Boeing Says No Problem on Dreamliner Costs

CHICAGO TheStreet) -- Boeing ( BA) shares soared Wednesday as the company not only beat third-quarter estimates but also provided long-awaited accounting numbers related to the sensitive topic of 787 Dreamliner profitability.

On Wednesday, Japanese carrier ANA operated the Dreamliner's first revenue flight, carrying passengers on a charter trip from Tokyo's Narita Airport to Hong Kong in about four hours.
All Nippon Airways Boeing 787 accelerates to take off for the airplane's inaugural commercial flight to Hong Kong at Narita International Airport in Narita, east of Tokyo, Wednesday, Oct. 26.

Boeing said the development cost for the aircraft, while still undisclosed, would be spread over an accounting block of the first 1,100 aircraft, which is what analysts had expected.

Disclosure of the accounting block number "removes a headwind to the stock," said BB&T analyst Carter Leake, in an interview. "The bears were saying that the 787 is a great airplane but it wouldn't be profitable for a long time, so the bar was extremely low. This number (1,100) is good enough."

In mid-afternoon trading, shares in Boeing, a Dow component, were up $2.99 to $66.71.

Development costs for the 787 have been estimated at $20 billion and above. But Boeing seems fully capable of absorbing the costs as it moves to expand production of its most successful product, the 737, by more than 30% by 2014.

Additionally, Boeing has just started to sell two new aircraft, the 787 and the 747-800, after completing flight tests in August. It delivered the first two 747-800 freighters to Cargolux this month and will sell small numbers of both aircraft in the current quarter.

Boeing said it has an order backlog -- largely for 737s -- of about 3,500 aircraft valued at $332 billion, including $26 billion in new third-quarter orders.

During Boeing's earnings conference call on Wednesday, Chief Financial Officer James Bell said the company carefully calculated how to spread 787 development costs. One key assumption was that the market exists to sell 5,000 aircraft over 20 years. Boeing has 821 firm orders for the 787, after losing about 30 orders during the quarter, and has the cost overrun of $9.7 billion, which "will grow as we increase production rates," Bell said. However, around 2014, when production is slated to reach 10 aircraft a month, those "deferred production costs will decline, and unit margins will exceed program margins," he said.

"The early airplanes are more costly," Bell said. "But it gets better over time."

CEO Jim McNerney said he is fully aware that after overcoming production hurdles that were far steeper than imagined, leading to a three-year-delay in the first delivery of the 787 to ANA, Boeing now has to execute. As far as getting to 10 787s a month, he said, "It's a matter of knowing what we've got to do and just putting one foot in front of the other and getting it done. (But) if it did slip a quarter or so, I don't believe that would have significant impact on the accounting or profitability."

Responding to a reporter's question, McNerney acknowledged that a few carriers are reducing their 787 orders. China Eastern, for instance, recently cancelled an order for 24 of the 787s and said it would instead buy 45 of 737s: McNerney said the airline is shifting to a more domestic focus. China Southern, which has 10 Dreamliners on order, has said it may cancel, but McNerney said the carrier has not discussed such a change with Boeing as far as he knows.

Air India's board has recommended cutting back its 787 order from 27 to 12 aircraft, according to press reports. But McNerney noted that the 787 is sold out through 2019.

"That's a long time to think about placing new orders," he said. "As soon as we get spaces in the production line available, we'll start selling them again."

United Continental ( UAL)will become the first U.S. airline to operate the 787 in the second half of 2012, when it inaugurates Dreamliner Houston-Auckland, New Zealand service. Major assembly of that aircraft has been largely completed, United has said.

On Wednesday morning, Boeing said it earned $1.1 billion, or $1.46 a share, in the third quarter. Analysts surveyed by Thomson Reuters had estimated $1.10 a share.

In the same quarter a year earlier, Boeing reported net income of $837 million or $1.12 a share.

Revenue rose 4% to $17.7 billion. Analysts had estimated $17.8 billion.

Boeing raised its 2011 guidance to between $4.30 and $4.40 a share, above the consensus estimate of $4.27.

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

>To contact the writer of this article, click here: Ted Reed

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>To submit a news tip, send an email to: Carrying its first paying passengers on Wednesday, the Boeing Co Dreamliner, the world's first carbon-composite airliner, flew to Hong Kong Wednesday from Tokyo.

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