In advance of the 787 update
Boeing will update its 787 program Wednesday (April 9) at 11 am EDT, when officials are expected to confirm the widely reported additional six month delay. A Reuters report suggests the new delay could be six to nine months, but nothing we’ve heard suggests the upper end of this range and the “street” consensus comes in at six months.
Wall Street analysts are restless. They make stock recommendations based on company statements and they’ve been embarrassed a couple of times as previous Boeing pronouncements proved to be wrong. In Boeing’s defense, predicting delays for a program as complex as building a new airplane must be problematic at best. Just ask Airbus. But Boeing certainly hasn’t helped its case when officials make definitive statements that the program is on time when all signs are that it’s not. As we previously reported, Boeing Commercial Airplanes president Scott Carson made a presentation at a Cowen Co. investors conference and said firmly that Boeing was sticking to its schedule of power-on at the end of March and first flight at the end of June. A week later James Bell, chief financial officer of parent The Boeing Co., made a similar statement at a Lehman Brothers investors conference. His remarks were likewise firm and unequivocal.
Considering that we were already hearing then that another delay was likely, we were surprised that neither Carson nor Bell left themselves any wiggle room.
This time around, corporate communications and others began hedging when Wall Street analysts issued reports of likely new delays, two weeks after the Carson-Bell comments. This is to Boeing’s credit, and corporate communications was more forthcoming about the issues this time than in the past–also to its credit. Then a story in The Wall Street Journal, presumably carefully leaked, all but confirmed the six month delay.
When the news comes from Boeing tomorrow, there won’t be a surprise (unless, of course, nine months is announced). The stock has already been beat down, so absent any shocker tomorrow, the market reaction should be pretty benign.
But that won’t stop the skepticism. Analysts have been unpleasantly surprised too many times and they will continue to wonder if there won’t be another one down the road. The problem for Boeing, of course, is that having damaged its credibility, it will be impossible to prove the negative–that there won’t be another delay.
Analysts are now turning to the cost to Boeing. Morningstar predicts the penalty costs will be $800 million to $1 billion. Wachovia issued a report today that forecasts penalties will cost $2 billion to $3 billion by the time Boeing gets the program, and deliveries, back on track (though Wachovia also admits this is a soft number).
So far we haven’t seen an analyst report that attempts to add up all the cost overruns, additional R&D money as well as the penalties. What we know is that Boeing has previously announced the addition of $1.5 billion in costs to the production and engineering of the program, but this is a pretty old number. The acquisition of the Vought portion (50%) of Global Aeronautica, the troubled South Carolina facility, is, we believe, essentially a no-cash deal. Terms weren’t announced but we understand accelerated payments for work done and work to be done offsets the acquisition cost and perhaps any potential liquidated damages for failure to perform.
It’s possible but unlikely that Scott Carson and program manager Pat Shanahan will get into the program costs and penalties. These are more appropriate questions for the Boeing first quarter earnings call due late this month.
We expect tough questions on the update call and tough questions on the earnings call.
We’ve been asked by media whether the new delay will mean any cancellations. Analysts have already written that they don’t think so and neither do we. For one thing, there is nothing wrong with the airplane itself: the 787 will be the ground-breaking airplane as has been advertised all along. For another, there is no place for airlines to go if they did want to cancel. Boeing’s own 767 and 777 lines are sold out to well beyond the date the 787 program is anticipated to be back on track. Boeing can’t flip a switch and boost production on either line for near-term orders because the supply chain can’t respond quickly enough. Airbus’ A330 line is sold out as well. So the airlines have to try and find lift on the used market, not from the production lines at Boeing or Airbus.
We’ve also been asked by the media whether all these problems prove the production model is flawed. Our answer to this is “no.” The execution of the model has obviously been flawed, and Boeing has acknowledged this on previous conference calls when officials admitted they failed to provide the oversight needed, and some suppliers and industrial partners failed to perform. We continue to believe that once Boeing gets the execution right, the production model will revolutionize airplane building. Assembling an airplane in three days is a fantastic opportunity. With the huge global demand over the next 20 years, this futuristic foresight can have nothing but benefit when the execution is fixed.
We’ll be reporting tomorrow following the update with news and analysis.
Update, April 8 530 PM PDT: We’re told Airbus is going to 12 A330s/A340s a month in 2009 from 10 in 2008. This has been under consideration but we’re hearing it’s a “fact” and if true, it’s sooner than expected. This could give Airbus some ability to offer the A330 as interim or supplemental lift to disappointed 787 customers.