Boeing throws Seattle a curve, doesn’t assume 737RE will be built there

Update, July 28, 6:45am PDT: Gates has expanded his original story with more about the developments through yesterday, plus IAM comments.

Update, 6:00pm PDT: Dominic Gates just sent this message concerning the Boeing statement below:

I just spoke with John Dern. (Dern is a corporate spokesman for Boeing in Chicago.)

Dern said: “I am not saying your report was inaccurate. This is not about your reporting. The statements were inaccurate.”

In other words, Boeing Chicago is disavowing the statements of its own senior PR executives here in Puget Sound.

Update, 510pm PDT: This story gets odder as the day goes on. This just came from Boeing:

The comments delivered this morning by Boeing Chairman, President and CEO Jim McNerney regarding the potential location of final assembly for the re-engined 737 stand as delivered. While Renton, Wash., logically would be our first location considered, no decision has been made, nor would one be made at this point in the program. The decision on where to build the airplane will be made in due course as we move through the process of launching the airplane and evaluating production requirements. The statements in the Seattle Times attributed to company spokespeople made after the company’s earnings call were neither accurate nor representative of the company’s or BCA’s position.

You have to read this carefully to fully understand what has been said here: “the statements” were inaccurate and not representative of the company’s or BCA’s position.

It’s very odd there is a public dispute between Boeing Chicago and BCA.

Update, 11:25am: Boeing Commercial Airplanes back-peddled from McNerney’s comments. Here is Dominic Gates’ story in the Seattle Times, just posted. BCA really steps back from McNerney.

Original Post:

Boeing CEO Jim McNerney threw Seattle a curve on the earnings call: he said the 737 Re-engine could be built somewhere other than at Renton, where the 737 has been built since inception.

His paraphrased comments:

We haven’t made the final decision about where we’re going to produce the RE airplane. After 42/mo, we do run into some challenges at Renton. We have other options and we will study them all as we think this through. We would study Charleston, Renton and compare with another site.

and

Renton is one of the great aerospace factories in the world. Until we have sorted out the milestones associated with the ramp-up, the degree to which we have to modify the airplane, major investments required, but until we sort that out we have to keep this open. Until we study it all, obviously we have to keep it open. There is significant investment required and until we figure it out we have to sort it out.

This will be a locally developing story today.

Boeing 2Q earnings up; delivery forecasts down slightly

Here is Boeing’s earnings press release.

Boeing announced its second quarter earnings today.

From the conference call:

Jim McNerney:

• The direction we are heading in single aisle program is clear with the American Airlines order for 737RE. We were prepared to pursue either re-engining option with EIS in the middle of the decade or the New Small Airplane option with a 2019-2020 EIS. The challenge we have is we do not have a clear answer to a new production architecture to ramp up new technology at rates of up to 60/mo by end of decade.
• It became more clear in recent months that our customers wanted certainty rather than the perfect solution, and a new engine wouldn’t be there yet.
• 737RE will be the most fuel efficient airplane in its segment and lowest cost on operating basis.
• Will spend next few weeks finalizing design and launch in the fall, pending board approval.
• Our commercial development programs are substantially complete and barring any problems that can’t be resolved for some reason, 787 and 748 will be delivered later in 3Q.
• Expect certification for the 787 before the end of August.
• Currently at 787 2/mo in Everett and going to 2.5/mo by year end. Charleston about to begin production and first rollout in 2012.

James Bell:

• 787 accounting block will be higher than previous programs, but high demand gives confidence all costs will be profitably absorbed over time. (In other words, no forward loss–Editor).
• The final contract of the KC-46A is not in a forward loss position despite loss on the first four tankers. This program will be profitable over time.
• Combined delivers of 25-30 747/787 delivers (down from 25-40) will be more weighted toward 747.

McNerney:

• This is clearly a very important year for Boeing to get new products into the hands of the customers. Working with discipline to ramp up rates.

Q&A

• What is configuration for the 737RE? What are sales expectations, particularly the US market? Comment on AA as the launch customer not the launch operator? McNerney: The 737RE is less costly and has less risk. Over last 2-3 mos market pushed more for the RE option. We have also been somewhat more mindful of the risks of getting a massive new production system up by 2019. There were more risks as we get into it than originally anticipated. The RE is largely about the engine, the configuration will have some systemic impact on parts of the airplane but wantto minimize this. We have confidence CFM can produce the engine and see manageable risk to integrate into the airplane. The AA deal is part of the most broader part of the marketplace that wants better efficiency today than more efficiency tomorrow. Doing an all-new airplane would put market share at risk. 2018 is less a function than when we can get the airplane done and more when AA wanted the airplane. Bell: we will see R&D impact will be a lot less than with a new airplane, about 10%-15% of new airplane.
• Will you get a premium for the 737RE? JM: There is no question we will be delivering significant productivity to the airlines, fairly conservative in the 10%-12% range, and operating cost improvements. We expect to capture a large part of this value in the pricing. Campaign-to-campaign can get in the way of that. We plan on and expect to get [additional] value.
• How was 737RE decision made and what is the broader strategy in this market? How do you solve the we need a bigger airplane? Decision seemed to be made under duress. JM: I understand the question, but we had been studying RE for long time so not last minute but admittedly our view changed in the last three months. The RE could deliver savings and combined with the technical risk moving to the right and the market moving to the left moved the decision.
• You’ve information USAF of overruns–you say the tanker is not in a forward loss–how does this square? JB: We look at this in the totality of the whole contract, not just the first four aircraft.
• There’s been a lot of news on the 787 program: discuss the line stoppage, slow-down in increasing production rate, delays of 787-9 to 2014. JM: Our projections for ramp, deliveries and certification has not changed. We did take 20 day pause to rebalance the line and I view that as good news because of the visibility across the chain. It’s worse to not rebalance. We’re pretty agile now to rebalance. It will be a positive over the life of this program. A couple of places got out of sequence and didn’t meet their objectives for completion. I don’t know where the Dash-9 rumor began to push into 2014. Our ramp plans on -9 are in place. It’s going well. We have the surge line in Everett as protection. 25-30 delivery forecast for 747 and 787 is a narrowing of the projection but holding the base of the projection.
• It seems unrealistic you will get to ramp rate given all pauses and problems. How are you going to do this? JM: The reason we feel that way is data suggests it is accomplishable. Our major supplier partners are healing up. Pauses helps the ability to get there. Another component is the modification work being done on airplanes already built. Statement of work is clearly understood. Additional engineering input is clearly going away. Is it a challenging ramp? Yes. Do we think we can do it? Yes.
• Will you take additional commitments for 737RE before board approval? JM: Obviously the board is aware of the direction we’re taking. You never want to outrun your board in terms of getting the formal approval you need. I expect we’ll see that soon. We are working to formalize the configuration and to document the business case. We’ll keep talking to customers.
• Why are financial terms of AA deal not a harbinger of unattractive deals? JM: Walking away from Ryanair deal last year was right thing to do. This one does. I would say the AA competition did get pretty heated as Airbus wanted to come in and get market share at AA. It was pretty aggressively priced but not irresponsibly priced from our perspective. It is very profitable for us and AA. The competitive dynamics were a little more intense there because of the early Airbus move.
• As you think about the cost profile of the 737 program, how might narrow-body production support the rates you are talking about? JM: We haven’t made the final decision about where we’re going to produce the RE airplane. After 42/mo, we do run into some challenges at Renton. We have other options and we will study them all as we think this through. We would study Charleston, Renton and compare with another site.
• JM: We think market share can be held in 737 class. We think there is a robust market for the re-engined airplane. The demand is there, particularly in the developing world and coming on strong in the US.
• JM: We believe 737RE will be 2, 3, 4% better than neo depending on the mission. We have centered on an option that makes sense.
• How do you prioritize going forward for a new airplane and the 777? You wouldn’t go so long between new airplanes and cause an engineering gap? JM: There is a balance between the risk of developing modifications and developing all now airplanes. There will still be a significant amount of engineering talent for 737RE and will probably turn more quickly to 777 modifications. We also have the 787-10 and then some degree of refurbishment of 777 which could range from small to large. We’re planning on modification being somewhat significant depending on A350-1000 final design.
• Does the NLRB case affect your decision for where to do narrow body? JM: We remain highly confident that at the end of the day, we will prevail. It depends on how competitive Renton will be but NLRB has zero impact on this decision.
• Surprising that you bring up doing 737RE elsewhere. Are you seriously considering doing the airplane somewhere else? Or are you just keeping options open? JM: Renton is one of the great aerospace factories in the world. Until we have sorted out the milestones associated with the ramp-up, the degree to which we have to modify the airplane, major investments required, but until we sort that out we have to keep this open. Until we study it all, obviously we have to keep it open. There is significant investment required and until we figure it out we have to sort it out.
• Does new small airplane go off into space someplace or does it get picked up 5-10 years down the road? JM: It’s more the latter. This work done now will be very valuable, and benefit from 787 development and technologies, and somewhere down the road after we re-engine, an all-new airplane will be the right thing to do.
• Will 737 be a RE only or NG plus RE? JM: We don’t have that question finally answered yet. There will be a time where both are transitioned.

Here is the quick-take from some of the analysts, preceding the earnings call:

American is the launch customer for 737RE–but not the launch operator

American Airlines is the launch customer for the Boeing 737 re-engine, but it’s not the launch operator.

As American’s 10Q SEC filing revealed the day the order was announced, AA won’t take delivery of the first 737RE until 2018. EIS is planned for 2016 or 2017.

We asked American about this. Sean Collins, director of financial communications for the airline, confirmed American doesn’t want to be the first operator of the aircraft.’

“We don’t like to be the first in line for a new airplane,” he said. “There is a learning curve to be worked out. We like to let that process work its way out. That’s the approach we’ve taken.”

American’s status as the launch customer but not the launch operator is somewhat ironic. Bombardier came under a great deal of criticism for having launch customers but not launch operators for its CSeries (a point rectified at the Paris Air Show, with an unidentified network carrier placing an order to become the launch operator). In fact, Boeing’s Nicole Piasecki, VP of Business Development and Strategic Integration, made the same criticism toward BBD in Boeing’s pre-Paris Air Show press briefing.

While BBD’s critics point to the facts that the CSeries is an entirely new airplane, using new materials, production techniques and suppliers, the 737RE is intended to be a reasonable straight-forward derivative of a well-established airplane. That American is sufficiently wary of being the launch operator is a statement of some kind.

We’ll leave it to analysts and observers to make their own interpretations.

But American’s decision leaves Boeing in the position of being able to offer initial delivery slots to Southwest Airlines and Delta Air Lines. Southwest launched 737 derivatives -300, -500 and -700 and has been agitating for two years or more for Boeing to upgrade the 737 or, preferably, proceed with a new airplane. Delta is currently deciding on the 757 replacement, evaluating the 737-900ER and the A321neo. A re-engined -900ER should change the dynamics of this competition a bit.