Developing, launching 7E7 jet will cost Boeing $5.8 billion
Seattle Times aerospace reporter
Following a conference of prospective 7E7 customers in Seattle, a top Boeing executive yesterday gave an upbeat report on the sales prospects for the forthcoming jet.
The company needs the plane to sell well; it's making a huge investment.
A Boeing internal analysis obtained by The Seattle Times projects the aerospace giant will spend a total $5.8 billion to develop and launch the 7E7.
The figure is considerably less than estimates of the amount Boeing spent on its last new wide-body jet program, the 777.
In part, that's because the $5.8 billion is not the total development cost of the 7E7. This time around, Boeing expects its global partners to provide a large share of the nonrecurring costs of launching the program.
But it will mean a considerable increase in Boeing's research-and-development spending compared with recent years.
At a media briefing after the close of the customer conference, John Feren, Boeing vice president for 7E7 sales and marketing, maintained a solidly optimistic outlook for orders.
He said the program is on track for success and was dismissive of the threat Airbus might launch a model to compete with the 7E7.
A separate Boeing document obtained by The Seattle Times shows Boeing's earlier confident claim that it will have 200 7E7 orders by the end of the year has a firm basis.
As of July, the document shows, prospective customer airlines had given Boeing "accepted proposals" — agreements with a deposit laid down but short of a firm order — for a total of 246 airplanes.
Of those accepted proposals, 35 are for the short-range version, the 7E7-3, all of those from a single customer, All Nippon Airways (ANA) of Japan. The remaining 211, from ANA and 15 other airlines, are for the basic, longer-range version, the 7E7-8.
Tom Fredo, ANA's spokesman in North America, said the first airplane off the line, a 7E7-8 going to ANA, is scheduled to be delivered in May 2008.
Feren faced some skepticism at yesterday's briefing over Boeing's ability to meet its order goal for the year. So far Boeing has announced only 82 orders.
"It's our plan to hit 200 by the end of the year," Feren responded. "Nothing has changed."
With the American airline sector in serious trouble, Feren said he expected the orders to come from Asia, the Middle East and Europe.
He also said Boeing will likely move up by at least a year the launch of the third version of the airplane, the stretch 7E7-9, to secure orders from customers keen on that particular model.
That launch had been pushed out to 2012, but this month Qatar Airways indicated it was ready to sign a 60-plane order if the configuration details of the 7E7-9 version could be accelerated.
Feren was also quizzed about the potential threat to the 7E7 from a still-vague proposal Airbus has talked about: development of a new derivative of its A330 wide-body jet that it has dubbed the A350.
No details about the A350 are available. While it likely couldn't match the efficiency of the 7E7, it would probably have a cockpit and avionics systems common to the existing Airbus fleet.
With the much smaller investment needed to create a derivative rather than an all-new jet, Boeing's European rival might be able to offer it at a very competitive price.
In October, Airbus Chief Executive Noël Forgeard said the company could develop the A350 for between $2.6 billion and $3.9 billion.
Some analysts doubt a derivative could seriously dent the prospects of an all-new jet like the 7E7.
"You get what you pay for," said Bert van Leeuwen, a senior vice president with Deutsche Verkehrs Bank, who attended the Boeing conference. "If you build a derivative for $2 billion, it's unlikely you'll get anything fairly similar to the 7E7."
Feren did not want to speculate on what Airbus might come up with.
"Let's wait and see," Feren said. "It's potential. It's a testimony to the [7E7] market size. There's a great market."
As for the prospect of Airbus undercutting the 7E7 on price, Feren was unruffled.
"[The 7E7] is loaded with value and features. It flies faster; it flies farther; it carries more payload," Feren said. "At some price, I'm sure somebody will take less. It's not something keeping us up at night."
The documents obtained by The Seattle Times contain 7E7 budget projections presented at company headquarters in Chicago in August.
It is unclear if the $5.8 billion figure includes development of all three 7E7 versions or just the first two.
A year-by-year breakdown indicates the entire 7E7 research-and-development investment for 2004 is just over $1 billion, increasing to $1.9 billion in 2005. It's unclear if these numbers include spending by partners as well as Boeing.
The development costs for all previous airliner programs have always been a closely guarded secret. Estimates in the trade media of what the company spent to develop the 777 in the mid-1990s have varied, reaching as high as $14 billion.
The 777 is widely regarded by analysts as having been too expensive. Boeing has never revealed the precise figure.
Program-development costs factor into the price of each airplane on top of the recurring costs incurred in actual manufacturing. The development costs determine how long it will take before the program can show a profit.
Reacting to the $5.8 billion internal Boeing figure, Richard Aboulafia, an industry analyst with the Teal Group, said Boeing's global partners would have to pitch in a substantial additional amount.
"The total is likely to be $3 billion on top of that," he said. "Will others step up to the plate and provide the rest?"
Aboulafia said it is possible the Boeing board might balk at approving what he sees as "an ambitious ramp-up" in annual R&D investment and perhaps opt to spread them out over an extra year, potentially delaying the program.
In 2003, Boeing's commercial-airplane unit spent $676 million on R&D.
But overall, Aboulafia said, the figure cited seemed a "reasonable" investment.
"It looks like fairly good value compared to the 777," he said.
Dominic Gates: 206-464-2963 or email@example.com
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