Boeing (BA), acknowledging continued production and design glitches on its 787 Dreamliner, pushed back delivery of the first plane for at least four months, to late 2009. The widely expected delay (BusinessWeek.com, 4/4/08) means the fuel-sipping jet is now 14 to 16 months behind schedule, which could force some airlines to seek compensation from the aircraft maker.
Boeing now expects to deliver only 25 of the planes during 2009, down from an earlier projection of 109. That will crimp 2009 revenues because more than 90% of an aircraft's sale price is typically paid upon delivery. But the Chicago company said it still expected strong earnings growth in 2009, and said its 2008 profit forecast remained unchanged. That seemed to reassure investors, who sent the stock up nearly 5%, to 78.60 in New York Stock Exchange trading.
Scott Carson, president and chief executive of Boeing's Commercial Airplanes unit, said in a conference call with analysts and reporters that unanticipated rework and other problems prevented the Dreamliner team from hitting milestones laid out in January, and that a more conservative approach to setting its milestones seemed prudent. "Once a week at least, I visit the airplane up in final assembly in Everett (Washington) and I must tell you I am very encouraged with the programs I am seeing on airplane No.1," Carson said. "We have indeed made significant strides. It wasn't been fast enough, but it is much faster and better than it was several months ago."
Customers Growing Restless
The company said while research and development costs will likely increase as a result of the schedule change, they won't impair 2008 per-share earnings, which are forecast in a range of $5.55 to $5.85. However, the cost of delays and penalties to airline customer could exceed $4 billion, Cowen and Co. analyst Cai von Rumohr said in a note to investors Wednesday. (The company earned $4.07 billion on sales of $66.39 billion in 2007).
As a result, the 787 won't contribute to profits next year. Moreover the R&D costs, combined with advance payments to suppliers, will squeeze cash flow. Boeing's expectations for 2009 per-share earnings, to be outlined with the disclosure of first quarter earnings on April 23, won't be as high as the current consensus of $6.99 and are likely to be in the range of $6.35 to 6.75, von Rumohr said.
Boeing originally targeted the first flight for last August and the first delivery for May. Last year the company revised that by about six months. Then in January it extended the schedule again, projecting the first flight at midyear and the first delivery for early 2009. The delays have been embarrassing for Boeing, which had been riding high on 787 orders—892 to date—while rival Airbus was mired in the two-year delay of its superjumbo A380 plane.
The 787 has been wildly popular because of the potential fuel savings of more than 20% made possible by lightweight carbon-fiber technology. But customers are growing restless because the delays require them to alter plans for their own fleets—sometimes making do with older planes that are costly to maintain and consume more fuel. Some say they are seeking financial compensation and replacement aircraft under the terms of their contracts. Boeing's Carson said it's too early to say how many customers would be eligible for penalty payments.
The carbon-fiber technology has presented a daunting challenge for Boeing engineers. If components of the plane are too heavy, the plane loses its energy efficiency. But if they are too light, the parts and even the entire plane might not be structurally sound. That was the case with the center wing box, the critical section of the plane where the wings are attached. It was found to be too light and needed to be strengthened. Engineers devised a patch for the first six aircraft; the seventh will have the redesigned wing box incorporated from the start.
Other delays are traceable to the complex global supply chain that Boeing pieced together.
Struggling Supply Chain
To lure other manufacturers to help foot the bill for the 787, Boeing outsourced an unprecedented share of the work overseas, including major contracts in Japan and Italy. But many of these partner companies have struggled, either in building the components themselves or getting the parts they need from others, in time to meet Boeing's rigorous construction schedule.
A prime example was the botched assembly of the fuselage at a South Carolina plant run by Global Aeronautica, an alliance of Italy's Alenia Aeronautica and Vought Aircraft Industries of Texas. Boeing late last month bought out Vought's interest in the joint venture, which is expected to speed things up. "We deeply regret the disruption and disappointment these changes will cause for our customers and we will work closely with each of them to minimize the impact," Carson said in the statement. "We have taken significant action to improve supply chain and production system performance, such as [with] our investment in Global Aeronautica."
In retrospect, many say Boeing should have been more conservative in its estimates and anticipated delays, which are inevitable with a completely new plane. "They should have built in more contingencies," says Cai von Rumohr, an aerospace analyst at Cowen & Co. (COWN). "There are a lot of lessons learned."
With the latest delay, Boeing finds itself in defensive territory similar to that occupied by Airbus (EAD.PA). The European planemaker's double-decker A380 was introduced with a big splash, and when Boeing chose not to develop a successor to its 747 jumbo jet, the Airbus plane seemed to have a lucrative market all to itself. But thanks to production glitches, mainly stemming from mismatched design software at different sites, Airbus is two years behind schedule with the big plane. It delivered only one A380 late last year, and expects to deliver only 13 in 2008, about half the number it originally expected during the program's first full year of operation.
Changes Aimed at Airbus
Besides the delays announced on Apr. 9, Boeing also said it is rejiggering the scheduled launches of the derivative models of the 787. The first model to be launched will be the 787-8, which will have 210 to 250 seats. Originally, Boeing was going to follow that with a smaller derivative called the 787-3, but that is now being pushed back till later, in favor of a second, larger derivative called the 787-9. This latter plane is now scheduled for launch in early 2012. It will have 250 to 290 seats.
Those changes are clearly aimed at the Airbus A350, the European answer to the 787. The first model of the Airbus plane, the A350-900, is scheduled to launch in mid-2013 and with 314 seats is relatively close in size to the 787-9. If Boeing can keep the revised 787 program on track, it should still have a considerable head start over the A350.
Airbus, for its part, downplayed the possibility it could benefit from the 787 delay. Speaking with reporters at a briefing in Auckland, New Zealand, Airbus sales chief John Leahy said, "I don't think it will give any real competitive advantage."