Bloomberg News

Boeing Moves Ahead on New 787 Versions as Grounding Drags

January 30, 2013

Boeing Profit View Matches Estimates With No Drag Seen From 787

Boeing gave the forecast still lacking a timetable for when Dreamliner deliveries can resume, clouding the future of the company’s most technologically advanced jet just 16 months after its debut. Photographer: Andrew Harrer/Bloomberg

As a regulatory probe of battery faults that grounded Boeing Co. (BA:US)’s marquee 787 Dreamliner drags into a third week, the planemaker is moving forward with plans to boost output and develop two more versions of the jet.

Production is set to rise to seven a month in midyear, from five now, and to double to 10 by year-end, Chief Executive Officer Jim McNerney said on an earnings call. In addition to the 787-8, the version comprising all 50 planes grounded by a battery fire on one and an emergency landing by another, the company is working on two more variants, the -9 and -10.

Boeing said nothing in the probe has called into question its use of a lithium-ion battery at the center of the review. The company, which detailed its plans in a fourth-quarter earnings report, forecast at least 60 Dreamliner deliveries this year, while still lacking a timetable to resume shipments.

“It could range from absolutely nothing to a big problem,” Richard Tortoriello, a Standard & Poor’s analyst who reiterated the rating he downgraded to hold after the emergency landing, said in an interview. “When you’re in a waiting game like this, where you don’t know what the risks are, it’s best not to be a cowboy.”

Boeing cautioned that yesterday’s deliveries and earnings (BA:US) forecasts rested on the presumption of “no significant financial impact” from the 787’s woes. The jets have been parked since Jan. 16.

Root Cause

Investigators haven’t yet found a root cause, McNerney said on the earnings call, so “if this assumption changes after we have gained greater fidelity, we will let you know.”

The planemaker predicted 2013 net income (BA:US) of $5 to $5.20 a share, in line with an average estimate of $5.16 in a Bloomberg survey of 25 analysts (BA:US). That’s predicated on the delivery of 635 to 645 commercial planes, up from 601 in 2012, as it increases jet output more than 60 percent in the four years through 2014.

The 787 projection, which trailed estimates by analysts, wasn’t hurt by the current halt in deliveries, said Chief Financial Officer Greg Smith. The shipments are lower mostly because of the delivery of about nine 787s that were built before the model was certified in 2011 and need “significantly” more catch-up work than the 32 from that batch delivered last year, he said.

Boeing aims to have all of those early models fixed and delivered by 2015, he said.

McNerney said the Chicago-based planemaker still expects to assemble the stretched 787-9 by midyear, with deliveries beginning in early 2014. It’s marketing the 787-10, with plans to seek official approval from the board to start selling that variant later this year.

Root Cause

“I fully expect guidance will get modified when we get closer to knowing the root cause” behind the battery faults, said Ken Herbert, an analyst with Imperial Capital in San Francisco who has an in-line rating on Boeing. “Until there’s more out of it and they know more concretely, they’ve got to approach it like this.”

U.S. and Japanese authorities are still trying to determine what caused the battery-fault warning that forced an All Nippon Airways Co. 787 to make the Jan. 16 emergency landing in Japan and sparked a fire in the lithium-ion packs on a Japan Airlines Co. jet in Boston on Jan. 7.

Analysts and investors have been baffled in estimating how much the 787’s grounding will cost Boeing. The expense will depend on how long the fleet is parked, what fixes might be needed, and what compensation may have to be paid to customers and suppliers.

Resource Drain

“While we are limited by the rules of the investigation on what we can say publicly, let me assure you that’s not always comfortable for us,” McNerney said on the call. “Nonetheless, we rigorously support the process because it gets to the right answers, the right way. And that is what has made air travel the safest form of transportation in the world. We do believe good progress is being made in narrowing down the potential cause.”

Engineers aren’t being diverted from the new 787 models, nor from development of upgrades to the 737 and 777, to aid in the investigation, McNerney assured investors, adding that its “drain on resources is not significant.”

The CEO said Boeing is prepared even if engineers go on strike. The Society of Professional Engineering Employees in Aerospace expects to decide today whether to ask members next week to authorize a walkout over Boeing’s plan to switch new hires to a 401(k)-style retirement plan, rather than the traditional pension.

“We’re all very hopeful that our discussions with Speea will not come to that,” McNerney said. “But I think we’re going to have enough experts available to keep looking at this issue if it goes that far,” he said of the 787 investigation.

Cash Flow

Boeing rose 1.3 percent to $74.59 at the close of New York trading yesterday as investors reviewed the quarterly earnings data. The shares previously had fallen 5.2 percent from Jan. 4, before the battery fire. On a price-earnings basis, they’re trading at a 22 percent discount (BA:US) to competitor Airbus SAS’s parent, European Aeronautic Defence & Space Co.

Operating cash flow, which is driven by deliveries, was $7.5 billion last year and will be greater than $6.5 billion this year, Boeing said. Carriers pay about 60 percent of the price of a plane in installments after they place an order and the rest upon receiving the plane.

Fourth-quarter net income (BA:US) fell 30 percent to $978 million, or $1.28 a share, compared with $1.39 billion, or $1.84 a year earlier, after a favorable tax settlement of 52 cents a share wasn’t repeated. Full-year profit fell 2.9 percent to $3.9 billion, or $5.11 a share, surpassing Boeing’s October forecast (BA:US) for earnings of $4.80 to $4.95 a share.

Sales jumped 14 percent to $22.3 billion in the quarter, from $19.6 billion a year earlier. Revenue will rise this year to a range of $82 billion to $85 billion, from a record $81.7 billion in 2012, Boeing projected.

The commercial unit’s fourth-quarter earnings rose 29 percent to $1.27 billion as sales gained 32 percent to $14.2 billion.

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

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


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