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Originally published October 26, 2006 at 12:00 AM | Page modified October 26, 2006 at 12:22 AM

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Boeing to pour billion more into R&D for 787, stretch version of 747

As it announced strong quarterly earnings Wednesday, Boeing also projected large increases in spending this year and next on development...

Seattle Times aerospace reporter

As it announced strong quarterly earnings Wednesday, Boeing also projected large increases in spending this year and next on development of the new 787 and on the forthcoming 747-8 jumbo-jet derivative.

The boost in research-and-development spending — the second in as many quarters — raised the R&D budget to almost a billion dollars more than forecast just five months ago.

The additional money for next year includes funding to pay extra mechanics in Everett, if needed.

Yet with revenue and profit for the quarter strong, executives seemed confident Boeing can absorb that extra spending. They still raised 2007 profit forecasts and tried to dispel any suggestion the bump in 787 costs meant the program is running into the kind of trouble afflicting Airbus.

In a teleconference with analysts, Chief Executive Jim McNerney characterized the increased R&D spending as merely "aggressive contingency planning."

"We are trying to witch-hunt the issues in this program right now," he said.

The reassurances convinced most analysts, but the market reacted more negatively. Shares closed down more than 3 percent at $80.86.

McNerney said the 787's weight "remains a dogged issue," and that a team dedicated to resolving that issue is working both within Boeing and with the major partners. Also, he said, Boeing has needed to help out its supplier partners with production issues.

But these problems were anticipated, he said, and haven't reached a level to perturb the 787 program, which has achieved huge sales success with 455 customer orders and commitments to date.

McNerney said the 787's "projected economics are significantly better than any airplane program I have been involved with."

"Notwithstanding some upward pressure on research and development," he said, "I don't see a fundamental change in an outstanding business case because of what we're talking about here today."

After the earnings call, 787 program spokeswoman Yvonne Leach confirmed the program remains on schedule for first flight in late August 2007 and first delivery to Japan's All Nippon Airways in May 2008.

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She also said one of the contingencies McNerney spoke about was the potential to shift some systems-installation work from the partners to the Everett final-assembly plant, a possibility program chief Mike Bair previously raised.

Leach said this is still just a contingency. "No work has actually moved to Everett yet," she said.

Boeing has, however, "authorized us to hire mechanics in final assembly if we do find that systems work is traveling to Everett. We don't know yet if that is actually going to happen," Leach said.

That work might move to Everett "only temporarily," she said, until the production system is mature and running well.

Most analysts took the added spending in stride.

"We would much prefer to see the company spending extra money on R&D versus letting the program slip," wrote Banc of America Securities analyst Robert Stallard in a comment on the Boeing results.

"However, we are conscious that investors are nervous following the Airbus A380 debacle," he wrote.

The A380 superjumbo from Boeing rival Airbus is delayed at least two years beyond its original schedule.

The slippage is blamed largely on problems with the complex wiring of the systems installed inside the giant airframe.

Boeing Chief Financial Officer James Bell addressed investor fears directly during the conference call, drawing a bright line between the Boeing 787 and Airbus A380 development programs.

"If some of the concern is being driven by what you see out there in other places, you have to understand there are distinct differences in what we are doing here," Bell said. "We don't have the complexity on our airplane that you see on the behemoth that the A380 is. We have a fifth of the electrical wiring."

Analyst Cai von Rumohr of investment bank Cowen downplayed the market reaction.

"While some investors will be 'spooked' by rising R&D, we think Boeing wouldn't have bought stock aggressively in the third quarter and raised 2007 guidance if it felt that 787 was becoming a problem," wrote von Rumohr in a research note.

Byron Callan of Prudential Securities noted that half the latest addition of R&D money is to develop a stretch passenger version of the 747-8 jumbo jet, which could win sales from the A380 delays.

"This should not be viewed as a negative and in fact improves the odds of post-2009 market share gains versus the Airbus A380," Callan wrote to clients.

Boeing's $694 million profit for the quarter, or $0.89 a share, far exceeded Wall Street expectations as margins in the commercial division approached 10 percent.

A one-time charge to terminate the Connexion inflight Internet service reduced earnings by 22 cents a share.

Adjusting profit for that special item and various one-time tax gains a year ago, Boeing's adjusted earnings per share was $1.11, up from an adjusted 33 cents a share in 2005.

The latest guidance adds $450 million in projected R&D spending this year and $500 million next year, compared with a projection given in May. Total projected R&D is now $3.2 billion this year and $3.3 billion in 2007.

But the increased cost of R&D and of some raw materials such as titanium was more than offset this quarter by increased revenue from deliveries and by productivity gains inside the Puget Sound-area's jet factories.

Other items worth noting:

787 milestones. CFO Bell cited a list of program achievements, including beginning assembly of the center box that holds the wing, starting fabrication of the landing gear, delivering the keel assembly between partners, testing the engine pylon, testing the new systems on a leased 777 and delivering the first Large Cargo Freighter that will transport big 787 sections around the world.

The coming narrow-body jet program. McNerney said there is not yet "a crystal-clear view" of how the narrow-body market will shake out. In the planning to replace the Renton-built 737, he said, there is much discussion around targeting smaller-size jets of about 100 seats, or bigger jets for 200-plus passengers, and there are "different camps within our company."

He cited an ongoing internal market study. "Over the next year, it's going to get a lot clearer," he said.

U.S. airlines perking up. McNerney said some domestic carriers have begun exerting pressure to accelerate aircraft deliveries.

Pending sales campaigns. McNerney said he is "optimistic" about major ongoing campaigns with Lufthansa and British Airways.

Employee bonuses ahead. Following the earnings results, Boeing updated employees on the company incentive plan. The plan is now projected to pay out about 10 days of additional pay to about 110,000 eligible employees early next year. Machinists union members are not eligible.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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