Boeing still sure delayed 787 will be profitable

Boeing said Thursday it will still make a profit on its 787 Dreamliner program, now the most delayed — and, according to analysts, the most expensive — jet in the company's history.

Even as executives announced a massive $2.5 billion write-off associated with the first-flight delays that now stretch to 28 months, they expressed confidence in its latest revised schedule.

Analysts are concerned about the mounting costs, but most were relieved the Dreamliner program is not in the red. In response, Boeing stock surged 8.4 percent.

The new plan calls for the 787 to make its first flight by the end of this year.

Boeing also extended its flight-test program by one to three months longer than previously planned, so the first delivery to initial customer All Nippon Airways of Japan is now due in the final quarter of 2010.

The new timetable came two months after the plane maker announced a shocking last-minute delay to the planned first flight in June, postponed after stress tests revealed a structural flaw where the upper wing joins the side of the fuselage.

First flight originally was scheduled to happen precisely two years before Thursday's announcement — Aug. 27, 2007.

"This is an incredibly complex program that's been very tough to execute," Boeing CEO Jim McNerney told employees in an internal message Thursday. "I know that none of us inside the company feel good about how the 787 program has played out over the past 18 to 24 months."

But McNerney said he has "a high degree of confidence" in Boeing's plan to fix the Dreamliner's structural problem, and in its new schedule.

"Having said that, we have added some cushion into the flight-test program against the possibility of unknowns," he said in a conference call.

Pat Shanahan, vice president of airplane programs, said the "more conservative" flight-test schedule will provide a buffer to protect customer delivery dates from further slippage.

"We have left a little wiggle room, and it's little," Shanahan said. "It's just to accommodate any disruption we might have in flight test or incorporating the [fix to the] side of body."

Boeing Commercial Airplanes CEO Scott Carson said that because the final-assembly line in Everett can roll out up to seven jets per month, a second line will be needed to meet the goal of delivering 10 Dreamliners a month by the end of 2013.

Boeing has said contenders for the second line are Everett; North Charleston, S.C.; and some unnamed locations. A site choice is due by the end of the year.

Boeing said it will take a $2.5 billion accounting charge this quarter because it considers the first three Dreamliners built to fly — airplanes that have been extensively modified and remodified — unsellable and suitable only for flight tests.

"Each airplane, while fully suited for the rigorous flight-test program and fully capable of meeting FAA certification requirements, has been determined to have limited commercial value," Carson said.

Boeing still hopes to sell the three other flight-test planes as private jets.

The $2.5 billion figure represents the total amount spent to build those first three airplanes, including the costs of all the rework of initial assembly because of supply-chain problems, then the redesigns and modifications needed to fix structural problems.

But this is money already spent, so there is no hit to the company's current cash position. "Substantially all of the cash outlays related to the amount written off have already occurred over the past couple of years," Boeing Chief Financial Officer James Bell said.

He insisted that, despite that expense and further billions of dollars in costs incurred due to the delays, the Dreamliner program still will be profitable over the long term as Boeing delivers its large backlog of orders.

Morgan Stanley analyst Heidi Wood estimated this month that Boeing's total 787 costs — including research and development spending, plus supplier claims, penalty payments to airlines for late delivery and the cost to set up a second assembly line — could be "in the vicinity of $20 billion."

Joe Campbell, an analyst with Barclays Capital, said he's now more worried about the cost of the program than the schedule.

He said Boeing has balked at requests from 787 supplier partners, which for more than two years have absorbed growing costs with no incoming revenue, to steeply increase what they are paid.

If Boeing were forced to comply, he said, the fixed costs per plane potentially could be raised to unprofitable levels.

Rob Stallard, an analyst with Macquarie Securities, wrote that the $2.5 billion write-off "is rather eye-watering, but we think it is better to take the pain now, remove the overhang and get on with the program."

Stock traders seemed to agree. Boeing shares rose $4 to close at $51.82.

For now, Boeing's focus is getting back on schedule.

The latest delay, which pushes out first flight as much as six months from the previous June 30 target, became necessary after engineers performing a stress test on the wing discovered that excess load at the ends of each of the wing stringers — the rods that stiffen the wing skins — had caused the fibrous layers of the composite plastic material to separate, or delaminate.

Shanahan said the fix for that flaw has been identified and tested on computer models. It will be installed simultaneously on both Dreamliner No. 1, the plane that will fly first, and on the ground-test airplane where the flaw was discovered.

Tests will be conducted on the ground to make sure that, with the fix installed, the delamination of the composite layers no longer occurs.

"I have absolute confidence that the analysis, the modeling and the design associated with the side-of-body [flaw] will work," Shanahan said.

He called the fix, "a straightforward modification."

"I don't think there is a fundamental change to how we look at composite design or how we look at the design of the wing," he said.

But he said installing the fix on each plane is difficult and slow due to "the limited access in the side-of-body area and the number of mechanics who can work in the center wing box at a given time."

The first 15 Dreamliners will have the fix done in Everett. For subsequent jets, the wing-box suppliers will do modifications in Japan before sending the sections for final assembly.

Shanahan said other tests have proceeded while engineers have been working out the wing join fix. As a result, the first two airplanes otherwise are ready to take to the air.

"Both airplanes are functionally ready to fly on all accounts other than the side-of-body discovery," Shanahan said.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com