Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

A long-serving chief executive often hands his or her successor a few nasties to deal with. Such is the fate of Boeing's Dennis Muilenburg, who last summer replaced Jim McNerney, the boss of the U.S. aircraft maker for a decade.

On Thursday Muilenburg disclosed about $2.1 billion in post-tax charges ($3 billion on a pretax basis) related to a trio of struggling aircraft programs: the 787 Dreamliner and 747 jumbo jets, plus a military refueling plane.

The charges themselves weren't all that surprising and the amounts bearable for a company that generated more than $5 billion of net income last year. Still, it's remarkable that Boeing has taken this long to face up to some of the problems. Moreover, it's hard to be confident that the write-downs will be Muilenburg's last.

First, the nitty-gritty. After tax, the charges amount to a $3.23 a share hit to Boeing's second quarter earnings, due next week. The Bloomberg consensus forecast on Thursday was for a quarterly profit of $2.30 a share, but that's obviously shifting lower. Don't be surprised if the company announces a loss for the three-month period -- its first since 2009, according to Bloomberg data.

Poised for a Loss?
Boeing unveiled charges on Thursday that will pressure Q2 earnings next week
Source: Bloomberg
Nb Q2 2016 is an estimate based on the three analysts who have updated their forecasts since Thursday

About 40 percent of the write-offs are related to the 787 Dreamliner, Boeing's technically impressive but vastly over-budget carbon fiber jet. Two 787 test aircraft produced back in 2009 will be reclassified as an R&D expense because it isn't worth refurbishing and selling them.

It's puzzling, to say the least, that it took seven years to realize the planes wouldn't find a buyer. More worrying, the writedowns are a reminder of the huge sums Boeing spent building the first run of 787 aircraft, which in turn makes it harder for the company to recoup its investment.

In aircraft manufacturing, costs follow a predictable "learning curve": the first planes cost a heck of a lot to build but as you get more experienced, manufacturing gets easier and cheaper. But if you blow the budget on the first run of aircraft, it's a sign that getting costs down sufficiently will be very difficult. Some might say impossible, though Boeing would dispute that.

So far it has run up more than $30 billion in deferred production and tooling costs on the 787, which it hasn't had to record as losses thanks to the flexibility of U.S. GAAP accounting. I've expressed concern about the 787 before, so won't bore you with the detail here. But with aircraft orders dwindling and competition intensifying -- putting pressure on prices -- it's still not easy to see how Boeing will recoup all that money.

Neither did it come as a great shock that Boeing took another charge on the 747 program, reflecting weak orders for the 747-8 freighter. Boeing investors should feel a little aggrieved, though. At last week's Farnborough Airshow, it said a slowdown in air-cargo growth was "temporary" and there was still a bright future for dedicated air freighters. In contrast, Airbus slashed its long-term forecast for air freighter volumes amid a big increase in passenger planes that can carry lots of cargo in their bellies. 

Cancelling its plan to increase the 747 production rate from 2019 onward implies that the Airbus assessment might be more accurate. Boeing shareholders should ponder what else the company might have got wrong.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net