Analysts warn of more softening in wide-body jet market

Demand for wide-body jetliners could be softening further, analysts wrote this week, which could affect Boeing and its key local supplier, Wichita-based Spirit AeroSystems.

Wells Fargo Securities senior analyst Sam Pearlstein and J.P.Morgan analyst Seth Seifman wrote in separate investor notes that wide-body demand remains soft and that if it continues, Boeing’s transition in production rates from the current generation 777 to its new 777X could be further affected.

So, too, could a planned rate increase on the 787 Dreamliner, the analysts wrote.

In Wichita, Spirit manufactures the forward fuselage of the 777 and 787, and other parts of each aircraft including nacelles, pylons and struts, and wing leading edges.

Both analysts described the market for wide-body, or twin-aisle, commercial airplanes as “generally soft” and “muted.”

The greatest current demand for wide-body aircraft is among overseas carriers including Emirates, Saudia, Oman and Virgin Atlantic.

“We would note the prevalence of airlines from the Middle East, where load factors are falling and yields face pressure,” Siefman wrote.

He noted that new orders for current generation 777s are thinning. Boeing’s current generation 777 backlog stands at 60 deliveries this year, according to Seifman’s research, and will eventually decline to two deliveries by 2020.

Pearlstein said Boeing booked 12 777 orders through May, which is “below the pace needed to bridge the transition to the 777X without further rate reductions.”

Boeing announced last year that it would pull back current generation 777X production from 8.3 a month to seven a month in 2017.

In 2018, Boeing said, it will further reduce the 777 rate to 5.5 a month.

Both analysts also were skeptical of Boeing’s plans to further increase 787 production following a rate increase earlier this year, with Pearlstein noting that “Boeing’s firm May-end 787 backlog (was) at its lowest level since 2007.”

“A larger 787 backlog underpins the recent production increase to 12/month but … plans for 14/month by decade-end remain unlikely to pan out, in our view,” Seifman added.

Both airplane programs represent about 35 percent of Spirit’s sales, Pearlstein estimates.

He said in his note that Spirit should see less of a decline in 777 revenue as Boeing lowers production on the current generation 777. That’s because Spirit also will be manufacturing parts for the 777X at about the same time current 777 production rates slow.

Spirit “would continue to deliver at 7/mo as it delivers 777 and 777X parts,” Pearlstein wrote.

It’s less clear what softening 787 demand would have on Spirit, he said, because it and Boeing are still negotiating pricing on the larger 787-9 and 787-10 variants.

Those “will continue to be focus areas for investors,” Pearlstein wrote.

Seifman acknowledged that Boeing could see an uptick in wide-body orders yet this year, including from the 100-aircraft Iran order as well as from China.

“Though we do not expect a broader resurgence in demand,” Seifman wrote.

This story was originally published June 22, 2016 at 4:35 PM with the headline "Analysts warn of more softening in wide-body jet market."