Good Boeing, Bad Boeing

Boeing seems like two companies. One mints money with the 737. The other uses the money to fund 787 delays.
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is headed into a golden age, as demand grows from airlines and from international defense customers.

Wall Street has bought into this rosy view, pushing Boeing up 30% this year, making it the Dow's third-best performer. Analysts are estimating earnings of $1.05 a share when Boeing reports on Wednesday, which represents a sharp reversal from a loss of $2.22 a share a year earlier.

"Boeing at this point in its history is as well-positioned as I have ever seen it," said Davenport & Co. analyst Carter Leake. "It's a duopolist, with airplanes in short supply," Leake said. "I am looking out ten years and it looks damn good."

Yet the Boeing story also has a troubling side. Development of the 787 veered far off course. The true cost of this variance is not known and may never be known. Another new airplane, the 747-800 freighter, was also delayed, as resources were diverted to the 787. Delays accounted for the year-ago third quarter loss.

In an Oct. 1 report, Gleacher & Co. analyst Peter Arment sketched out the dichotomy within Boeing.

On the one hand, he said, "Boeing is incurring more costs on the 747-8 program" and "the 787 and 747-8 still have headline risks," he said. On the other hand, "program accounting benefits coupled with continued strong performance within the 737 and 777 platforms have partially offset the increase in costs."

In fact, Arment noted, "a higher number of 777 deliveries and continuing strong profit contributions from both the 777 and 737 programs" led him to increase his estimate to $1.06 a share. Other analysts also raised estimates, so that consensus has risen from 99 cents at the start of the month.

To extrapolate, good Boeing -- the 737 and the 777 -- profitably supports bad Boeing, the delay-wracked development programs for the 787 and the 747-800.

Meanwhile, despite anticipated declines in U.S. defense spending, Boeing Defense, Space and Security seems unlikely to suffer. Arment noted that "international orders

are expected to boost the long-term outlook for defense," which accounts for about 50% of Boeing revenue, estimated to be about $65 billion in 2010.

For Boeing Commercial Aircraft, the bottom line is always its order book, equivalent to seven years of revenues. Most orders are for the 737, the best-selling airplane in history. Boeing has delivered 6,543 of them and has 2,127 outstanding orders. About 4,000 aircraft are currently in service, flown by airlines in 115 countries. At any given moment, 1,200 737s are in the air somewhere in the world.

Yet it can be difficult to shrug off the 787 conundrum, which can be defined with a question: Is the long-awaited aircraft a miracle, or is it a boondoggle?

The first Boeing 787 is supposed to be delivered early in 2011, nearly three years after the original May 2008 delivery date. While the delay cost has not been wholly quantified, Boeing has taken about $3.5 billion in charges (both cash and non-cash) associated with delays.

At a 2009 investor conference, CEO Jim McNerney

acknowledged that Boeing fumbled on 787 production. "There's plenty of blame to go around," he said. "We asked some partners to do some things that they, technically and financially, were not able to do."

At the same time, McNerney points to the 850 orders for the aircraft as proof that Boeing made a good decision when it decided to build the plane.

Mark Blondin, aerospace coordinator for the International Association of Machinists, can be excused for reminding that the union warned Boeing repeatedly about the flaws in its production concept. "We told them this is not going to work," Blondin said. "We said: 'you will lose control of the final product.' Look it up. We told them many times."

Yet Blondin remains a backer of the airplane. "Once it gets tooled up, it's going to be a good thing for the customers," he said. "It has 20% plus fuel savings and, as far the capability it has, they can put 330 people in (the 787-900.)It will be a bill help for the airlines."

Consultant Scott Hamilton, who publishes an online newsletter about aircraft manufacturers, said "the 787 ramp-up is going to be more challenging that has been acknowledged so far, because Boeing still doesn't have a supply chain that has solved all of its problems. It might take another year or two before they are where they ought to be."

Hamilton said the lengthy 787 delay is unprecedented in Boeing's history. As a glitch, it compares to the 1997 meltdown of the 737 line, a result of a too-rapid production ramp-up, which led to a $2.6 billion write-off and a sharp decline in Boeing's share price. Analysts are all over the map in estimating how many 787s Boeing must produce to break even on the aircraft.

Analysis is more difficult because "program accounting" allows the upfront costs for developing a new plane to be spread over several future years. "They can stretch out costs to such an extent you don't know what break even truly is," Hamilton said. Normally, about 400 to 500 airplanes must be delivered and paid for before a program breaks even. Analysts have estimated that it could take delivery of three or four times that many 787s before the airplane is profitable.

Leake's view is that Boeing could have done better, but its problems are underwhelming. "I'm as frustrated as the next guy with Boeing's painfully slow refusal to acknowledge that their 787 timeline was too compressed," he said. "But delays, reworks, and engine problems are the normal course of business in aircraft design.

"Once Boeing starts to approach its 10 aircraft per month production target in late 2013, this will all be forgotten," Leake said.

-- Written by Ted Reed in Charlotte, N.C.

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Ted Reed