Boeing: 2010 production cut possible

James Bell, the CFO of The Boeing Co., appeared today at a Cowen & Co. investors conference. Here is a synopsis of his presentation, as he gave it. The third bullet point refers to potential production cuts in 2010.

  • This is one of the toughest commercial and financing markets we’ve ever seen.
  • 2008 challenging: progress made, but outweighed by IAM strike and financial markets.
  • 2009: expect up to $68bn in revenue as return to full production rates (from the IAM strike.) We still think stable production rates for commercial are appropriate, based on conversations with customers, strike-adjusted schedules. 2009 financial guidance assumes may have to make modest schedule adjustments starting in 2010 [NOTE: this statement is more definitive since the earnings call last week–see our additional comment at the end of this column]. (No detail on possible production rates was provided.)
  • If network carriers don’t start taking delivery of new airplanes in next several years, they will face unmanageable fleet replacement in the middle of the next decade.
  • Productivity on mature programs: 737 has been on Lean track for years, 777 improved by 20% with more improvements possible.
  • Boeing Capital Corp. believes it has adequate sources to support airplanes in 2009 from diverse sources. BCC will be financing in 2009, the first time in several years. We assume BCC will finance $1bn this year, issuing debt to cover a large portion of this.
  • Defense: International markets provide significant growth opportunities from 14% of revenue in 2008.

Q&A begins:

  • 2008 had eight cancellations and 110 deferrals. It’s picking up significantly in 2009. So far have maintained production because of over-commitments and schedule adjustments.
  • More pressure is on deferrals. Widebody is holding up, single aisle weaker.
  • We don’t see any issues in 2009 with our customers wanting to take deliveries, nor of financing difficulties. But we’re not naive and recognize things can change quickly. But we don’t see any change in 2009.
  • In 2008 75%-80% of deferrals came from the domestic market, expect to see more foreign customers in 2009. We’re seeing this across all models, equal across all models.
  • The lead time to bring rates down is 12-18 months to do so in an orderly fashion. After 9/11 we did this much more rapidly. With high backlog we do have a little more time to work our way through it.
  • Continuing 787 challenges: we feel better because we are making progress, we’re getting ready to get them into flight test. Obviously we’ve been disappointed with some of the quality in the supply chain. Airplane 5 came in in a lot better shape. We’re making the kind of progress we need in order to support the schedule we talk about.
  • Flight testing for the 787: We’re going to have more hardware flying. There’s a lot of integrated testing on the ground to make it more efficient. In our schedule we’ve provided for the normal. If something abnormal comes out of it [then we’ll have to deal with it]. Now it’s about getting it up in the air. We still have weight issues. From a technology standpoint, we’re pretty comfortable.
  • 747-8: We were extremely disappointed with charge [of $685m] and delays, driven by changes to -400 model to make it meet the performance targets. We’re about 95% through the freighter and 60% of freighter is common with passenger model. There are still risks on the development program. We’re concentrating the market for replacements for the -400 passenger market, and we think this will come with time.
  • 787 production ramp up beyond 10/mo: we’ll make that decision after how we see production works how we intend it. I think we’ll know sometime in late 2010, 2011, how production system is working.
  • Margin on the 787: right now given what we know we are still guiding zero margin on early deliveries. This will grow over time [but Bell won’t give details]. We’re still optimistic this airplane will provide value for customers and shareholders.
  • Cash position, helping 787 suppliers: We don’t have the same capability we had a year ago [due to the strike, production issues] to help suppliers who might be in cash squeeze due to delays of the 787. With these and 747, it doesn’t take a lot to see cash dissipate. Manpower reduction is to help up manage cash.
  • 787 R&D up $3bn this year. Inventory pressures will continue through 2010. Cash advances won’t get better unless new orders come in.
  • We have a commercial paper program backed by a $3bn line of credit and good credit ratings. We could do long-term debt and will look at all these options.
  • IDS’s cash is pretty stable. This issue is the build-up on the Commercial side. Cash is a watch item in 2010. That’s why we haven’t given guidance yet. I don’t expect cash to start coming back until 2011.

Our addition comment:

During the earnings call last week, Bell raised the prospect of production cuts but in a very general way. At the same time, he said delivery levels would increase with the start in 2010 of 787 deliveries. Here’s what Bell said in the earnings call. Note that as recently as one week ago, he predicted stable delivery rates over the next several years. His reference to production rate cuts was not specific to 2010, though in context this could be inferred. His statement today is much more specific.

Our baseline assumption is that in-production commercial airplane programs remain at stable delivery levels over the next several years. However, our financial guidance does consider risk around operational performance and market uncertainties, including the risk of potentially having to take modest production cuts at BCA.

We expect first quarter revenue, earnings per share and cash flow to be the lowest of this year based on timing of volume and deliveries. Our 2009 commercial delivery forecast is between 480 and 485 airplanes. We expect higher levels in 2010 as we begin delivering our 787s.

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