Update, from 7:30 am-the Earnings Call:
Jim McNerney (JM):
- Passenger traffic remains resilient, but cargo traffic weakening and needs watching.
- Interest in 737 MAX remains high, still working with customers [to define product].
- We’re monitoring European debt crisis for impact on financing airplanes but believe any outcome will be manageable.
- Defense spending will depend on outcome of Congressional Super Committee working to cut deficit and whether automatic cuts emerge that will harm national defense and the industrial base.
- Sticks with goal of 10 787s/mo by the end of 2013. Sticks with first 787 from Charleston next year.
- Change incorporation in 787s on track and defined. Challenge remains to burn down the work on timely basis.
- Defense: continuing emphasis on cybersecurity, intelligence which are growth areas.
- KC-46A completed first integrated review on technical specs, now focusing on preliminary design review in early 2012.
James Bell (JB)
- 1,100 block is consistent with accounting practices. Over 20 years estimate market demand at 5,000 units. 1,100 block is 10 years of production. Initial gross margin booking rate on 787s is in low single digits, to be assessed quarterly. Deferred production balance $9.7bn for 40 airplanes and will grow as more airplanes produced. Will begin to decline after hitting 10/mo.
- Our clear priority [now] is executing ramp up across all programs and developing KC-46A and MAX.
- JM: If 787 rate of 10/mo did slip a quarter or two it wouldn’t have an impact on accounting block.
- JM: Not really seeing cargo customers seeking 747-8F delays due to softening market.
- JB: When we get up to rate and stabilize for a year, year and a half 787 revenue will exceed costs to build it. (In other words, 2014-2015 is when on a purely revenue/cost basis, the 787 will be profitable–Editor.) [Later]: I would assume 2015 rather than 2014. Late 14 or early 15 to be stable.
- JB: We’ve never set the accounting block previously, so have not adjusted it. We never went through analysis to determine if there would have been a forward loss at 1,000.
- JM: We are not over-reaching market demand, we are following market demand [with production rates]. We are not going for market share.
- JM: We have pretty good fidelity on what the MAX is, still having discussions. It is settling down quickly on details, happy with design. We’re still thinking through where we would produce it.
- JM: Vast majority of rework is on first 40-45 airplanes. Our plan is that after 50-60 mark we are pretty much in the clear, pretty clean after that.
- JM: We’re in a sweet spot seeing demand for the 737NG and the 737 MAX.
Boeing set its long-awaited accounting block for the 787 at 1,100, an announcement coming with the third quarter earnings release today. Boeing said, “At quarter end, the 787 had 821 units sold firm and approximately 200 options. The company established the initial accounting quantity for the 787 program at 1,100 units, consistent with accounting practices applied on other new airplane programs.”
Previous airplane programs were typically set at 400, according to a good analysis by Jon Ostrower.
Ostrower, in Hong Kong following the 787′s first flight (and thus up long before we were), had this quick take on the earnings announcement and some observations about the 787 ramp up and deliveries this year.
Boeing also lowered its delivery forecast for the 787 and 747-8 to just 15-20 combined. Originally Boeing forecast 25-40 evenly split between the two airplane types then in July 25-30, weighted toward the 747. Since then, Atlas Air canceled three 747-8s that would have been delivered and Boeing’s internal plan for the 787 has been eight while key suppliers have been telling us four-six. Boeing said in its press release today that two thirds of the deliveries will be 747s, or 10-13. Thus, this means 5-7 787s will be delivered this year if forecasts are met.