Boeing will update its 787 program Wednesday (April 9) at 11 am EDT, when officials are expected to confirm the widely reported additional six month delay. A Reuters report suggests the new delay could be six to nine months, but nothing we’ve heard suggests the upper end of this range and the “street” consensus comes in at six months.
Wall Street analysts are restless. They make stock recommendations based on company statements and they’ve been embarrassed a couple of times as previous Boeing pronouncements proved to be wrong. In Boeing’s defense, predicting delays for a program as complex as building a new airplane must be problematic at best. Just ask Airbus. But Boeing certainly hasn’t helped its case when officials make definitive statements that the program is on time when all signs are that it’s not. As we previously reported, Boeing Commercial Airplanes president Scott Carson made a presentation at a Cowen Co. investors conference and said firmly that Boeing was sticking to its schedule of power-on at the end of March and first flight at the end of June. A week later James Bell, chief financial officer of parent The Boeing Co., made a similar statement at a Lehman Brothers investors conference. His remarks were likewise firm and unequivocal.
Considering that we were already hearing then that another delay was likely, we were surprised that neither Carson nor Bell left themselves any wiggle room.
This time around, corporate communications and others began hedging when Wall Street analysts issued reports of likely new delays, two weeks after the Carson-Bell comments. This is to Boeing’s credit, and corporate communications was more forthcoming about the issues this time than in the past–also to its credit. Then a story in The Wall Street Journal, presumably carefully leaked, all but confirmed the six month delay.
When the news comes from Boeing tomorrow, there won’t be a surprise (unless, of course, nine months is announced). The stock has already been beat down, so absent any shocker tomorrow, the market reaction should be pretty benign.
But that won’t stop the skepticism. Analysts have been unpleasantly surprised too many times and they will continue to wonder if there won’t be another one down the road. The problem for Boeing, of course, is that having damaged its credibility, it will be impossible to prove the negative–that there won’t be another delay.
Analysts are now turning to the cost to Boeing. Morningstar predicts the penalty costs will be $800 million to $1 billion. Wachovia issued a report today that forecasts penalties will cost $2 billion to $3 billion by the time Boeing gets the program, and deliveries, back on track (though Wachovia also admits this is a soft number).
So far we haven’t seen an analyst report that attempts to add up all the cost overruns, additional R&D money as well as the penalties. What we know is that Boeing has previously announced the addition of $1.5 billion in costs to the production and engineering of the program, but this is a pretty old number. The acquisition of the Vought portion (50%) of Global Aeronautica, the troubled South Carolina facility, is, we believe, essentially a no-cash deal. Terms weren’t announced but we understand accelerated payments for work done and work to be done offsets the acquisition cost and perhaps any potential liquidated damages for failure to perform.
It’s possible but unlikely that Scott Carson and program manager Pat Shanahan will get into the program costs and penalties. These are more appropriate questions for the Boeing first quarter earnings call due late this month.
We expect tough questions on the update call and tough questions on the earnings call.
We’ve been asked by media whether the new delay will mean any cancellations. Analysts have already written that they don’t think so and neither do we. For one thing, there is nothing wrong with the airplane itself: the 787 will be the ground-breaking airplane as has been advertised all along. For another, there is no place for airlines to go if they did want to cancel. Boeing’s own 767 and 777 lines are sold out to well beyond the date the 787 program is anticipated to be back on track. Boeing can’t flip a switch and boost production on either line for near-term orders because the supply chain can’t respond quickly enough. Airbus’ A330 line is sold out as well. So the airlines have to try and find lift on the used market, not from the production lines at Boeing or Airbus.
We’ve also been asked by the media whether all these problems prove the production model is flawed. Our answer to this is “no.” The execution of the model has obviously been flawed, and Boeing has acknowledged this on previous conference calls when officials admitted they failed to provide the oversight needed, and some suppliers and industrial partners failed to perform. We continue to believe that once Boeing gets the execution right, the production model will revolutionize airplane building. Assembling an airplane in three days is a fantastic opportunity. With the huge global demand over the next 20 years, this futuristic foresight can have nothing but benefit when the execution is fixed.
We’ll be reporting tomorrow following the update with news and analysis.
Update, April 8 530 PM PDT: We’re told Airbus is going to 12 A330s/A340s a month in 2009 from 10 in 2008. This has been under consideration but we’re hearing it’s a “fact” and if true, it’s sooner than expected. This could give Airbus some ability to offer the A330 as interim or supplemental lift to disappointed 787 customers.
Steve Trimble of Flight International has this bizarre piece. It’s about the Joint Cargo Aircraft, the C27J, which is being acquired by the Army and the US Air Force. It turns out the Army is paying half that of the Air Force.
As an aside, this is an Italian airplane made by Alenia (the same company involved in the Boeing 787 program). This European company partnered with a US company to make the big to the Pentagon. This sounds familiar, doesn’t it?
The US company partner is–Boeing.
This story by Dominic Gates of The Seattle Times paints a grim picture for Boeing’s Integrated Defense Systems. He points out that IDS “can’t boast even a single prime contract to supply the US military’s next generation of fighters, bombers, tankers and transport planes.”
Here’s an article from Aviation Week discussing China’s plans to build a plane that directly targets the Boeing 737 and Airbus A320 lines and another in The Australian about the engine competition between GE and Rolls-Royce that’s developed concurrently with the rivalry between Airbus and Boeing.
Here is the Boeing GAO Supplmental Filing of Boeing’s tanker protest.
Update: 1000AM PDT: Boeing just wrapped up a conference call discussing the supplemental filing. The call largely went over the filing, and the Q&A was largely expansive on the filing. Read the filing and you’ll get the gist of the call.
A couple of points of interest:
Boeing expects to have a transcript of the call available later, as well as an audio archive. We’ve asked for the transcript when available and will post it here. The audio archive will be posted at Boeing’s Tanker Blog.
We’ll link select articles as they pop up on the Internet.
Update, April 4, 0730AM PDT: A few articles of interest:
Jed Babbin, former deputy undersecretary of defense for Bush 41, writes another well-reasoned piece on the tanker; he’s a pro-Boeing advocate and he, like his previous writing we linked, does a good job of avoiding histrionics.
Aviation Week’s Amy Butler does another in a series of fine reporting. Her piece is here.
George Talbot, reporting from Boeing’s “enemy territory,” The Mobile (AL) Press-Register, does his usual good reporting with this piece.
Meanwhile, in the Internet website wars, Northrop has launched a new site, America’s New Tanker. This serves as another effort by NGC to rebut Boeing’s PR campaign.
Update 0945AM PDT: Here’s another opinion piece, this one in support of the KC-30, from DefenseTech.org.
From The Wall Street Journal:
The Government Accountability Office denied motions filed by Northrop Grumman Corp. and the Air Force to dismiss parts of Boeing Co. protest of a $40 billion contract to provide aerial refueling jets.
Both companies characterized the developments as victories.
“Boeing’s decision to abandon the public relations rhetoric contained in its original protest filings is in keeping with our motion,” said Northrop spokesman Randy Belote in a statement. Northrop also said that it was encouraged that Boeing “streamlined” its approach.
“This decision is consistent with our view that full consideration of all appeal grounds is warranted,” Boeing said in a statement, calling it a “significant development” in the company’s appeal.
The full article is here.
Update, 400PM: We’ve obtained the redacted copy of the USAF Motion to Dismiss Boeing’s protest (which the GAO has now denied–the Motion to Dismiss, that is). The 49 page PDF provides extremely interesting reading in the dynamics between Boeing and the Air Force.
Update 740PM: Boeing says it did not narrow its protest, and claims this is only Northrop’s “spin.” Here’s a Reuters story.
Our Corporate Website has been updated with in-depth commentary. This week we write about eco-aviation and of technology transfer to Japan and the Boeing 787.
We quickly received a note from Lynn Lunsford of The Wall Street Journal on the latter subject. We cited a Forbes story in our comment–Lynn points out Forbes picked up the item from his piece on March 27. The relevant except is below:
In what could prove to be an important alliance, Mitsubishi Heavy has persuaded Boeing to participate in the program by working with it to adapt elements of the same carbon-fiber composite technology being used in Boeing‘s new 787 Dreamliner. Mitsubishi Heavy and two other Japanese companies are major financial partners with Boeing on the bigger jet, so they already have experience with these materials. By incorporating composite materials that don’t corrode or fatigue with age, Japanese officials hope to differentiate their product from those of competitors that rely largely on aluminum.
Mitsubishi Heavy and Japanese government officials had hoped that Boeing would sign on as a significant investor in the project, but the Chicago aerospace company declined, saying it needed to stay focused on getting its delayed Dreamliner out of the door. “We will participate in a limited way. Discussions are under way to determine exactly what will be of most value to the program,” said a Boeing executive familiar with the talks.
Here are some new developments on the continuing USAF tanker saga: