UPS CEO says $5.3 bln order for Boeing 747 freighters reflects demand

October 27, 2016 9:56 AM EDT

United Parcel Service (UPS) employees unload packages from the cargo of an airplane at the Regional Air Hub in Rockford, Illinois, December 9, 2014. Picture taken December 9, 2014. REUTERS/Jim Young


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By Alwyn Scott and Nick Carey

NEW YORK/CHICAGO (Reuters) - United Parcel Service Inc (NYSE: UPS) said on Thursday it ordered 14 Boeing (NYSE: BA) 747-8 cargo jets, a deal worth $5.3 billion at list prices that potentially breathes new life into an aircraft Boeing had warned it might cancel.

The UPS order, which includes options for 14 more of the hump-backed planes, reflects growing demand the freight company is seeing for air cargo after years of anemic growth, Chief Executive Officer David Abney said in an interview.

"We have the demand and these aircraft will allow us to handle the demand on a very scheduled basis," he said as UPS reported third-quarter results.

The purchase adds significantly to Boeing's order book at a time when it and rival Airbus (NYSE: AIR) have struggled to sell widebody aircraft.

Slow sales of the 747-8, the latest version of the four-engine plane that first flew in 1969, prompted Boeing to recently cut production to six a year and to warn in July it might stop making the plane.

Similar-sized two-engine planes that are more fuel efficient have largely eclipsed the 747's passenger mission. Sales have also slowed for Airbus' large four-engine A380 passenger jet.

But the 747-8 freighter's special hinged nose gives it a unique ability to carry large cargo. Boeing has said it expects 747 demand to recover when air cargo traffic growth resumes and when a wave of older 747s are retired beginning around 2019.

On Wednesday, Boeing predicted 4.2 percent annual growth in air cargo traffic over then next 20 years, driven largely by e-commerce traffic and express delivery in China.

"Markets linked to Asia will lead all other international markets in average air cargo growth," Boeing said, citing a need by 2035 for 550 large, 747-size freighters.

UPS plans to use its 747-8s on important "trunk routes... connecting Europe to Asia, Asia to the U.S.," Abney said. It will use older 747s and other planes now flown on those routes to replace smaller planes on other routes, adding capacity.

"It’s really a cascading effect that is more than the sum of its parts," he said. "We may be adding only 14 at this time, but ... there’s going to be multiples of larger aircraft with more capacity and much more locations."

"What is important is this is net add," he said. "In some places you’re buying just to replace aircraft. This is not. This is a growth strategy. This is about opportunity.... We’re going to put these planes to work as soon as we get them.”

UPS shares were down 0.9 percent at $107.62 and Boeing shares were down 2 percent at $142.60 in midday trading on the New York Stock Exchange.

(Reporting by Alwyn Scott and Nick Carey; editing by Meredith Mazzilli and Cynthia Osterman)



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