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Boeing Bets on Reviving Demand for Its 'Queen of the Skies'

- By Mayank Marwah

Boeing Co.'s (BA) magnificent aircraft, the 747, is one of the company's most prestigious pieces of work. The "Queen of the Skies," however, has faced increasing danger of extinction over the past several years as sales have slowed.

Boeing unveiled the 747-8I in response to Airbus' (AIR.PA) A380 several years ago. This tactic, however, did not work in favor of the company. The American aero major suffered delays in the 747-8 program, which resulted in heavy charges the company had to account for. The aircraft manufactuer registered losses to the tune of $2.1 billion on the 747-8 in 2015 and 2016 since it had to reduce production rates to keep pace with deteriorating sales.

The 747 got a big boost in 2016 when United Parcel Service (UPS) placed orders for 14 of the freighter variant. UPS has also taken the option of doubling the original order size if required. This was the largest order bagged by Boeing for the redesigned 747.

The current backlog for the 747 is not large enough to keep Boeing's production facility busy. Currently, the Chicago-based company is building the airplane ahead of schedule for dearth of a solid backlog, though the production rate remains low. Total unfilled orders for the 747 program stand at 26. Of the total orders, 19 are for the 747-8F. The unfilled orders for passenger variants is extremely thin. Arik Air withdrew its order for the 747-8I, which lowered Boeing's backlog by two units.

The company, however, is not ready to throw in the towel in reviving its majestic creation, which transformed the concept of long-distance air travel when introduced in the late 1960s. Boeing has found a new lease on life for the 747.

A big bet

Boeing is making a massive bet on the 747 hauling cargo. This is the company's temporary plan to sustain its iconic jumbo plane. The company will buy its own planes and lease them to cargo haulers.

The cessation of the U.S. Export-Import Bank by Congress has been a major blow for Boeing as it has conventionally supported overseas operators in buying planes. The misery does not end there. Over time, leasing companies have become more cautious about investing in planes that are seeing a dwindling customer base.

To counter these challenges, Boeing has come up with the strategy of renting the 747s to cargo operators in countires like Russia and Azerbaijan. Evidently, this increases the company's risk and exposure to possible defaults on payments. Boeing, however, is optimistic of the recovery seen in the air cargo market and is hoping the strategy will fetch positive results for the risk undertaken by the company.

George Dimitroff, head of valuations for Flight Ascend Consultancy, commented on the need for the aircraft in this market.

"We believe in the long-term need for this aircraft," Dimitroff said. "As long as they don't over-produce, which Boeing aren't doing at the current rate, we believe there will be long-term demand."

There is no doubt Boeing has taken a risk in reviving the dying demand for the jumbo jet. Buying and leasing one's own planes on such a large scale is a huge gamble. In case the cargo market does not recover or respond the way Boeing expects, cargo carriers may default or may not renew their operating leases. In such a case, Boeing would have to arrange for other customers to keep its revenue flowing.

Although the four-engine 747 is considered one of the industry's materpieces and is among Boeing's top-selling jets in history, the latest version has struggled to impress airlines as they shift to more fuel-efficient, long-haul twin-engine planes. Only time will tell how effective Boeing's latest efforts will be in taking its queen to the skies once again.

Disclosure: I do not hold any position in the stocks discussed in this article.

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