Boeing’s (BA) skill at marketing the fuel-sipping benefits of its 787 Dreamliner has far exceeded its ability to actually build the plane. That’s left the maker of the much-hyped, long-delayed aircraft with more than $16 billion in inventory tied up in planes under construction, forcing it to stash 35 nearly finished jets outside its plant in Everett, Wash., and at facilities as far away as Texas.
The aerospace giant received some good news on Aug. 26 when it gained regulatory approval to begin delivering the world’s first plastic-composite jetliner. However, most of the 787s in the works will be sitting on the tarmac for months more as they complete construction, eating into the returns of a program that’s already unlikely to log a true profit before the tail end of this decade. “This is like dinner in the anaconda right now,” says Bill Batcheller, chief investment officer at Tower Wealth Management. “It’s a big bulge in the middle of the balance sheet, and it’s got to work its way through.”
Counting all those mothballed 787s, plus four aircraft in the factory and six test jets, Boeing has more planes on hold than Virgin Atlantic Airways has in service. That’s put a crimp in the aerospace giant’s finances: Working capital as a percentage of sales is approaching 50 percent, vs. less than 25 percent in 2009. Explains Wolfgang Demisch, a partner at Demisch Associates, an aerospace financial consultant: “It’s like they’re dragging a boat anchor equivalent to 25 percent of their sales, which is at the expense of the profitability of their enterprise.” Boeing’s stock has fallen 34 percent since the first 787 delay in October 2007.
Boeing has some help in carrying the cost. It created a production system for the 787 using suppliers around the world to build most of the plane; most don’t get paid until Boeing does. Also, airlines generally shell out about 60 percent of the price of a plane in installments leading up to its delivery. Boeing spokesman Chaz Bickers says the planemaker expects inventory growth to moderate as deliveries progress. Boeing’s “strong core operating performance and cash management” provide a foundation to support the 787 program as well as the latest update of the 747 jumbo jet, he says.
Boeing can “eat some of the dirt of the inventory cost” by using so-called program accounting that allows long-running aircraft and defense programs to allocate costs across a large number of expected unit sales, says Demisch. The more planes Boeing expects to sell, the greater it can spread out the costs on its books. The company won’t disclose the size of that accounting block signaling its assumptions on 787 finances until it reports third-quarter earnings in October.
Boeing has probably spent $300 million to build each 787 so far and will realize revenue of as little as $50 million apiece for the early models, Barclays (BCS) analysts Joe Campbell and Carter Copeland estimate. Douglas Harned, an analyst with Sanford C. Bernstein (AB), says that the 45th plane to be built will probably cost Boeing at least $184 million. That would make the average cost (adjusting for a learning curve) over the first 1,000 jets at least $116 million per plane, he projects—one reason Harned says it’s unlikely the 787 program will show a positive gross margin on those planes.
Struggles with new materials and manufacturing processes extended testing to 20 months instead of the eight originally planned. That meant about half the 787s in inventory were already built before Boeing pushed back deliveries again last year after a fire during a test flight. (Jim Albaugh, chief of the Boeing Commercial Airplanes unit, says “once our customers get this airplane, they’ll forgive us for the fact we’re a little late.”) Each of the partially built planes is in a different state of readiness, since Boeing kept improving processes after the jets began rolling out in 2009. They’ve undergone waves of repairs based on testing tweaks; many jobs remain, including replacement of electrical panels redesigned after the test flight fire.
Production has been stalled at a rate of two planes a month for more than a year, and Boeing repeatedly has frozen the final assembly line in Everett for catch-up sessions, including a four-week pause last month. “Anytime you’re building an airplane out of sequence, the amount of work that’s required probably goes up by a factor of 10, because they have to unbuild all the things you built on top of whatever you have to change, and then build it all back,” says Demisch. “It’s cost that will be added to production and make the likelihood of a profit on this program over the next half-dozen years very, very low.”