787 delay could wind up costing Boeing $1 billion
Seattle Times aerospace reporter
The recently announced six-month delay in the 787 Dreamliner program could cost Boeing close to $1 billion in added expenses, a leading Wall Street analyst said Wednesday.
In a teleconference to discuss Boeing's third-quarter results, Chief Executive Jim McNerney and Chief Financial Officer James Bell projected that the six-month slide in delivering the 787 will cause a $3.5 billion drop in next year's revenues. Yet they reaffirmed that profit for 2008 is expected to hold up.
The big hit from the 787 delay is buried deeper in the quarterly financial details:
• $200 million assigned for extra research-and-development spending on the Dreamliner.
• About $500 million set aside as a contingency, said Bell, "to protect against any increases in costs in the supply chain as we go forward and deal with the disruption associated with the slide."
• Added to that, Boeing will have to pay an estimated $200 million or so in penalties to airline customers, according to a separate calculation by analyst Joe Campbell of Lehman Brothers.
Campbell said it's realistic to expect Boeing could pay more than $900 million in extra costs.
"When a program this big gets messed up, to get away with $1 billion, you did good," he said.
Beyond the 787, Boeing's broader financial numbers for the last quarter were strong. Net profit was up nearly 61 percent from last year's third quarter, to $1.1 billion. Adjusting for a one-time charge last year, it was still up 30 percent.
The company's order backlog stands at $300 billion, fully $224 billion of that in the booming commercial-airplane division.
Still, the singular focus in the conference call with Wall Street analysts was the 2008 impact of the 787 delay and prospects for getting back on track.
McNerney said Boeing is pouring money and people into the Dreamliner program to meet the new schedule so that the revenue impact is temporary and much of the lost cash flow can be recouped in 2009.
Only a handful of Dreamliners — three or four, McNerney said — are now expected to go to customers by the end of 2008. As Boeing outlined two weeks ago, first flight is set for around the end of March and first delivery by December.
McNerney said that by the first delivery, some 55 to 65 Dreamliners will be in the process of construction. Later Wednesday, Boeing clarified that only 40 to 45 of those will be at the Everett plant completed and awaiting delivery.
That clutter of jets on the flight line at Paine Field is supposed to prime the pump for a total 109 deliveries by the end of 2009, just three less than the original plan.
McNerney insisted Boeing can pull off building almost the same number of airplanes in a time frame six months shorter.
Even as Everett mechanics scramble to fix the problematic first two jets, he said, the major suppliers will maintain something close to the original production plan and fill the pipeline with the 787's large structures ready for final assembly.
"We're continuing to build the major subassemblies for the airplane at the same rate," said McNerney. "It's the deliveries that will be pushed out.
"The majority of the supply-chain work will continue on the old schedule," he said.
Analyst Campbell remains skeptical.
"Do I believe the production schedule is now safe? Have they taken the risk out of the manufacturing?" he asked rhetorically in an interview. "It's hard to see."
Campbell said he's waiting for more detail from Boeing to determine if the revised production plan is too aggressive.
A detailed revision of the manufacturing schedule will be ready within the next two to three weeks, McNerney said, one that "addresses not only the timing of supplier deliveries to us but also the quality and completeness of parts and assemblies provided by the supply chain."
That points to the crux of the 787 delay. McNerney acknowledged that some of the first large 787 structures to arrive in Everett were incomplete and that even the work that had been done was inadequately documented.
"We were surprised on the physical reality of some of the things that we received from suppliers versus the documentation," he said.
More production workers — though "not a large number" — will be added in Everett in the weeks ahead, McNerney said. And program executives have sent hundreds of manufacturing engineers and parts-procurement experts to the major 787 partners to help fix the supply chain.
Pat Shanahan, a hotshot company troubleshooter appointed last week to take over program leadership, "has already hit the ground running and is fully immersed in leading the team," McNerney said.
Shanahan is credited most recently with turning around a series of troubled defense-side programs, including the Chinook helicopter, the V-22 Osprey tiltrotor and ground-based missile-defense programs.
Boeing's projected cash flow in 2008 is now reduced by $4 billion. CFO Bell said about $2.5 billion of that is due to the loss of revenue from having to push back the delivery of about 35 Dreamliners from 2008 to 2009.
But he said most of that revenue will be added back in 2009 as deliveries recover almost to the original schedule.
The corporate leadership bumped up Boeing's 2008 research-and-development spending by $400 million. Half of that is to fund extra work on the 787.
The other $200 million goes to the defense division, to fund programs including the Air Force refueling tanker.
Bell said Boeing can maintain its profit forecast even with the reduced income because of productivity gains in the factories, moves at the corporate level to snip compensation and pension expenses, and some cushion built into the projections.
With 710 firm orders already booked, McNerney said the 787's business case remains "very compelling."
The latest 787 plan reinserts some cushion back into the schedule, so that if problems arise in flight tests, there's some room to deal with them. But McNerney said Boeing still plans a packed flight test schedule, with pilots flying 24/7.
"We have kept that kind of intensity but reinserted normal margins for hiccups."
Despite all the reassurances, Boeing's shares slid 69 cents to $94.26, after slipping as much as $1.50 earlier in the day.
Dominic Gates: 206-464-2963 or email@example.com
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