Where Boeing Is Its Own Best Customer

To sell new jumbo jets, it’s become the No. 1 buyer of older 747s | “It unloads a problem [from airlines] to Boeing”

Julie Johnsson

Auto dealers have long been willing to take an old clunker off a potential buyer’s hands in order to clinch a sale of a shiny new model. Now airplane makers are following suit. Boeing is acquiring previous versions of the 747 from airlines ordering its new, tough-to-sell 747-8. Of the 19 older 747s that have changed hands so far this year, Boeing has snapped up seven, according to data compiled by Ascend Online Fleets. That makes it the biggest buyer of the used jets in 2013.

While the purchases put Boeing on the hook for finding new operators, it helps nurture demand for the newer 747-8 — among a class of fuel-thirsty four-engine aircraft that airlines frown upon these days. New sales are pivotal to keeping 747 assembly lines humming as Boeing slows output 13 percent to 1.75 planes a month and stashes some unsold 747-8s in desert storage. “It unloads a problem [from airlines] to Boeing,” says Douglas Kelly, senior vice president for asset valuation at aviation consultant Avitas. “It’s just like trading in your car.”

While Boeing declined to comment on specific customers or aircraft sales, the Ascend data show that this year’s sellers of 747-400s to the world’s largest planemaker are all buyers of the 747-8 family, which includes both passenger and all-freight versions. The buyers are Korean Air Lines and Cathay Pacific Airways, as well as Cathay’s Dragonair unit and its cargo joint venture with Air China.

Production of the 747-400 ended in 2009. New features on the 747-8 include improved engines and an elongated version of the fuselage hump that gives the plane its distinctive profile. It entered commercial service in 2011, two years late, after Boeing diverted engineers to the delayed 787 Dreamliner.

Potential buyers for the 747-8 are dwindling as cargo companies increasingly ship freight by rail or in the bellies of passenger versions of large twin-engine jets such as Boeing’s 777s, favored for their fuel economy and low maintenance costs, says Richard Aboulafia, an aviation consultant.

Purchasing older 747s is “a pretty smart move on the part of Boeing,” says aviation consultant Michel Merluzeau. The latest 747s, which retail for about $350 million each, have drawn only five orders this year. But there were also five cancellations, according to Boeing’s website. “I think it’s one year at a time for that program,” Merluzeau says.

Boeing’s buybacks help 747-8 customers avoid recording losses on older planes they would otherwise struggle to sell amid a global glut of used jumbos, Avitas’s Kelly says. With demand weak for air freighters, conversions of passenger 747s to carry cargo have dried up, he says, curtailing one of the usual options for airlines to extract value from aging aircraft. About 75 747-400s are parked in deserts around the world, according to Ascend, and valuations have tumbled. A 1992-vintage 747-400 that was appraised at $41.6 million in January 2008 is valued at $16.7 million now, Kelly says.

Korean Air, which has sold six 747-400s to Boeing since 2010, agreed in June to buy five 747-8s as part of a planned $3.6 billion aircraft purchase. The carrier is the second-largest global operator of the 747-400 and one of the biggest buyers of the latest version of the 747-8, according to Ascend.

Cathay Pacific, which has ordered 13 of the new 747s outfitted to carry only freight, sold one 747-400 to Boeing this year, as did Air China Cargo, which is 49 percent-owned by Cathay. Dragon-air sold Boeing three of the jets.

Lately, planemakers are particularly eager to deal on four-engine models. Last year, Boeing even bought five of its rival Airbus’s A340s — a four-engine widebody no longer in production — from China Eastern Airlines, which was taking 20 of Boeing’s 777s in a $6 billion deal based on full list prices (which are often discounted for early or multiple purchases).

Airbus has acquired three of the nine A340s sold this year after buying back 10 of the jets in 2012. “In some exceptional cases, Airbus has bought back A340s to support new business,” Andreas Hermann, vice president and head of A340 re-marketing at Airbus, said in an e-mail. “Regardless of the negative perception of some, the A340-500/600 continues to provide efficient lift for long haul.” Boeing officials remain optimistic that the cargo market will revive, bringing new orders for the latest version of a jumbo jet that’s been a freight-hauling workhorse since the 1970s.

In some ways, the 747-8 is a victim of Boeing’s engineering success: The 777’s extended range version has a maximum distance of 7,725 nautical miles (14,305 kilometers), giving airlines the ability to use a twin-engine plane on routes once reachable only by four-engine jumbos. A 747-8 outfitted to carry passengers has a listed range of 8,000 nautical miles.

With 53 unfilled 747-8 orders, Boeing has enough work to keep the 747-8 production line busy through the end of 2015, figures George Ferguson, senior aerospace analyst for Bloomberg Industries. “They see a mission for those aircraft,” he says. “The market isn’t exactly telling us that.”

The bottom line Boeing is taking old 747s in trade in order to encourage sales of its newer $350 million 747-8 jumbo jet.


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