Tuesday, July 30, 2013

Boeing and Its Customers Try to Put a Price Tag on Fuel Savings: New Version of the 777 Jet Is More Efficient—And Is Expected to Be Its Most Expensive

 
The Wall Street Journal


Updated July 29, 2013, 8:35 p.m. ET
By   JON OSTROWER

The Wall Street Journal


LE BOURGET, France—With demand for more-efficient jets surging, airlines appear willing to make big investments to save on fuel costs. But as Boeing Co. completes plans for the new version of its popular long-range 777 jetliner, the U.S. aerospace giant and its customers are struggling to determine just how much they are willing to pay to achieve it.

Boeing's executives and salesmen spent much of their time at the Paris air show last month negotiating preliminary deals needed to win its board's approval to formally launch the new jetliner, known as the 777X, but a final price tag has remained elusive. The planned twin-aisle plane, which will seat 350 to 400 passengers, is critical to Boeing's efforts to fend off rival Airbus's assault in the market for long-range jets.

Boeing said its new 777X would burn 20% less fuel per seat than the current generation of 777s, which have been hot sellers. That's a potentially big savings for airlines, which spent $210 billion on fuel in 2012, according to the International Air Transport Association. Fuel is airlines' single-largest expense, accounting for about half of the cost of operating a long-range flight.

How big a savings depends on the future price of oil, which is hard to forecast. That complicates Boeing's efforts to determine a price in time to announce the 777X's launch—a step that lets it start signing contracts and taking deposits from buyers—around year-end and as early as the Dubai air show in November, according to industry officials involved in the discussions.

"The hard part…is the pricing part," said John Plueger, president of Air Lease Corp., a potential buyer who has been closely involved in the 777X's early development. Boeing "still has a lot of review to go yet" on the commercial terms of its offers, he said.

Scott Fancher, Boeing vice president of airplane development, said translating the 777X's fuel efficiency into dollars and cents is necessary to find "an equitable way to reflect that value in the price of the airplane." Mr. Fancher said "there are varying opinions of where fuel prices are going to go."

Brent crude oil prices, on which IATA's forecast is based, peaked around $144 a barrel in July 2008, and have fluctuated between $91 and $127 a barrel in the past two years, according to the U.S. Energy Information Administration.

Over the past 12 months, the price of jet fuel, refined from crude, is up 4.5% in dollar terms, according to the IATA.

The list price for the 777X is likely to approach $400 million, said one industry executive familiar with the negotiations. Early customers are likely to get steep discounts, but even with those, the price of the larger of two planned versions of the 777X, with 400 seats, could top $200 million by the time it is delivered around 2020, they added.

While U.S. safety officials investigate the crash landing earlier this month of an older model Asiana Airlines Boeing 777, the inquiry isn't expected to affect sales efforts of the 777X, say industry analysts.

The expected 777X price would make it Boeing's priciest twin-engine jet ever, and close to the double-deck A380, which at a list price of more than $400 million is Airbus's priciest model. Boeing's most expensive plane currently is the 747-8 jumbo, which lists for $352 million. The largest model of its flagship plane, the advanced 787 Dreamliner, lists for $290 million.

The 777X is expected to incorporate many—though not all—of the Dreamliner's technological advances to help achieve fuel-efficiency goals, including wings made of carbon-fiber used on the Dreamliner and new General Electric Co. engines.

Forecasting fuel savings has become increasingly important for plane makers as oil prices have risen and airlines have become more cost conscious. But the long lead times for jetliners, and their long service lives, make predicting cost savings especially hard. The first 777X isn't expected to be delivered until around 2020, and the planes could fly for some two decades or longer.

Airbus, a division of European Aeronautic Defence & Space Co. has said that in pricing its A320neo it shared the value of the single-aisle jet's 15% fuel savings with airlines, effectively adding half the value of the savings as a premium to the price. That equates to $8.7 million more than the current generation A320, which lists for $91.5 million.

For the 777X, Boeing must factor in Airbus's plans for its 350-seat A350-1000, due in 2017, pitting its upgraded model against the European plane maker's all-new design. Airbus flew the first 300-seat A350 over the Paris show in June, a week after its first test flight, and the plane has since accumulated more than 90 hours flying during its first month in testing.

But Kevin Michaels, vice president at ICF SH&E, an aviation arm of consultancy ICF International Inc., said slower growth of developed markets, increasing fuel-efficiency standards of U.S. and European car fleets, expanding gas exploration and widening use of renewable fuels could curb oil prices in the future. "It isn't a given that it's going to go up and up and up," he said.

A jet that burns significantly less fuel per passenger is an "insurance policy" for airlines that can count on the savings should the trajectory of oil swing unpredictably with geopolitical events, said Michel Merluzeau, managing partner at G2 Solutions, a Seattle-based aviation consultancy.

Other factors also go into a plane's price, including expected maintenance costs, reduced noise and emissions, and the manufacturer's own expectations for its costs.

During its early years of development between 2004 and 2006, Boeing sold the 787 at steep discounts partly because it believed its costs would plummet with manufacturing and design covered mostly by suppliers. Having learned from the troubles of that program—which was delayed for years—Boeing will have to spend more itself to develop the 777X, including new factories to build the jet's wings. As a result, the company is weighing a more conservative approach to selling its new jet.

Mr. Fancher said Boeing is still finalizing details of the jet's business case, including where major pieces—like its wings—will be built. Those decisions will guide its upfront investment, and how much it spends for each plane it makes.

"The greater the affordability to Boeing, the greater our pricing flexibility in the marketplace," he said.

Source:  http://online.wsj.com