Boeing Seen Reaping $6 Billion a Year on 787 Output Boost

Boeing Co., rebounding from the 787 Dreamliner’s three-month grounding, is moving closer to a further production increase that would reward investors by freeing up billions of dollars for dividends and buybacks.

While the planemaker isn’t discussing goals beyond 2013, Boeing will need a faster rate to fill more than 800 Dreamliner orders and make room for a stretched version of the jet by 2020. Analysts surveyed by Bloomberg project the pace will reach 14 a month as soon as 2015, up from Boeing’s target of 10 by yearend.

Building the additional planes would boost annual revenue by $6.7 billion, based on a Bloomberg Industries estimate. That would benefit investors because Boeing has targeted a payout of 80 percent of free cash flow in dividends and share repurchases, such as the $3.6 billion plan restarted in December after its suspension during the Dreamliner’s 3 1/2-year delivery delay.

“The sooner they can ramp up production, the better for the company,” said Peter Jankovskis, chief investment officer of Lisle, Illinois-based Oakbrook Investments LLC, which manages $3.5 billion including Boeing stock. “With these record backlogs, now it’s a matter of turning those into deliveries and getting the cash coming through the door.”

Boeing’s stock price reflects some of that anticipation. The Chicago-based company’s shares surged 37 percent to $101.83 since Jan. 16, when regulators grounded the global 787 fleet because batteries overheated on two planes. The U.S. Federal Aviation Administration cleared the jet to fly again on April 19.

Sale Prices

Aircraft sale prices are among the most closely guarded secrets in the industry. The estimate for Boeing’s revenue gain by George Ferguson, a senior aerospace analyst for Bloomberg Industries, is based on a $139.2 million average sale price for the two current Dreamliner models. That was derived from the appraised value of a 787-8 disclosed in a United Continental Holdings Inc. regulatory filing last year.

The 787-8, the smallest of the Dreamliner family that’s currently being delivered, has a list price of $206.8 million. The larger 787-9, which is scheduled for delivery next year, is listed at $243.6 million.

Peter Arment, a Sterne, Agee & Leach Inc. analyst, has a more conservative estimate for the annual revenue boost, based on steeper discounts to list prices than the 38 percent implied by the valuation in the United filing. Building four more planes a month, or 48 more a year, would increase revenue by about $6 billion, said the analyst, who has a buy rating on Boeing.

Increase Under Study

Chaz Bickers, a Boeing spokesman, said the company doesn’t discuss pricing and had no comment on analysts’ revenue models. Marc Birtel, another spokesman, reiterated the planemaker’s comments at a May 22 investor meeting that a further production increase is under study, without elaborating.

Oakbrook’s Jankovskis said investors are buying on optimism that profit and sales will keep rising. In the years after the first Dreamliner postponement, in October 2007, the shares lost more than two-thirds of their value and didn’t close above the pre-delay price until this month.

Shrinking the backlog of 833 Dreamliners on order through May, between 478 of -8 model and 355 of the larger -9s, would let Boeing offer the -10X variant this decade, as it has signaled.

At six years, the order-to-delivery time for new Dreamliner orders is now twice the wait that’s typical in the industry, said Carter Leake, a BB&T Capital Markets analyst in Richmond, Virginia.

‘Long-Term Thinkers’

“Airlines are long-term thinkers, but they’re not going to wait six to seven years,” said Leake, who recommends buying the stock. “A lot can happen between now and then.”

The new 787-10X Dreamliner would seat as many as 350 people and is part of Boeing’s bid to keep its lead in wide-body sales over Airbus SAS, Chief Executive Officer James McNerney told investors on May 22.

Any production increase comes with challenges, especially on a model such as the Dreamliner, whose commercial debut in 2011 was postponed seven times as Boeing struggled with new manufacturing techniques and increased reliance on suppliers. Those vendors make a majority of parts on the 787.

Accelerating the assembly line would require Boeing to persuade contractors to invest in adding their own capacity, said JB Groh, an analyst with D.A. Davidson & Co. in Lake Oswego, Oregon.

“That’s probably the gating item: going to the supply chain,” said Groh, who has a neutral rating on the shares.

Dreamliner Market

A market for more Dreamliners exists if Boeing produces them, said Yair Reiner, an analyst with Oppenheimer & Co. in New York, who has an outperform rating on Boeing.

The plane’s range of as much as 8,500 nautical miles (15,750 kilometers) creates new route possibilities for airlines, and carriers have about 1,800 twin-aisle Boeing 767s and out-of-production narrow-body 757s in service that could be replaced by Dreamliners, Reiner said.

By the end of this year, Boeing plans to start assembling seven Dreamliners a month at its plant in Everett, Washington, and three in North Charleston, South Carolina. Future boosts in output probably would involve speeding up the pace in the South Carolina factory, according to most analysts surveyed by Bloomberg.

The plant, which Boeing bought in 2009 from a supplier that was falling behind on deliveries, employs 6,000 workers on 2.6 million square feet (240,000 square meters) of space.

Boeing said in April it plans to invest $1 billion there through 2020 and create at least 2,000 more jobs after spending a similar amount since 2009. The site has tooling in place now to build five Dreamliners a month and space to make seven, said Howard Rubel, a Jefferies & Co. analyst in New York who has a buy rating on the stock and who toured the plant in May.

“This thing is a beehive of activity that’s going to deliver a lot of sweet honey,” he said.

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