On-Time 787 Delivery? Dream On

Boeing announces daunting tech problems and postpones the launch of the cutting-edge 787 by months

by Stanley Holmes

Aircraft No. 1 sits inside a cavernous plant in Everett, Wash., its needs tended to more devotedly than those of any monarch. For every mechanic working on the plane, there are hundreds more engineers, managers, and other staffers. The retinue seems to grow by the day, and with it, concerns about when the 787 Dreamliner, viewed as the future of Boeing (BA) and of the commercial jetliner industry, will be ready to fly.

In the face of growing skepticism, Boeing on Oct. 10 announced a six-month delay in its planned initial deliveries of the 787 Dreamliner due to "continued challenges completing assembly of the first airplanes." The Chicago aerospace giant had maintained that the first flight test of its new "plastic" plane would be in mid-December—already delayed twice from the original first flight in August—and that its first delivery would follow in May, 2008. But now the company's long record of delivering new airplane programs on time will come to an end with the Dreamliner—though the company claims that the delay will not have an adverse financial impact to earnings. "We are disappointed over the schedule changes that we are announcing today," said Boeing Chairman and Chief Executive Officer Jim McNerney. "Notwithstanding the challenges that we are experiencing in bringing forward this game-changing product, we remain confident in the design of the 787, and in the fundamental innovation and technologies that underpin it."

In an interview with BusinessWeek on Oct. 9, Boeing had acknowledged for the first time what may be the program's biggest challenge right now: integration of the systems software that controls basic, critical functions such as navigation and fuel usage. People who have come into contact with the plane say that could delay a test flight until January, which Boeing officials are now confirming.

Company Claims No Financial Impact

Boeing declined to discuss the status of Aircraft No. 1, but cautioned that its status changes daily. It noted in a statement that "pacing issues" for first flight and first delivery "present risks to our schedule beyond current plans" and that it's working to understand the full implications of "our continued struggle with these issues."

The process of building any plane is an intricate orchestration of millions of parts and thousands of people. But the Dreamliner raised the bar. Not only would Boeing build the world's first plane made of 50% composite fiber, which allows it to be lighter and more fuel-efficient, but it would also outsource much of the never-before-attempted manufacturing work around the globe. As partners struggle to master new techniques on Boeing's schedule, delays have inevitably set in, and Boeing has thrown immense resources at mounting problems, sending teams of technical experts to work with overseas suppliers to share best practices. Such efforts caused the company to increase 2007 research and development costs by a half-billion dollars in the second half of the year.

Just how far those costs may exceed the contingency funds that Boeing has set up will determine whether a one-time write-off or revised earnings guidance is in the offing. Boeing officials claim the delays will have no financial impact. That question was at the heart of an unusual Oct. 5 analyst report put out by Lehman Brothers' (LEH) Joseph Campbell Jr. titled, "Time for More Frank Commentary," the report was essentially a plea for Boeing to concede there could be delays beyond the one-to-three months many industry experts expect. "Thus far, Boeing has been able to avoid any need to adjust earnings downward, but it is less clear that this can continue if the program needs to slip," wrote Campbell. Boeing's stock closed down 2.2% on Oct. 5, and has dropped more than 5% since Campbell's remarks.