement over the weekend with Iran, which wants to buy 15 current model 777s.
That’s not enough to fill even the roughly 39 empty slots that loomed in the production schedule over the next two years without the rate cut.
With the rate cut, Boeing needs to sell only a handful more planes to close out its delivery schedule over the next two years. But it still will have to find some 25 new orders over the next year or two to fill empty production slots in 2019 and 2020.
And that’s assuming the Iran deal goes through, despite potential congressional opposition. Lund said Boeing has “already factored this agreement into our assessment.”
Separately on Monday, Boeing announced a 30 percent quarterly dividend increase for shareholders who will get $1.42 per share.
“Boeing is well positioned to generate increasing cash flows and meet our commitment to provide competitive returns to our shareholders,” said CEO Muilenburg.
Management also said it will set aside $14 billion to repurchase shares over the next two-plus years. This year, Boeing has already repurchased $7 billion worth of its shares to buoy the stock price.