Boeing's 747 jumbo jet may have won a reprieve from an uncertain future as United Parcel Service agreed to buy at least 14 freighters -- the biggest order in almost nine years.
The deal for 747-8 aircraft, valued at $5.3 billion based on list prices and fueled by UPS's international expansion, may provide the first signs of an air-cargo recovery that would renew demand for the iconic hump-backed plane dubbed the "Queen of the Skies." Sales have dwindled for the four-engine 747 and Airbus Group's A380 superjumbo as passenger carriers shift long-range flights to more fuel-efficient twin-engine jets.
UPS will deploy the front-loading cargo planes on international routes while shifting some earlier-model 747s to domestic flying, the Atlanta-based courier said Thursday. The jets, which will be delivered over a three-year period starting in 2017, will begin a "cascade" of aircraft-route reassignments that will add significant capacity to the company's busiest lanes.
"UPS is making several strategic capital investments for increased global operating capacity," Chief Executive Officer David Abney said in a statement.
UPS's international export volume has grown by more than 40 percent since 2008, with U.S. domestic volume rising by 20 percent, said Myron Gray, president of U.S. operations. That growth spurt should support the addition of the bigger 747-8 freighters, which can carry 16 percent more cargo than their predecessors, according to Boeing. The shift will enable UPS to reduce the frequency of flights in overseas markets, Gray said.
Talk of the jet order dominated a morning call between UPS management and analysts, with some skeptical of the new fleet strategy. UPS fell 1.4 percent to $107.13 at 11:44 a.m. in New York. Boeing dipped 2 percent to $142.68 after rising Wednesday by the most since January 2015.
The trading may reflect investor concern that the plane purchase and other recent capital expenses might eat into UPS' free cash flow and reduce its ability to buy back shares and issue dividends, Stephens Inc. analyst Jack Atkins said.
"The underlying air market is not strong enough to support that kind of expansion," Atkins said in an interview. "Obviously, they feel like that plane fits in well with their network."
The order is the largest Boeing has landed for the redesigned 747 since November 2007, according to the manufacturer's website. It gives new credence to the company's forecast of a late-decade replacement cycle for older air-cargo jets, which may revive the half-century-old 747 program. UPS also holds options for another 14 jumbo freighters.
Boeing had only netted three orders for the 747 this year. The sale almost doubles Boeing's current backlog of 15 unfilled orders for the plane, according to the Chicago-based manufacturer's website. The company said in July it was slowing 747 production output to six a year and would have to end the program if new orders didn't materialize.