Boeing 787: A Paradigm Shift or Just a Nice Airplane?

CHICAGO -- ( TheStreet) -- A year after it entered commercial service, the Boeing ( BA) 787 is starting to fulfill its promise, but some question just how much promise it has.

Of course, carriers that fly the aircraft, including United ( UAL), which flew its first 787 flight on Sunday, are pleased. In fact, Gerry Laderman, United senior vice president, said investors in the equipment trust certificates issued to finance aircraft purchases have been willing to accept lower interest rates when 787s serve as collateral.

Additionally, "We have a competitive advantage being the first in North America" to fly the 787, Laderman said Sunday, in an interview aboard the inaugural intra-U.S. flight. " American ( AAMRQ.PK) is three years behind us, at least." He said passengers making connections to international flights are likely to seek out the 787.

But stock market investors do not seem overly excited. Analysts estimate that Boeing will have to sell 1,100 jets before it makes a profit, and aviation consultant Richard Aboulafia maintained that while the 787 is a nice airplane it is hardly transformational despite all of the hoopla that surrounds it.

"A lot of people have thought about the aircraft in terms of a revolution," Aboulafia said. "It's not that."

So far, Boeing has taken orders for 838 aircraft and delivered 33. On Thursday, Nov. 1, a year after taking delivery of the first 787, Japanese carrier ANA said it is flying 16 of them. "ANA is delighted with the performance of the 787s in its fleet over the course of the last year," said ANA CEO Shinichiro Ito, in a prepared statement.

ANA said the aircraft's fuel efficiency exceeds initial estimates: The savings in fuel costs are 21%, compared with an estimate of 20%. It said passengers prefer the airplane, with 40% saying they specifically selected the 787.

Another indication of the 787's promise came late last month, when Singapore Airlines said it will sell five A340-500s back to Airbus, and would order five A380s and 20 A350s. The A350 and the 787 are similar in that both are smaller, long-range aircraft, and aviation analyst George Hamlin said the transaction is an indication that the 787 "has proved its point.

"The A350 hasn't flown, but it has the same game plan as the 787, to be as efficient as possible in a smaller package," Hamlin said. "Singapore took 20 of them while returning bigger planes and taking (a few) A380s.

"We've seen that aircraft with too many seats haven't done so well," he added. "As (former AMR CEO) Bob Crandall once said, 'Nobody ever went broke with an aircraft that is too small.'"

United is the first U.S. carrier to fly the 787, but ANA, Japan Air Lines and Ethiopian have flown the aircraft to and from the U.S. Of the 33 now flying, ANA has 16, JAL has six, Ethiopian, Air India, LAN, and United have two each and Qatar has one. Boeing has 805 firm orders. Potential orders from American ( AAMRQ.PK) and Delta ( DAL), which inherited an order from Northwest, have not yet been booked and are not counted.

Despite "teething problems," customers have been happy with the 787, said aviation consultant Scott Hamilton. "I haven't heard of any airline having any particular problems with the airplane once it entered service," he said. ANA and Air India briefly grounded aircraft due to engine problems.

Like many major construction projects, the 787 arrived late and over budget. The first delivery was three years late and, even last week, questions arose about how quickly the next three United 787s will arrive. Boeing long ago admitted to major flaws in its execution of a plan to outsource key components to an array of vendors around the world. In setting up a second 787 plant in Charleston, S.C., Boeing stepped into the hornet's nest of Congressional anti-labor hysteria, which the company reeled in by negotiating a new contract with the International Association of Machinists in 2011. Now, the IAM is seeking to organize the Charleston plant.

In August, Australia's Qantas Airways said it would cancel orders for 35 787s; the airline still has options for 50 of the planes. In March, China Eastern cancelled an order for 24 aircraft. But orders come and go. Boeing once had about 860 orders. Now, it has orders for 805 after delivering 33.

So far, Boeing shares have not benefited from the start of 787 deliveries. From Jan. 1, 2011, the shares are up 5%, while the S&P 500 is up 12%. This year, Boeing is down 6% while the S&P is up 12%. Analysts have consistently suggested, over the past two years, that Boeing shares would gain once deliveries began, but that is not what has occurred.

According to Aboulafia, "The sad truth in this business is that, since the dawn of the jet age, you cannot say that any single aircraft has revolutionized anything." The advent of twin aisle jets and of the high bypass turbofan are considered similar events in the development of jet aircraft, he said, and yet world airline traffic grew 309% in the 1960s, before the two "revolutions," and 214% from 1970 to 1980.

Hamlin said the 350 and the 787 represent a major shift in terms of materials used in airplanes. "The first paradigm shift was from wood to metal, and now we are shifting from metal to composites," he said. Does that matter to carriers who fly the aircraft? Yes, in terms of fuel efficiency, but in terms of passenger growth, "everything is structured around hubs now," Hamlin said. "Customer loyalties are already lined up."

-- Written by Ted Reed in Charlotte, N.C.

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