Published December 12, 2016 in the Everett Herald
by Dan Catchpole, staff reporter
EVERETT — Cuts are coming to the Boeing Co.’s 777 line — deeper and sooner than previously planned by company leaders.
The company announced plans Monday to cut production from the current 8.3 airplanes a month to five a month in August — a roughly 40 percent cut. The decision likely will mean job cuts next year in Everett, where the 777 is assembled, though how many and exactly when is not clear.
Boeing already planned to reduce production to seven a month in early 2017. As the 777X goes into final assembly in 2018, 777 deliveries are expected to drop to about 3.5 airplanes a month.
The company has struggled to sell its classic — and profitable — long-haul workhorse as it develops a successor airliner, the 777X. Demand for twin-aisle airplanes has dried up in recent years after several years of heavy spending from airlines. Some customers also may be waiting for the 777X, which is slated to enter service in 2020. The low cost of fuel means airlines are as financially pressed to upgrade to newer, more efficient models.
Monday’s announcement comes one day after Boeing and Iran Air signed a deal that includes 15 777-300 Extended Range (ER) airplanes, with deliveries beginning in 2018.
However, that deal, which still could be sunk by Republicans in Congress, is not enough to buoy the 777 line, said Elizabeth Lund, a Boeing vice president and general manager of the 777 program.
Boeing still needs to bring in more 777 orders to keep the line working at the lower rate, she said. “Our sales team will continue their tireless work to fill existing openings in our skyline at the five airplanes per month production rate.”
“The 777 program does expect some impact on employment next year,” Lund said in an email to employees. “While the exact number of affected positions has not been determined, we will do our best to lessen the impact.”
Boeing will not say exactly how many people work on the program.
An aerospace industry study commissioned by the state estimated that the 777 program supported about 19,700 jobs at Boeing in 2012.
Jon Holden, the head of IAM District Lodge 751, which represents Boeing workers in Western Washington, said the union did not know how many Machinists would be affected by the lower production rate.
“Going forward, we will discuss with the company the potential for using voluntary layoffs, with the hope of avoiding involuntary layoffs,” Holden said. “We also will monitor other Boeing job moves during this time. We have great concern about the number of jobs leaving our facilities in Puget Sound for new locations where the company is creating jobs, capacity and capability outside of Washington state.”
Lund told employees that “continuing to work aggressively to reduce costs” will bolster the 777’s competitiveness. The plane has faced intense pricing pressure in recent years as Boeing has worked to bridge the gap between the 777 classic and 777X.
Industry analysts see further 777 rate cuts as likely, though. In October, Boeing CEO and Chairman Dennis Muilenburg indicated further rate cuts might be necessary.
The company could have to drop monthly output by one airplane each year as 777 production is cut to the bone to make way for the 777X, said Richard Aboulafia, an aerospace analyst and vice president of the Teal Group, a consulting firm.
“The twin-aisle market is glutted,” he said.
Boeing likely will try to keep the 777 line going for at least a couple years after the 777X enters service with airlines in 2020, said Scott Hamilton, an aerospace analyst based on Bainbridge Island.
The company is planning a roughly two-year transition between the 737 Next Generation and the 737 MAX, both of which are made in Renton.
Demand for the 777 Freighter could extend the life of the 777 classic line a few years longer, especially if Boeing closes the 747 line.
Currently, Boeing delivers about 20 large freighters a year — counting 777s and 747s, said Alan Hedge of ACMG, which tracks the cargo market and publishes an air freighter demand forecast.
“We think demand won’t drop lower than 15 freighters a year” in the next few years, he said.
Boeing has indicated it does not plan on introducing a 777X freighter until a few years after the 777X enters service.
The company’s chief rival, the Airbus Group, has not shown any interest in moving into the large freighter market, so “Boeing likely will be the only game in town,” he said.
The news of the 777 production rate cut came the same day that Boeing raised shareholders dividend to $1.42, a 30 percent increase.
The company has increased the amount about 190 percent over the past four years, and it consecutively has paid quarterly dividends for 75 years.
Boeing also has sent value back to shareholders by buying back stock — $7 billion worth this year. The company’s board has authorized buying back up to $14 billion in shares.
“As our team delivers on our large and diverse order backlog, and drives greater efficiency across our business, Boeing is well positioned to generate increasing cash flows and meet our commitment to provide competitive returns to our shareholders,” Muilenburg said in a statement Monday. “At the same time, Boeing is continuing to invest in our people, innovation and growth as part of a balanced cash deployment strategy.”
Buying back shares quickly delivers value to investors and is more flexible than raising dividends, which shareholders often expect to remain up. However, some industry watchers say Boeing could better use the money by investing in program development.