Bloomberg News

Boeing Said to Seek Buyers for $1.1 Billion of Early 787s

February 25, 2014

Boeing Factory

Workers assemble a Boeing Co. 787 Dreamliner airplane at the Boeing Everett Factory in Everett, Washington. Photographer: Patrick T. Fallon/Bloomberg

Boeing Co. (BA:US) is struggling to find buyers for 11 of its earliest 787 Dreamliners valued at $1.1 billion after two airlines dropped orders for the holdover models from the jet’s troubled birth, people briefed on the plans said.

The partially completed planes, which are heavier than new 787s and can’t fly as far, have been parked for about four years near a Seattle-area plant. Black plastic shrouds the windows, and 17,000-pound (7,700-kilogram) counterweights dangle from wings in place of engines to keep the jets balanced.

Boeing began building Dreamliners before getting U.S. certification in 2011, amassing a record inventory that included dozens of older versions requiring repairs to meet federal standards. Boeing is starting upgrading the last of the 787s to be fixed as it boosts sales efforts, said the people, who asked not to be identified because the talks are private.

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The work shows the “diversion of personnel and resources needed to deal with unprofitable aircraft,” said Richard Aboulafia, an aerospace analyst at Fairfax, Virginia-based consultant Teal Group. “It is a commentary on plans gone badly wrong.”

Boeing’s marquee jet, the first airliner built mainly from composites instead of the traditional aluminum, ran more than three years late while the Chicago-based company worked out kinks with the carbon-fiber materials, onboard systems and a manufacturing process that relied more heavily on suppliers.

Terrible Teens

The early Dreamliners are known in the industry as the “terrible teens,” a nod to their place in the assembly-line order and the factory woes. The teens weigh more than other 787s due to custom-fitted reinforcements and needed the most work among the more 60 early Dreamliners that required post-assembly modifications.

“We are actively marketing those airplanes and have several available opportunities,” Doug Alder, a Boeing spokesman in Seattle, said by e-mail while declining to elaborate.

What Put the Dream Into the Dreamliner?

Boeing has approached PT Garuda Indonesia (GIAA) and Malaysia Airline System Bhd. (MAS) as well as Latin American and Middle Eastern carriers about the early 787s, said one of the people.

Garuda is considering buying twin-aisle planes and is looking at ordering 10 Airbus A330s, the Dreamliners and larger Airbus A350s, a person familiar with the discussions had said earlier this month.

Airline Responses

Russia’s Transaero Airlines opted out of an order for four of the jets in December, three people said, while Indonesia’s PT Lion Mentari Airlines said in January it was switching to Boeing 737s instead of taking five Dreamliners. The sales push also includes two 787s for which RwandAir signed a letter of intent in 2012 and for which no firm agreement has been reached, one person said.

Transaero, Garuda and Malaysia Air didn’t respond to requests for comment. RwandAir Chief Executive Officer John Mirenge said the carrier’s purchase plans aren’t final and that it wouldn’t take any 787s until 2017. The Kigali, Rwanda-based airline has seven planes.

The 787s are the last of those that Boeing mothballed to fix supplier work done out of sequence and to resolve issues that surfaced during flight tests. The faults included an electric-panel fire and structural weakness where the plane’s wings melded with its body, the repairs that spurred the structural modifications on the so-called teens.

Bargain Hunters

ANA Holdings Inc. (9202), the first commercial 787 operator, and other customers opted to ditch the teens for planes manufactured with the enhancements.

Barring a global aerospace slump, Boeing should be able to place the reworked 787s with bargain-hunting airlines seeking twin-aisle jets to fly shorter, densely traveled routes, said Douglas Kelly, senior vice president for asset valuation at Chantilly, Virginia-based aviation consultant Avitas.

“Asia seems like exactly the right place,” said George Ferguson, senior analyst with Bloomberg Industries in Skillman, New Jersey, especially if Boeing targeted sales to potential customers of the re-engined A330 contemplated by Airbus Group NV. “You can see it as a competitor to the A330.”

Buyers would probably pay less than half the current $211.8 million list price of the 787-8 version, Kelly said. The 787 teens have a market value of $115 million each for a single-unit or small lot sale, according to Avitas estimates. Airlines will probably demand 10 percent to 15 percent discounts, bringing the price closer to $100 million, Kelly said.

‘Good Value’

The upgraded Dreamliners will boast the same warranties as new planes, 10 percent fuel savings over Airbus’s A330-200 and creature comforts such as greater cabin humidity and dimmable electronic window shades, Kelly said. Their range will be about 1,000 nautical miles (1,852 kilometers) shorter than later 787s.

For carriers that don’t need to fly 7,850 nautical miles nonstop, as Boeing promises the 787 can do, the teens “still represent a good value,” Kelly said in a phone interview. “It’s just a matter of what price are you going to be prepared to pay for that versus a standard-build 787.”

In addition to the 11 teens, three other Dreamliners used for test flights also await upgrades, according to Flightglobal’s Ascend Online database. Boeing has firm orders for two of the test aircraft and is seeking a buyer for the third, according to a Feb. 14 company filing.

Boeing fell 2.2 percent, the most among 30 companies on the Dow Jones Industrial Average, to $126.78 at the close in New York. The stock (BA:US) has declined 7.1 percent this year, while the Standard & Poor’s 500 Index is down 0.2 percent.

Margin Pressure?

Boeing’s inventory ballooned to $42.9 billion in 2013 from $8.1 billion in 2006 as Boeing parked some jets, provided cash advances to suppliers and invested in tooling for the Dreamliner and a revamped 747-8 jumbo that was also delayed, according to company filings and data compiled by Bloomberg.

Once customers are found and deliveries begin, the high-cost teens may squeeze margins for Boeing’s airplane business and cause unit costs to briefly surge, said Jeff Morris, head of U.S. equities at Boston-based Standard Life Investments.

Investors have moved on to other concerns, like Boeing’s production cadence as it raises 787 output, Morris said. “The market tends to be forward-looking and this is a legacy issue,” he said.

Boeing faces writedowns if it can’t find customers for the unsold 787s, Teal Group’s Aboulafia said. Boeing recorded a $2.7 billion research and development expense after concluding it couldn’t sell the first three 787 flight-test Dreamliners in 2009 because they required “an inordinate amount of rework.”

“It’s good to remove any residual overhang, any doubt that there’s more like that,” Aboulafia said.

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net

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


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