Boeing webcast on 787 8/27

Update:

Here is a 16 minute podcast about the conference call and news.

Original Post:

Here is a running recap of the Boeing webcast on the announcement today of the new schedule and $2.5bn charge.

Present on the call are CEO Jim McNerney, CFO James Bell, Scott Carson, CEO of BCA, and Pat Shanahan, VP Products at BCA.

McNerney (JM): There is no question the execution of this program has had challenges and there is work still to be done. We see the 787 adding tremendous value to the customers and Boeing.

Carson (SC): We are contacting customers with timing of deliveries. 787-9 first delivery in 4Q13. As part of schedule adjustment increased time between first flight and first delivery to address issues that might arise during testing. First three test airplanes, suitable for flight testing and certification, have limited commercial value.

Shanahan (PS): Over past two months engineering has developed full understanding of stresses and modeling has been tested. Straight-forward modification but installation is difficult due to space available and number of people who can be inside to modify. Static test will be repeated before first flight. Modifications on planes 1-15 will be done in Everett; from #16, mods will be done at partners. On airplanes 1 and 2, software changes have been implemented. Both airplanes are ready to fly except for wing-to-body modifications.

Bell (JB): The program is not in a forward loss position. $2.5bn charge on test airplanes will be taken in 3Q09. Six test airplanes were originally to be refurbished for commercial delivery, and now we determined that the first three flight test airplanes can’t easily be sold and therefore won’t market the first three test aircraft. The sole use for these aircraft is now for flight testing. We believe we can sell flight test airplanes 4-6. First three airplanes removed from program accounting but last three remain in program accounting.

Q&A begins.

JB: It would not be fair to say that if Boeing weren’t taking this $2.5bn that there otherwise would be a forward loss position. Taking this loss has positive implications for future profitability of the program.

SC: Possibility of planes 4-6 being sold in executive market continue to look to be commercially viable and marketable. JB: inventory value on these three is considerably less than on first three but don’t disclose the value.

JB: Operating models and productivity improvements from lessons learned went into analyzing whether there would be a forward loss. Analysts cannot assume the $2.5bn represents the cushion between a forward loss and not a forward loss.

JM: We’ve gone through a pretty thorough analysis on the side-of-body to understand the fix and implementation of fix to determine schedule. We have a high degree of confidence for the fix and implementation. We have added flight test cushion to schedule for unknowns but internally will be running to previously planned flight schedule.

PS: Why should our confidence be higher in the schedule so we don’t have to do another call like this? Time has passed since June and we continue to mature the airplanes, testing, sub-assembly testing, we are seeing a lot of maturity in airplanes themselves as we taxi. The pilots tell us the airplanes are ready to fly. I feel confident in side-of-body fix. The analysis has tracked as originally thought. So question is how do we maximize concurrency so we can go forward? I feel confident.

SC: We will continue to refine discussions with customers about who takes what airplane when. We have stayed in touch with supply base and discussions contine to proceed. Having the schedule in place and looking at global economic conditions that may influence when customers want the airplanes will influence delivery schedule.

SC: First three airplanes will be FAA-type certified.

JB: We will be looking at R&D effort going forward for derivatives and look at plan how much balance we will have to have better control. We won’t take everything back and redraw the lines but we are using lessons learned to come to some concrete assumption how we will do that. We are looking at how we can make this operating model better going forward for us and supply partners. We are not looking to shift burden to partners.

PS: The models still remain credible, added clarity to models and testing adds greater fidelity and understanding to center wing box and body join. We’ve changed the model so that the model will show conditions. We feel comfortable now designing to those models. I have absolute confidence that the analysis for side of body and it works. There is nothing that has drawn us to other parts of the airplane that draws analysis.

JB: We can’t give delivery guidance on 2011 and 2012. Same ramp up as prior schedule.

SC: Second line is required when we get to rates above seven a month. We are in the process of evaluating where it will be by YE. We placed a hedging move in South Carolina to assure we did not have an adminstrative issue and we can now evaluate two sites, including availability of trained personnel, costs, and meeting schedule. Permitting process is about meeting schedule.

JB: Inventory continues to grow at about $800m per quarter. $2.5bn expense is a significant increase to previously expended R&D.

PS: Extended flight testing schedule is a more conservative approach, not reflective of any new issue. It’s to allow if anything comes up with side-of-body issue.

SC: Will decide on Line 2 late this year and this supports the schedule of 10/mo by 2013. Each supplier is in a little different condition to support a higher rate but we are more constrained than they are, generally, about where we put the second line.

SC: We have taken steps a number of times to strengthen the team, done a lot more outreach with supply base than we did initially. The team has held up very well to the challenges. We have brought people in from IDS and other locations.

5 Comments on “Boeing webcast on 787 8/27

  1. At the time when the 787 programme was launched back in 2004, I seem to recall that Boeing’s production target was 10 aircraft per month by 2012 on a single line. Therefore, it is significant that the company now believes that a second line will be required for rates over 7 per month. The reason for this significant decrease must be the realisation that the final assembly of 787s will be more time consuming than projected when the programme was launched.

  2. Here’s my opinion on the call:

    I took the idiotic runup in BA stock today as an opportunity to sell off a sizable chunk of my remaining position. I then spent the proceeds buying Jan 10′ BA puts with a 40 strike.

    Today’s runup was based on… well nothing but market desperation to find something, anything to buy. Heck, the fools have been buying consumer discretionary stocks for a couple days now after the cyclicals topped out. And the hedge fund managers saw the opportunity to fleece some suckers, as you will see when the next selloff occurs.

    As I predicted, BA took the charge, and at least they were up front enough to do that much. But even that was disngenuous on further examination, as we then learn that the first three are essentially pile of scrap carbon fiber that have no useful value in commercial service. Three underperforming, cobbed together 787 bizjets with no presold customers. That accounted for the charge….

    That only means ANOTHER charge will be coming for Q4 09 or Q1 10′. Today’s charge in no way accounts for excess program costs due to high spend/zero revenue. And Boeing commercial intends to stay afloat by having a fire sale on 737’s (MOL,are you listening) and probably selling more bonds. Look for NO production cuts on 737. They will practically give them away rather than lose the tinyest trickle of revenue.

    Then they have the moxie to still claim no forward loss. On what kind of voodoo accounting they base that on I have yet to discover. Bell’s reputation is now in the bin with that of his boss. Apparantly, nobody had the stones to pin down Bell on the accounting quantity he was using.

    And the final stake through the heart, you have the comments on the -9.

    Something doesn’t add up.

    If you supposedly want a second line up and running by 2012 (particulary in charlston) and have it dedicated to the -9, and have it in customer hands by 2013?

    That is simply not going to happen. That is a load. That is BS. If they keep the second line in everett, I still have severe doubts.

    At very least this means that when Boeing’s current union contracts expire, there will be no second line generating revenue anywhere, thus materially strengthening the Union’s bargaining position a great deal. If the second line is established in charlston, and producing no income in late 2012 as I predict, the unions are going to be angry, and have the perfect opportunity to get the boot in in a big way.

    And as OV-099 observed, if 7/mo in going to be max rate for a single line, Boeing’s estimates of the cost of production ar catastrophically off the mark.

  3. Some more thoughts on forward loss.

    By taking the charge on the first three, and writing them off, on paper anyway, Bell avoided having to declare a forward loss…for now.

    But it shows just what shakey ground he stands on, and his willingness to use slight of hand with the numbers to try and obscure the facts.

    I will reiterate that this sort of smoke and mirrors cannot fool those who think things through.

    And I suspect that if BA comes close (er)to a forward loss on 787 again, they may well write off #s 4, 5, and 6 in the same manner for the same reason.

    But they are just delaying the inevitable here.

  4. “Then they have the moxie to still claim no forward loss. On what kind of voodoo accounting they base that on I have yet to discover. Bell’s reputation is now in the bin with that of his boss. Apparantly, nobody had the stones to pin down Bell on the accounting quantity he was using.”

    I agree that this is strange on the part of the analysts. Boeing stating they are not in an FL position without stating the accounting base is a bit like me claiming I am a billionaire, but refusing to mention the currency I count that in.

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