Boeing Soars Despite the 787 Doubts

CEO McNerney reported substantial gains and vowed that problems in the Dreamliner production won't prevent Boeing from delivering the 787 on time

In its fourth-quarter conference call on Jan. 31, Boeing (BA) vigorously defended itself against questions that its new carbon fiber 787 Dreamliner was falling behind schedule, even as it reported profits for the period more than doubled on strong commercial airplane and defense system sales.

Boeing Chairman and Chief Executive Officer James McNerney told Wall Street analysts that while some of the key 787 suppliers were having trouble meeting the schedule, Boeing will meet its contractual obligations to airline customers. "We expect to deliver the 787 on time, with first delivery in May, 2008, and in accord with our contractual commitments," McNerney said. "We continue to work late-supplier and schedule challenges as we struggle to meet our milestones."

Earnings Boost

Meanwhile, Boeing reported strong fourth-quarter and yearend financial results that surpassed Street expectations. The Chicago aerospace goliath raised its 2007 earnings forecast by 10 cents a share and its 2008 earnings forecast by 20 cents a share, based on a record $250 billion backlog—up 22% for the year. Fourth-quarter profit climbed to $989 million, or $1.29 a share, from $460 million, or 58 cents, a year earlier, exceeding analysts' estimates. Sales jumped 26%, to $17.5 billion.

Boeing stock surged 4.1% on Jan. 31 in trading on the New York Stock Exchange, closing at $89.56 a share.

For the year, Boeing said its 2006 profit fell 14%, to $2.2 billion, or $2.85 a share, from $2.6 billion or $3.20 a share in 2005. Its 2006 revenue climbed to $61.5 billion—up 15% from $53.6 billion last year. Operating cash flow increased to $7.5 billion in 2006 from $7 billion last year. "2006 was a very good year," McNerney said. "We achieved new records in revenue, cash flow, and backlog, and overcame some meaningful challenges."

Dreamliner Deadline Race

The most meaningful challenge, though, continues to be producing the fuel-sipping 787 Dreamliner on schedule without blowing out the budget. Many investors and industry insiders remain skeptical that Boeing will meet its deadline. The first composite-based aircraft poses many technical and manufacturing challenges never attempted at such a grand scale. What's more, Boeing is depending on global partners to supply the bulk of the airframe and electronic systems and that network is about to be severely tested.

Still, McNerney said that despite tough challenges, the first 787 would be assembled as planned in the April-May timeframe. The plane is scheduled to be rolled out in July and its first flight test is targeted for the end of August. He also said there would be twice-quarterly updates to discuss the 787's progress.

He offered more details on the nature of some of the problems.They fall into two general categories: weight reduction challenges and supplier delays. The company recently scrapped plans for a wireless entertainment system in the plane after struggling with regulatory approval and the extra weight. He said engineers are redesigning numerous parts and changing some materials. "We have identified a number of areas where we are taking weight out of the airplane," he said. "I'm feeling pretty comfortable on the progress of weight reduction."

Not "Out of the Woods Yet"

McNerney appeared less confident with questions about supplier delays. He mentioned for the first time that four primary suppliers were struggling to keep on schedule and, in some cases, were sending unfinished work—known as "travelers." The two companies struggling the hardest: Mitsubishi (MSBHY), which is making the composite wing box, and Alenia, which is building the horizontal stabilizer and aft fuselage.

Alenia seems to be the furthest behind, according to people familiar with the matter, and Boeing has sent scores of engineers to try to speed up the process. To underscore this urgency, it recently named Rich Noviello vice-president for 787 Alenia program management and immediately sent him to Italy to take over the supervision of the partnership. Mitsubishi is in better shape, said McNerney, who recently visited the Japanese manufacturing giant. "What we are doing with Mitsubishi and Alenia is adding our resources to supplement theirs to get them through the knothole," McNerney said. "Both are making good progress. I think part of the task is to recognize the problem early, over-resource the issue, and continue to communicate. We are not totally out of the woods yet."

Since joining Boeing in July, 2005, McNerney has pushed hard to develop new aircraft including the Dreamliner and the 450-passenger 747-8, planned for 2010. In the second and third quarters, McNerney added about $1 billion to research and development to keep the new programs on schedule. Boeing is spending $635 million to make sure the first 787 will arrive on time. He put a chunk of that money into eight contingency programs that are triggered if a particular part of the 787 development falls behind schedule or is expected to lag. So far, McNerney said he has triggered half of the plans to help shore up the late suppliers, and the problems range from structures to wire bundles and other electronic systems. "Three or four of our teammates are working hard with us to retire risk," he said.

Defense Contracts

Meanwhile, Boeing's defense unit, which accounts for more than half of the company's sales, has forecast a revenue increase of 3.2% at the high end this year, to between $32 billion and $32.5 billion. Spending to fight wars in Afghanistan and Iraq helped sales.

During the quarter, Boeing's Integrated Defense Systems won an Air Force contract valued at as much as $2 billion to produce 10 more C-17 transport aircraft. The purchase adds to the 180 C-17s bought by the Air Force and extends production through October, 2009.

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