787 delay could wind up costing Boeing $1 billion

Penalties paid to customers may hit $200M, top analyst says

The recently announced six-month delay in the 787 Dreamliner program could cost Boeing close to $1 billion in added expenses, a leading Wall Street analyst said Wednesday.

In a teleconference to discuss Boeing's third-quarter results, Chief Executive Jim McNerney and Chief Financial Officer James Bell projected that the six-month slide in delivering the 787 will cause a $3.5 billion drop in next year's revenues. Yet they reaffirmed that profit for 2008 is expected to hold up.

The big hit from the 787 delay is buried deeper in the quarterly financial details:

? $200 million assigned for extra research-and-development spending on the Dreamliner.

? About $500 million set aside as a contingency, said Bell, "to protect against any increases in costs in the supply chain as we go forward and deal with the disruption associated with the slide."

? Added to that, Boeing will have to pay an estimated $200 million or so in penalties to airline customers, according to a separate calculation by analyst Joe Campbell of Lehman Brothers.

Campbell said it's realistic to expect Boeing could pay more than $900 million in extra costs.

"When a program this big gets messed up, to get away with $1 billion, you did good," he said.

Beyond the 787, Boeing's broader financial numbers for the last quarter were strong. Net profit was up nearly 61 percent from last year's third quarter, to $1.1 billion. Adjusting for a one-time charge last year, it was still up 30 percent.

The company's order backlog stands at $300 billion, fully $224 billion of that in the booming commercial-airplane division.

Still, the singular focus in the conference call with Wall Street analysts was the 2008 impact of the 787 delay and prospects for getting back on track.

McNerney said Boeing is pouring money and people into the Dreamliner program to meet the new schedule so that the revenue impact is temporary and much of the lost cash flow can be recouped in 2009.

Only a handful of Dreamliners three or four, McNerney said are now expected to go to customers by the end of 2008. As Boeing outlined two weeks ago, first flight is set for around the end of March and first delivery by December.

McNerney said that by the first delivery, some 55 to 65 Dreamliners will be in the process of construction. Later Wednesday, Boeing clarified that only 40 to 45 of those will be at the Everett plant completed and awaiting delivery.

That clutter of jets on the flight line at Paine Field is supposed to prime the pump for a total 109 deliveries by the end of 2009, just three less than the original plan.

McNerney insisted Boeing can pull off building almost the same number of airplanes in a time frame six months shorter.

Even as Everett mechanics scramble to fix the problematic first two jets, he said, the major suppliers will maintain something close to the original production plan and fill the pipeline with the 787's large structures ready for final assembly.

"We're continuing to build the major subassemblies for the airplane at the same rate," said McNerney. "It's the deliveries that will be pushed out.

"The majority of the supply-chain work will continue on the old schedule," he said.

Analyst Campbell remains skeptical.

"Do I believe the production schedule is now safe? Have they taken the risk out of the manufacturing?" he asked rhetorically in an interview. "It's hard to see."

Campbell said he's waiting for more detail from Boeing to determine if the revised production plan is too aggressive.

A detailed revision of the manufacturing schedule will be ready within the next two to three weeks, McNerney said, one that "addresses not only the timing of supplier deliveries to us but also the quality and completeness of parts and assemblies provided by the supply chain."

That points to the crux of the 787 delay. McNerney acknowledged that some of the first large 787 structures to arrive in Everett were incomplete and that even the work that had been done was inadequately documented.

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