The once-vaunted 787 program has become an albatross around the neck of Boeing ( BA). Even as the aircraft maker reported a better-than-expected quarter, the fate of the long-awaited aircraft, now at least two years behind schedule, dominated the discussion on an earnings conference call, particularly as Boeing for the moment stayed with earnings guidance that Wall Street has largely dismissed. The company left full-year earnings guidance at $4.70 to $5 and said it would update later this quarter, after it completes an assessment of the impact of the fix it has developed for the problem of unanticipated stress levels where the 787 wing joins the fuselage. As of Tuesday, analysts surveyed by Thomson Reuters were estimating full-year earnings at $4.52. "The underlying engine in this company is performing well and that's predominantly the basis of our guidance," said CFO James Bell said. "We've got to complete this assessment. The real question is, 'Is it containable in the program accounting assumptions?' We don't know." On the plus side, Boeing has orders for 850 aircraft, despite 60 cancellations so far this year, providing a long-term opportunity to amortize costs. "So far, we have determined the program is profitable," Bell said. But he acknowledged that the company's most recent financial assessment "really puts pressure on the profitability."
Meanwhile, CEO James McNerney conceded that the marketing around the 787 was too intense, and the development program was too ambitious, given the innovative effort to develop a global supply chain with heavy reliance on partners.
"There is no doubt that the baseline was too ambitious," McNerney said. "It's hard for me to characterize whether it was marketing ambition or financial goals. The initial plan outran our ability to executive it. "Some of that's good," he said. "It drives an organization. But I think we got the balance wrong at the beginning of this program."
Scott Hamilton, managing director of aviation consultant Leeham Co., says that given billions of dollars in 787 cost overruns, Boeing is unlikely to show a profit on the first 1,000 aircraft. "At the present time, the 787 is dragging the whole company down," he says.
Among the unreported costs, Hamilton says, "The 747-8 is delayed because of the years-long diversion of engineering resources. Engineers were not released to the 747, so engineering was outsourced overseas, with resulting poor work and rework. Engineers from other commercial programs were also diverted, as were engineers from defense programs. "Having said all this, once the 787 gets on track, still years away, the airplane will be good," he says. "But forget any profits for at least 1,000 planes." For the moment, the paradox is that, apart from the 787 program, Boeing had a strong second quarter, as net income rose 17% to $998 million or $1.41 a share. Analysts surveyed by Thomson Reuters had estimated $1.21 a share. Boeing said it benefited from growth in defense programs and commercial airplanes. "These are two fundamentally healthy businesses that especially in these tough times we are fortunate to have at the core of this company," McNerney said.
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McNerney even cited a positive economic sign, saying that the rate of requests for delivery deferral fell during the quarter. Boeing had 70 deferral requests in the second quarter, but "the backlog of deferral requests is coming down right now," he said. "We are somewhat encouraged by it." Boeing shares were trading Wednesday afternoon at $42.97, down 5 cents.
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