Added 787 spending doesn’t slow Boeing profit surge
Boeing raised its 2013 profit forecast and beat analysts’ third-quarter estimates with an increase in jetliner deliveries, while disclosing an additional $5 billion in planned 787 spending.
Seattle Times aerospace reporter
Boeing’s costs on the 787 Dreamliner program are rising sharply as it smooths kinks in its assembly lines, introduces new models and invests in equipment needed to raise production rates, according to financial results released Wednesday.
The cost of ongoing revamps to the 787 production facilities in Everett and North Charleston, S.C., has bumped up the projected cumulative investment and production costs for the jet program by an extra $5 billion over the next couple of years.
Is that an investment that will pay off in efficiency, as Boeing suggests? Or is it evidence of out-of-control costs?
“It’s hard to draw a firm conclusion,” said aerospace analyst Carter Copeland of Barclays Capital. “They are spending more than we previously thought.”
Boeing’s accounting doesn’t factor the extra 787 spending into its current quarterly profits, however, and the third-quarter earnings blew past expectations and sent the stock soaring.
The company’s shares jumped more than 5.3 percent to close at an all-time high of $129.04.
Copeland noted that even as Boeing admitted it needs to spend more money on the 787 in the future, “they are also generating more cash than we expected in the present.” The company raised this year’s cash flow projection by half a billion dollars.
Boeing reiterated that it will increase 787 production to 10 jets per month by the end of the year, and said it will go to 12 per month in 2016, and then to 14 before the end of the decade.
To prepare for those rate hikes, improve the flow of work, and make adjustments needed to introduce the larger 787-9 and later the even-larger 787-10, Boeing is continuing to spend heavily on equipment and on reconfiguring its assembly lines as well as the 787 fabrication plants in North Charleston.
“It’s a good thing,” said Boeing chief financial officer Greg Smith, speaking on an earnings conference call. “We’re supporting a higher production rate and strong demand for this airplane.”
The cost of all these improvements is evident in the detail of the financial disclosures.
Boeing’s “program accounting” system spreads the losses in the early years of any new airplane program by deferring much of the early production costs.
To date, Boeing has deferred a running total of just over $20 billion in 787 costs. That’s money already spent that is withheld from the profit and loss calculations until much later when the program is mature.
Three months ago, Boeing projected that the cumulative deferred costs would peak at “slightly over $20 billion” and that next year — after Boeing reaches the point where the money it’s paid for delivering a 787 is less than the money spent on building the jet — the total would finally begin to fall.
But Wednesday Boeing said deferred accounting costs will continue to rise into 2015 to a peak of $25 billion.
Smith said the near-term acceleration of spending will be balanced by a faster reduction of the deferred costs later as the company pumps out jets at the new higher rates.
Also on the call, Boeing chief executive Jim McNerney addressed the recent rash of in-service problems for airlines operating the 787.
Japan Airlines (JAL) and Norwegian Air Shuttle in particular have been beset with a variety of airplane systems glitches that have caused canceled and diverted flights.
McNerney said that the 96 Dreamliners now in service worldwide average 97 percent dispatch reliability, meaning that 3 percent of the roughly 200 flights per day fail to leave on schedule.
Most airlines aim for a dispatch reliability rate higher than 99 percent. And McNerney noted that some airlines using the 787 are below the 97 percent level.
“While we’re seeing improvement, we’re not pleased yet,” said McNerney.
Systems software has been a major part of the problem, he said.
“Software false messaging is roughly a third of the issue here and that is frustrating for us and very frustrating for our customers,” McNerney said.
He said Boeing has sent out people and spare parts to deal with the issues and is also making “some engineering changes at the component level to increase reliability.”
Still, Boeing’s bottom-line financial results were stellar.
The increased tempo of commercial jet production blunted the effect of a slowdown in military sales, and management raised its yearly profit forecast to between $5.40 and $5.55 per share.
Net profit for the quarter rose to $1.2 billion, or $1.51 per share, on sales of $22 billion.
“We expected very strong results, and that’s what they delivered,” said Peter Arment, a New York-based analyst for Sterne Agee & Leach.
Commercial jet sales for the quarter increased 15 percent to $14 billion, with operating margins at 11.6 percent.
Defense sales were up just 3 percent at $8 billion, with operating margins at 8.4 percent.
Sales on the military side of the business, now just 36 percent of Boeing’s total revenue, are stagnating as the U.S. budget cuts known as sequestration take hold and some of Boeing’s military aircraft reach the end of their life cycles.
Boeing announced in September that it would wind down production of its C-17 military transport aircraft.
Sterne Agee’s Arment credited the improved overall results to the efficiency of Boeing’s long-standing assembly lines in Renton and Everett.
“When you’re delivering this amount of aircraft from very mature programs such as 737 and 777, you’re having tremendous efficiencies and cost absorption,” said Arment. “That’s allowing them to deliver very strong margins.”
The bump in the stock leaves Boeing the top performer this year in the Dow Jones industrial average, with a year-to-date rally of almost 69 percent.