Bloomberg News

Boeing Rises Most in Six Weeks as 787 Delivery Ends Delays

September 26, 2011

(Updates with CEO’s comment on profit in fifth paragraph.)

Sept. 26 (Bloomberg) -- Boeing Co. rose the most in six weeks in New York trading as the delivery of the 787 Dreamliner ended more than three years of delays on the world’s first jetliner made of composites instead of aluminum.

All Nippon Airways Co. received the plane today at a ceremony outside Boeing’s widebody-jet factory in Everett, Washington. Boeing climbed $2.50, or 4.2 percent, to $62.01 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain since Aug. 12.

Starting with today’s handover, Chicago-based Boeing will begin working off an order backlog of 821 Dreamliners. It aims to boost output fivefold to 10 a month by the end of 2013, a record for wide-body planes, after the setbacks raised costs, ballooned 787 inventory to $16.2 billion through June and upset airlines’ timetables for adding new routes.

“We have a robust plan” to increase production, Chief Executive Officer Jim McNerney told reporters. “On the new planes now coming into our factory, the condition of assembly is equivalent to the condition of assembly we have on our other airplanes. So things are beginning to move.”

McNerney said the 787 program will be considered profitable immediately under Boeing’s accounting system, which matches cost and revenue. The cash break-even point on a unit basis, when more money comes in for each plane than is spent to build it, is “a number of years out in front of us,” though will occur this decade, he said.

Cash-Flow Gain

“We see profitability on the overall 787 program as relatively far off,” Richard Tortoriello, a Standard & Poor’s equity analyst in New York, said in a note to investors. At the same time, “we expect deliveries to result in a substantial decrease in 787 inventory and a correspondingly large increase in cash flow from operations in ‘12,’’ he wrote.

The twin-engine 787 is Boeing’s 11th all-new model and the best-selling ever. It’s also the company’s first new jet in 16 years, after the 777. Boeing doesn’t expect to develop another new plane until next decade, after deciding in July to upgrade the engines on the 737 instead of building a replacement jet.

‘‘The last number of years have reminded us of the risk of development, particularly with big innovation like this,” McNerney told reporters. “Those lessons will be fresh in our mind as we think about our development programs going forward.”

Materials, Manufacturing

Struggles with the composite materials and manufacturing process pushed back the jet’s entry into service seven times since 2007. The U.S. Federal Aviation Administration gave its approval to the model last month, after 20 months of flight testing.

“Boeing is now in the position of demonstrating that it can begin the ramp-up,” Howard Rubel, a Jefferies & Co. analyst in New York, said in a note to investors. “We figure Boeing can deliver eight to 12 planes prior to year-end.”

Rubel and Tortoriello both recommend buying Boeing shares.

The Dreamliner is part of Boeing’s strategy to help reclaim the top spot in industry sales lost to Airbus SAS in 2003. The composite body is lighter than traditional aluminum, cutting fuel use, and upgrades such as LED lighting and larger windows are designed to improve passengers’ in-flight experience.

“Thank you for waiting for this day,” McNerney said in Japanese to All Nippon President Shinichiro Ito at the ceremony.

All Nippon Service

All Nippon’s first 787 passenger flight will be a special trip between Tokyo and Hong Kong on Oct. 26. The jets then will start on shorter routes within Japan, because the first ones are overweight and not as fuel-efficient, according to Satoru Fujiki, All Nippon’s senior vice president for the Americas.

Regular domestic service will start Nov. 1 between Haneda and Okayama and Hiroshima, followed by intercontinental service between Haneda and Frankfurt in January after the Tokyo-based carrier receives several more of the jets. With 55 787s on order, All Nippon would be the biggest operator of the plane.

Carriers have penalty clauses written into contracts for late deliveries. All Nippon has worked with Boeing to receive 767s and 777s to blunt the effect of not getting the 787 in May 2008 as planned. Fujiki declined to give financial details.

After dropping 39 percent since since the Dreamliner’s first delay in October 2007, Boeing’s stock may be in line for a boost, said Ken Herbert, a San Francisco-based analyst with Wedbush Securities.

Following the first delivery of each new model and variant in the past two decades, Boeing outperformed the Standard & Poor’s 500 Index by an average of 8.1 percent three months later, Herbert said. The planemaker’s advantage rose to 14 percent a year after each new jet’s debut.

Operating Costs

Boeing has promoted the 787 as being 20 percent cheaper to operate than comparably sized jets, due to the lightweight materials and an all-new system for onboard power that relies on electricity, not air diverted from the engines.

“We absolutely stretched the bounds of technology here,” said Bob Leduc, president of Hamilton Sundstrand Flight Systems, which makes the jet’s electrical system. “If we had to do it all over again, we probably would have wished we would have had it a little more mature.”

The plane, which seats 210 to 290 people, is being marketed for long-haul routes such as Tokyo-New York that have been the domain of larger aircraft.

Boeing drew from a decade of research by psychologists and architects to make air travel more comfortable for passengers. Bigger windows feature dimming glass instead of window shades; larger luggage bins will accommodate more bags while allowing for more headroom; and LED lighting highlights new archways.

Because the carbon-fiber reinforced composite plastics don’t corrode like metals, cabin air can have more humidity and be kept at a higher pressure, so travelers feel they’re at a lower altitude than on other planes.

“This has not always been a smooth journey,” Boeing Commercial Airplanes President Jim Albaugh told a crowd of hundreds of employees, airline executives and politicians at the Everett plant. “But nothing important ever is.”

--With assistance from Rachel Layne in Boston. Editors: Ed Dufner, James Langford

To contact the reporter on this story: Susanna Ray in Everett, Washington, at sray7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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