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CEO: Boeing's 'Priorities Are Clear'

Jan. 28, 2011
Aerospace giant needs to get 787 and 747-8 programs on track.

Chicago-based Boeing Co. acknowledged that delays in its 787 Dreamliner launch are threatening the program's profitability, as the Dreamliner's troubles were a factor in its 2011 earnings outlook that disappointed Wall Street.

"The cumulative impact of the 787 schedule revisions has put pressure on program profitability, and the team continues to evaluate improvement opportunities to offset these pressures," Corporate President and CFO James Bell told analysts during Boeing's fourth-quarter 2010 earnings conference call on Jan. 26.

Bell, however, noted that the Dreamliner program, as of fourth-quarter 2010, "is not in a loss position."

Boeing expects to deliver its first 787 Dreamliner in third-quarter 2011. Delays in the 787 program tempered Boeing's 2011 earnings outlook.
Boeing earlier this month announced that it expects first delivery of the 787 to take place in third-quarter 2011. The company said it "has been gradually returning individual airplanes to the flight-test program" after an electrical fire on a test plane forced an emergency landing this past November.

The incident was the latest in a number of setbacks that have put the 787 program more than three years behind schedule.

Boeing on Jan. 26 projected earnings per share between $3.80 and $4 this year -- below Wall Street estimates of around $4.56 per share -- citing an expected $650 million increase in its pension expenses; shrinking domestic defense budgets; and the delayed 787 program.

The "main takeaway" for Richard Aboulafia, vice president, analysis, at the Fairfax, Va.-based Teal Group Corp., is that "787 development costs, as we see in the R&D numbers, are getting pretty darn high."

"If you look at the original plans for the program, this should've been a year with plenty of good 787 cash," Aboulafia said. "Instead it's costing [Boeing] billions in extra R&D."

Same goes for the new 747-8, which is behind schedule and "costing more than expected too," Aboulafia said.

Delivery of the first 747-8 freighter has been pushed back from fourth-quarter 2010 to mid-2011. First flight of the 747-8 intercontinental passenger airplane "is on track for the end of this quarter with first delivery expected at the end of the year," Boeing Chairman, President and CEO Jim McNerney told analysts earlier this week.

While Boeing "made significant progress" with its flight tests of the 787 and 747-8 last year, McNerney admitted that the company "continued to face challenges in fully meeting our commitments" for the two programs.

"As we look forward in commercial airplanes, the priorities are clear," McNerney said. "We must complete 787 and 747-8 development and deliver these airplanes to our customers. We need to successfully ramp-up production across all commercial programs to deliver on our backlog of over 3,400 units and create the capacity to support further customer demand."

'Significant Rebound in Air Traffic'

Boeing's full-year 2010 revenues dropped 6% to $64.3 billion, but net income increased 152% to $3.3 billion. Earnings per share shot up 142% in 2010, from $1.84 to $4.45.

McNerney told analysts that last year saw a "significant rebound in air traffic, with 2010 passenger and cargo levels reaching peaks last seen in 2007 and 2008."

"Looking forward, we expect growth rates to continue along their historical growth trends, as air traffic has reached pre-recession levels," McNerney said.

Boeing responded to the rebound by raising production rates, he noted. Boeing plans to increase production of its bread-and-butter 737 from 31.5 airplanes per month to 35 in the beginning of 2012, and then to 38 per month in the second quarter of 2013.

Boeing's full-year revenue will be in the range of $68 billion and $71 billion, according to the company in its 2011 guidance. The revenue forecast reflects the company's expectation that it will deliver 25 to 40 Dreamliners and 747-8s.

"We're entering 2011 well-positioned for growth, with a large order book, increasing global demand for commercial airplanes, greater clarity around our domestic defense outlook, and significant international defense sales opportunities," McNerney said. "Our focus for the year is to deliver the 787 and 747-8; manage disciplined increases in commercial airplane production rates; and drive improved competitiveness and financial performance throughout the business."

McNerney: "Our focus for this year is to deliver the 787 and 747-8."
The 787 and 747-8 delays notwithstanding, one of Boeing's big challenges will be responding to what the company expects to be "an extended period of flat to declining U.S. defense budgets with intensifying pressure on contractor margins," McNerney pointed out.

"In that light, we continue to accelerate our own efforts to reduce infrastructure cost and maximize efficiencies," he said.

While "budget pressures in the U.S. and in other developed markets continue," McNerney said, the company sees defense opportunities in the Middle East and Asia, where spending remains strong.

"There is a clear window of opportunity for our multi-role aircraft and other products, as our international customers confront the need to transition to the next level of capabilities, while also seeking proven reliable systems," McNerney said.

About the Author

Josh Cable | Former Senior Editor

Former Senior Editor Josh Cable covered innovation issues -- including trends and best practices in R&D, process improvement and product development. He also reported on the best practices of the most successful companies and executives in the world of transportation manufacturing, which encompasses the aerospace, automotive, rail and shipbuilding sectors. 

Josh also led the IndustryWeek Manufacturing Hall of Fame, IW’s annual tribute to the most influential executives and thought leaders in U.S. manufacturing history.

Before joining IndustryWeek, Josh was the editor-in-chief of Penton Media’s Government Product News and Government Procurement. He also was an award-winning beat reporter for several small newspapers in Northeast Ohio.

Josh received his BFA in creative writing from Bowling Green University, and continued his professional development through course-work at Ohio University and Cuyahoga Community College.

A lifelong resident of the Buckeye State, Josh currently lives in the Tremont neighborhood of Cleveland. When the weather cooperates, you’ll find him riding his bike to work, exercising his green thumb in the backyard or playing ultimate Frisbee.  

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