787 Update, Week of May 26

Testing continues on the 787 as it prepares for first flight in June.

Speculation is rampant over whether the airplane will be ready to fly before, during or after the Paris Air Show (but for clarity, “during” does not mean “at” the air show).

We believe Boeing would dearly love to be able to talk about first flight at the air show. Tests appear to be moving more quickly than anticipated, as reported by Flightblogger in its running countdown to first flight.

We are hearing widely divergent opinions about whether first flight will happen in time for Boeing to discuss it at the air show or not.

Separately, JP Morgan issued its routine post-Boeing investors’ day report last week. It contained an interesting item that we did not hear, listening to the podcast, or missed its significance if this comment by CFO James Bell was during his formal presentation. (If it came during the break-out sessions, these were not webcast and we wouldn’t feel silly missing it.)

Joe Nadol, the aerospace analyst, wrote:

“Management acknowledged that BCA overall could generate negative earnings on a unit basis next year, meaning that the loss on the 787 deliveries could more than offset the earnings from 737 and 777. A major question going into next year is how large the initial deferred production cost balance will be that will drag on earnings for years to come, and we think somewhere between $5-10 billion is probably the right number, but management has offered no guidance whatsoever on that front.”

We understand there are billions of dollars in claims by airlines and suppliers and the final numbers aren’t even in yet because until the airplane gets delivered and a production stream is in place, the final numbers can’t known. The 787 will be a good/great airplane when certain block points are achieved,  but the program has been a financial disaster so far (and as a long-term shareholder, this is of no small consequence to us).

4 Comments on “787 Update, Week of May 26

  1. There is always a limit to liquidated damages, which in most industries amounts to 5% of contract value at so much a week, typically 0.5% per week.
    A few hundred frames are likely to incur the maximum claim, and possibly additional claims for the anticipated performance shortfall, which is probably an additional negotiated penalty.
    Makes an enormous hole in earnings.as well as profit forecasts.
    This could be with them for a few years, particularly if the production ramp up isn’t going to happen as quickly as planned.

  2. Reading between the lines of the Flightblogger report, it sounds to me like Boeing is not so much cutting corners but certainly rounding them off quite a bit. Lets see how much the pilots allow the Boeing brass to pressure them.

    Lets face it, even though Boeing has, in their
    third(?) or fourth(?) revised schedule, stated a first flight in the second quarter of 2009, Mr. McNerney himself has publicly stated he “hoped” for an April first flight. To me that is as good as forecasting an April first flight and hence, they are now a month late, and counting, on that as well.

    Anybody who has been in the commercial aerospace business for any time knows that this first flight prediction based on a “quarterly” time frame is just so much smoke to hide the fact that they still do not have near as much control as they seem to have many believing (or is it hoping?).

    How come everyone is so soft on this company?
    I do not understand this.

  3. “The 787 will be a good/great airplane when certain block points are achieved”

    That is certainly true. My only concern is with regards to the FT programme. It is not a question of running it ’24/7′, the problem is results. Having worked with people who were working on the flight test, the big problem is getting good quality data to analyse + the time to analyse it. I don’t want to go into too much detail but will say that if they manage to do it in anything less than 8 month, it will be an achievement. I think they had put themselves under unnecessary pressure and hope that the fiasco post the ‘roll out’ will not be repeated with the flight test.

  4. 787 will arrive when the weight is under control, and especially when the -9 enters service. Until then, my jury will be out.

    I too, am uneasy with the highly compressed F/T program.

    There is just no precedent for it, no benchmark. All that can mean is uncertainty and risk, and the markets hate both.

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