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Originally published April 23, 2009 at 12:00 AM | Page modified April 24, 2009 at 2:56 PM

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Corrected version

Boeing delivers mix of good and bad news

Boeing's quarterly net profit fell by half due to the worldwide slump gripping its airline customers, and Wall Street analysts foresee project the need for further cuts to airplane production and employment next year, but Boeing chief executive Jim McNerney leavened bad news with good.

Seattle Times aerospace reporter

In the opening three months of 2009, Boeing's net profit fell by half due to the worldwide slump gripping its airline customers. Cash from operations was a tenth of what it was a year ago.

And Wall Street analysts foresee the need for further cuts to airplane production and employment next year.

Yet in a morning conference call with those analysts, Boeing CEO Jim McNerney leavened bad news with good.

McNerney acknowledged that customers have already deferred deliveries on some 60 airplanes that had been scheduled to roll out in 2010 and 2011. Boeing is in discussions about deferrals of more than 60 others.

But the 787 Dreamliner is on track to fly in June, with ground tests proceeding well, he said.

"All the airplane systems, including engines, are cleared for first flight," McNerney said. "We've also completed the structural testing on the static airplane that is required for first flight."

And despite a major cut in 777 production in Everett from seven to five airplanes per month, which Boeing announced April 9 and will put into effect next year, McNerney said he has "reasonable confidence" the 737 production rate in Renton won't be reduced, thanks to deliberate overbooking of delivery slots for the single-aisle jet.

He contrasted Boeing's position in the single-aisle jet market favorably with that of rival Airbus.

Airbus "ramped up much more aggressively on production rates. We were restrained," McNerney said. "So, we had a lot more over-ordering in our backlog, anticipating that some day there may be a softening, which is what we are seeing right now."

Yet Boeing Chief Financial Officer James Bell conceded the 737 overbooking of 2010 deliveries has already been absorbed, and he failed to convince analysts the single-aisle production rate can hold.

Rob Stallard, an analyst with Macquarie Securities, said that as Boeing negotiates with customers in trouble, it might only encourage more 737 deferrals if it announced reduced production of the jets.

Stallard is sticking to his forecast of a 737 rate cut in 2010, from 31 to 25 a month. Most analysts have similar projections.

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McNerney also said the new 747-8 jumbo-jet program, now operating at a loss and with just over 100 orders, is still viable and remains "a good niche airplane."

"We don't intend to kill the program," McNerney said.

However, with the freighter market in serious trouble, Boeing has shelved a planned increase in 747-8 production. As a result, the first delivery of the follow-on passenger version of the jet is pushed out six months, into the last quarter of 2011.

McNerney said Boeing is on track to reduce its total work force by 10,000 this year, a goal set before the 777 production cut was decided. That rate cut will mean more job losses next year.

Boeing's first-quarter profit was hit, as expected, by the accounting impact of the production cut and by reductions in jet pricing linked to deflation.

Those factors led to a charge of $435 million, or 38 cents a share, at the commercial-airplanes unit.

The rate reduction planned for next year contributed $200 million of that hit to the quarterly profit. That's because Boeing spreads its program costs out over hundreds of airplanes built over multiple years.

When it plans to build fewer planes in the accounting period, that means the costs per plane have to be increased.

And deflation in consumer and commodity prices affects Boeing's revenue because its jet contracts include clauses that assume inflation in the economy, to be covered by higher customer payments on delivery.

With general prices going down instead of up, the revenue expected from deliveries is sharply down, which contributed the remainder of that hefty charge.

The upshot is that profit was down even though quarterly revenue was up — 3 percent from the year-earlier period, to $16.5 billion, as the company delivered 121 commercial airplanes, up from 115 a year ago.

Profit from operations in the commercial-airplanes unit dropped to $417 million from $983 million a year ago.

Overall, Boeing earned $1 billion from its operations. Net profit was $610 million, or 86 cents a share, compared with $1.21 billion, or $1.62 a share, during the same period last year.

The company cut its profit forecast for the year by 35 cents to between $4.70 and $5.05 a share.

But in the current recession, Wall Street is looking more closely at cash flow than profit, said UBS analyst David Strauss.

Boeing netted $200 million in cash from operations and also borrowed $1.8 billion in new debt to increase its cash reserves to $4.2 billion. That war chest is still $3.5 billion lighter than it was a year ago.

"The fact that they went out for more debt is a signal that they are concerned from a cash-flow perspective about what can happen down the road," said Strauss. "They need more cushion."

On the defense side, McNerney expressed concern about the prospect of big cuts in Pentagon spending, with major Boeing programs tagged for reductions by Secretary of Defense Robert Gates. However, he said the budget plan announced by Gates is only the beginning of a long congressional appropriations process.

He clearly hopes to see political pressure mitigate the proposed cuts.

"Over the course of the next few months, we expect a healthy and rigorous discussion as Congress evaluates the proposals and determines the funding for each program," McNerney said.

Though defense-unit profits dropped 18 percent from the same quarter last year, Boeing said that was mainly due to the timing of deliveries of some big-ticket items, including C-17 heavy-lift military cargo jets.

Boeing's stock closed up 65 cents, or 1.8 percent, at $37.30 Wednesday.

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

Information in this article, originally published April 23, 2009, was corrected April 24, 2009. A previous version of this story misidentified the affiliation of Wall Street analyst Rob Stallard. He is a research analyst with Macquarie Securities.

Copyright © 2009 The Seattle Times Company

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