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A different view: Why 787 cancellations are a good thing

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Air-Berlin_560.jpgSince last summer, Air Berlin has been rumored to be a likely candidate for canceling part of its 787 order. Today, the German carrier announced it has canceled 10 of 25 firm 787s it had on order, as well as an additional 5 options.

The cancellation reduces the backlog to 866 aircraft from 57 customers. Ten 787s for Iraqi Airways (Republic of Iraq), an unidentified 787-9 customer and United's order for 25 787-8 were added to the 840 orders that Boeing held at the time of first flight.

While never a good thing, let me suggest a different way of thinking about cancellations. 

For 787, they might actually be a good thing.

Jim Albaugh's comments from JP Morgan Aviation, Transportation & Defense Conference on March 9th gives an interesting insight on why this might be the case:
I think the last issue on the 787 and one we're working very, very hard is profitability. We've made a significant investment in this airplane. And, while it's profitable, it's not profitable enough to justify the kind of investment that we made.
If 787 profitability concerns are at the forefront of Mr. Albaugh's thinking, a cancellation could provide an opportunity for Boeing to re-negotiate prices with existing customers that want to move up in the delivery stream, while making way in the backlog for better pricing with future customers. 

Nearly 75% of today's backlog was booked before the program announced its first delay in October 2007. All aircraft that were sold before that point worked under the assumption that production of all three 787 models would be leaving the factory at a rate of 10 aircraft per month by the end of 2010. That was a very different environment to evaluate the price of a 787 than it is today after two years of delays and major changes to the supply chain.

With 787 production now underway, Boeing now has a much better sense of what it costs to build the composite jetliner in the context of its already "significant investment" than it did in July 2007 when the Air Berlin order was first placed. Despite a shrinking backlog, any relief from the weight of that investment in terms of pricing new aircraft orders should probably be seen as a net positive.

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