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Originally published July 24, 2013 at 12:29 PM | Page modified July 25, 2013 at 12:30 PM

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Boeing aims to ramp up jet output, not local jobs

While production on the 787 and other jets is set to boom here, employment apparently is not.

Seattle Times aerospace reporter

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Boeing painted an optimistic picture of future production and profits as it announced better than expected quarterly results Wednesday.

Chief Executive Jim McNerney even shrugged aside the July 12 Dreamliner fire at London’s Heathrow Airport as a blip in the new jet’s progress.

“We remain highly confident in the future of the 787 program and the integrity, safety and performance of the airplane,” McNerney said in a conference call.

But executives also underscored Boeing’s unrelenting campaign to lower costs, which may come at the expense of local jobs.

While production of the 787 and other jets is to boom here, employment apparently is not.

Asked about Puget Sound-area job cuts this year and future job prospects, Chief Financial Officer Greg Smith spoke of moving work to lower-cost regions of the U.S.

“We made choices to go to more affordable areas within the business to ... drive productivity and profitability,” said Smith.

Boeing is looking to place more work at sites “where we see lower overall cost rates,” he added.

Though Boeing’s leadership had made similar statements, they typically came either during union contract bargaining or when management was seeking incentives to locate a new airplane program here.

In contrast, Smith’s remarks were a statement of a general strategic push that threatens to lower Boeing’s already sagging employment level in the Puget Sound region.

Smith said the projected 800 layoffs in the production workforce announced in March were driven by improved efficiency as the 787 shifted to smoother, more routine assembly work.

But other job cuts here — such as the movement of IT jobs to Missouri and South Carolina and up to 700 layoffs in engineering that were announced in April — were apparently more driven by cost considerations.

Even as engineering-employment rates here are set to fall, Boeing has placed some 737 MAX engineering design work in South Carolina and moved some engineering support work on older jets to California.

As for the future employment trend here, Smith said: “We peaked out last year. We’re starting to come down this year and will continue to assess that going forward.

“We are looking at every opportunity to continue to drive productivity and profitability.”

In a later conversation, Boeing spokesman Chaz Bickers said Smith’s remarks about employment costs here were broadly applicable as Boeing responds to the competitive nature of the commercial business and to defense-side cuts.

Boeing defense jobs have disappeared in the Puget Sound region, too.

Bickers said some corporate support functions have been “centralized to bring down cost.” For example, he said, accounting for the defense division has been centralized in St. Louis.

McNerney attributed much of Wednesday’s upbeat earnings news to such cost cutting and efficiency improvements.

In response to defense cuts, he said, “We’ve gotten after our costs very aggressively and very early.”

And Smith said the better-than-expected profit margins on the commercial side came down to “a very solid, disciplined focus ... on all aspects of cost.”

Overall, Boeing took in revenue for the quarter of nearly $22 billion, and reported a net profit of $1.1 billion, for a profit margin of 7.9 percent.

Boeing’s stock closed down 84 cents, or 0.8 percent, at $106.95 Wednesday.

Despite spending $1 billion on share buybacks and issuing $400 million in dividends, the company ended the quarter with a massive cash and liquid-asset hoard of $14.3 billion.

With 787 deliveries up compared with a year ago, the commercial-jet division’s revenue was up 15 percent to $13.6 billion. Its reported earnings from operations jumped 20 percent to $1.45 billion.

Boeing delivered 16 Dreamliners in the quarter, compared with just one in the first quarter, when the planes were grounded.

Although those deliveries boost revenue, they actually lower profit margins because each Dreamliner still costs more to build than Boeing customers paid for it.

Carter Copeland, an analyst with Barclays Capital, estimates from the earnings data that the 787s delivered in the quarter each cost about $195 million to build.

That’s down from about $240 million for 787s built six months ago, a substantial improvement. Still, customers paid no more than $100 million each.

Asked during the teleconference when the 787 would be profitable, Smith responded flatly that “the program is profitable today.”

However, this is true only through the lens of Boeing’s “program accounting” system, which defers for years the heavy early production costs of new airplane programs.

Dreamliner losses in this and previous quarters are spread out over years ahead for accounting purposes, with the assumption that they’ll be erased by later profits when the manufacturing process is mature.

To date, Boeing has deferred a running total of nearly $19 billion in 787 costs already spent that won’t appear in the profit and loss calculations until much later.

In a footnote to the results, Boeing said that if the accounting is done on the basis of cost per airplane built, the commercial division did not earn $1.45 billion from its operations, but actually lost $104 million in the quarter.

On that basis, the 787 and 747-8 losses within the quarter more than wiped out all the profits from the mature 777 and 737 jet programs.

Still, on the basis of program accounting, Smith raised the profit guidance for the year.

And Boeing maintained its projection of delivering a record 635 to 645 airliners this year, including at least 60 Dreamliners.

Meanwhile, the company’s defense division is preparing for significant cuts that could hit next year under the congressional budget “sequestration” process.

“We are ... anticipating some pretty draconian kinds of scenarios and we are not out of the woods at all. We’re just entering the woods,” said McNerney.

Counterbalancing that, McNerney said commercial demand is led by “strong customer interest in our future new airplanes.”

The 787 fleet was grounded earlier this year after the 787’s main batteries overheated in two major incidents. McNerney said Boeing has already fully compensated its airline customers for that, with no material financial impact.

As for the Ethiopian Airlines 787 that caught fire while parked at Heathrow Airport, McNerney said Boeing is in discussions with the carrier as to what should be done with the badly damaged jet.

“Both we and the carrier have insurance,” McNerney said, so the financial impact will be “very little.”

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

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