Boeing's Dreamliner Nears Takeoff

When the long-delayed Boeing 787 Dreamliner finally takes wing above Washington State in its first test flight later this month, much will be riding on its sleek, carbon-fiber back. Some 56 buyers, ranging from Etihad Airways in the United Arab Emirates to Northwest Airlines, have ordered 866 of the planes—enough to keep Boeing busy for more than a decade. This state-of-the-art plane, slated to make its first commercial flights with Japan's All Nippon Airways early next year, will set the Chicago-based manufacturer apart from Airbus and other rivals for years to come.

But one thing the plane won't do is give Boeing (BA) much of a financial lift—at least not for several years. First, Boeing will need to recover its research-and-development costs, estimated at $3.5 billion to $4.5 billion. What's more, initial customers are expected to pay a discounted price of $130 million to $170 million per plane. That's far less than what Boeing pulls in on such tried-and-true models as the 747, a bigger plane that can retail for more than $300 million. At first, a Boeing spokesman says, the new plane will be a "zero-margin" affair.

Even when the Dreamliner is up and running, most carriers are likely to stick with a workhorse jet, such as the 737, with seats for 130 to 200 passengers. The new Dreamliner will be stunning in terms of fuel-saving technology—it burns 20% less fuel than similar planes—and offer such passenger-friendly features as a touch more humidity in the air. But the twin-aisle plane, with room for 210 to 300 passengers, is best-suited to intercontinental flights. It would make little economic sense to use it on the workaday, short-haul flights that are the mainstays of the airline industry.

More immediately, the Dreamliner will do little to raise overall commercial plane sales, which are slumping for Boeing and Airbus as airlines defer and cancel orders for planes of all sizes. Even the new jet has felt the pinch. Through June 2 of this year, customers have cancelled 57 orders for Dreamliners and placed 13, for a net reduction of 44. There are 866 of the jets on order.

"A Three-Year Downturn"

The air travel slowdown, which is punishing carriers around the world, looks likely to keep the number of new planes in the skies down for a while. "This looks like a three-year downturn," says Richard Aboulafia, a vice-president at aerospace consultant the Teal Group. Boeing reported on June 4 that it received just 20 orders for all of its commercial jets in May, down from 67 in May 2008.

Commercial plane sales are likely to account for as much as $33.7 billion out of Boeing's expected $68.2 billion sales in 2009, BernsteinResearch analysts estimate. But next year the commercial unit's sales will probably slip to $29.7 billion, they add, dragging down Boeing's overall tally to $64.6 billion. And net income could slide from an expected $3.3 billion this year to $3 billion in 2010.

Nonetheless, investors appear to be excited about the Dreamliner's prospects—as well as by reports that United Airlines may order as many as 150 planes from either Boeing or Airbus this fall. Investors have bid Boeing's share price up to about 50, the highest it has traded since last fall and up sharply from about 29 in March. Of course, Boeing shares fetched more than 107 in the fall of 2007.

The company expects to roll out just a half-dozen of the Dreamliners this year for testing. Then, once it is cleared to fly commercially, Boeing is expected to deliver about 15 to carriers next year. The company says it will ramp up manufacturing to produce as many as 10 planes a month by the end of 2012, though analysts are skeptical of that aggressive timetable. Bernstein analyst Douglas Harned suggests the 10-per-month rate is more likely by mid-2013; he expects only about 60 of the planes to leave factories in 2012. Says Harned: "The manufacturing processes used to produce these aircraft are new, and the ability to reach 2012 production rates has not yet been demonstrated."

Boeing management contends it can meet the production time lines. Even though the plane is already two years late and still must convince regulators that it will be airworthy for the decades of service each is likely to see, executives argue that they have solved the supply-chain problems that dogged the program. "The airplane will fly in June, and we will embark on the flight-test program," Chief Executive Officer James McNerney Jr. said at a recent investor conference. Afterward the company will increase production to the 10-per-month rate. Says McNerney: "We think that's manageable."

Do airlines need new planes?

With airlines struggling with overcapacity and tight credit, Boeing will be hard-pressed to move more planes of any kind. The company has trimmed production plans for this year and is cutting its workforce by some 10,000 jobs, largely because of lackluster demand. BernsteinResearch figures the company will deliver just 386 planes of all sorts next year, down from an expected 456 this year. The firm estimates that Boeing will deliver only 301 models of its most popular plane, the 737, compared with an expected 358 this year. "The real issue is: Do the airlines need the airplanes? In 2010 we believe they do not," says Harned. Of course, analysts may have to rework their projections if orders such as the expected one by United come through.

Regrettably for Boeing, it likely won't be able to rely on defense sales to pick up the slack of commercial sales. The Obama Administration, like the Bush Administration before it, wants to cancel or curtail some major programs Boeing supplies, such as C-17 transport planes. Members of Congress, fretting about constituents who work at defense plants, have been restoring funds for the big transports, but it's not clear that will continue.

Boeing also recently lost a potentially healthy revenue source when Washington shelved plans for combat search-and-rescue helicopters, sending them the way of the curtailed F-22 Raptor fighter jets, on which Boeing is a subcontractor. The Defense Dept. is restructuring and probably downsizing the Army's so-called future combat systems program, in which Boeing and San Diego-based SAIC are the top managers. And the fate of a long-sought-after airborne refueling tanker plane is up in the air until at least later this summer. Add it all up, and BernsteinResearch expects Boeing's defense sales overall to rise from $33.6 billion this year to about $34 billion next year thanks to programs already in place, but then slide for at least a couple of years.

McNerney's game plan to deal with the defense changes is ambitious. He intends to diversify Boeing's sales, pitching more C-17s to allies such as Australia, Qatar, the United Arab Emirates, and the U.K., along with other NATO countries. He is also selling F-15 fighter jets to Singapore and South Korea. At home he wants Boeing to move aggressively into areas such as cybersecurity, where Boeing recently made some acquisitions in the software area, along with homeland security and unmanned flight systems. The company is also betting it can sell more Chinook and Apache helicopters, which are needed for warfare, and it is working on the computerized "virtual fence" under way for both the Mexican and Canadian borders.

The challenge in all the defense efforts is whether Boeing will reap anywhere near the money it will be losing on fighter planes and other big aircraft that can fetch hundreds of millions of dollars each.

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