Tuesday, January 07, 2014

Boeing's Key Mission: Cut Dreamliner Cost




The Wall Street Journal

By  Jon Ostrower

 
Jan. 7, 2014 8:14 p.m. ET

Boeing Co. showed in 2013 that having burning batteries aboard its most-advanced aircraft wasn't necessarily bad for business.

Despite a series of embarrassments, including the temporary grounding of its flagship 787 Dreamliner after two battery incidents, Boeing's commercial-jet business had one of its best years ever.

This is expected to be another banner year for the company, but to succeed in the long run, Boeing will have to slash the cost of building the Dreamliner while meeting ambitious delivery schedules for six new commercial-jet models it plans to churn out in the next six years.

Boeing booked its fourth consecutive increase in net new aircraft orders last year. The aerospace giant also topped its previous record for jet deliveries, and is set to surpass rival Airbus Group NV for the second year in a row. Operating profit at Boeing's commercial-jet division soared 24% to $4.3 billion in the first nine months of 2013, and the full-year number likely exceeded the high of $4.7 billion set in 2012.

Boeing shares, meanwhile, are trading near an all-time high after rising more than 80% last year, making the stock the year's best performer in the Dow Jones Industrial Average.

The strong financial performance came even as Boeing was beset by the 3½-month grounding of the Dreamliner, an unrelated fire aboard one of the new planes and a spate of reliability issues that have frustrated the aircraft's customers. The gains partly stem from the airline industry's voracious demand for new fuel-efficient jets.

"At the end of the day airlines are focused on economics, and the economics [of the 787] look pretty good," said Richard Aboulafia, vice president of analysis for the Teal Group aerospace consulting firm.

For Boeing, the cost of producing the Dreamliner, which was delayed by 3½ years because of design and manufacturing problems, is a thorny issue. The Dreamliners delivered so far continue to cost the company much more to make than what it charges for them, a fact obscured by its soaring financial results.

In effect, Boeing's accounting method lets it book future profits now by spreading out the costs and revenue from the 1,300 Dreamliners it expects to deliver over roughly a decade. Boeing says it uses this "program accounting" because of the huge sums needed to develop new jetliners and to manufacture early versions of them, before production becomes more efficient.

If Boeing booked the difference between current sales and costs for each product it delivers, the way most companies do, its commercial-jet division's operating profit for the first nine months of 2013 would instead have been a $69 million loss, according to company figures.

Boeing's cumulative Dreamliner sales pushed past 1,000 in 2013, its first strongly positive sales year since 2008, helped by its launch in June of the new stretched version, dubbed the 787-10.

The company doesn't provide cost and sales data for specific planes, but its single-aisle 737 and long-range 777 generate millions of profit on each delivery, helping to offset the Dreamliner's cash drain.

"On a cash basis, [Boeing is] losing quite a bit of money on every [787] aircraft they ship," said Joseph Nadol, an analyst at J.P. Morgan Chase & Co. Mr. Nadol estimates that Boeing's unit costs for delivering each 787 exceeded the plane's estimated $115 million average selling price by $45 million in the third quarter, down from $73 million in the first quarter.

Mr. Nadol expects Boeing to continue outperforming the market. But, he adds, the question of whether it can reverse the loss per plane on its forecast schedule in the coming years remains the "elephant in the room."

Boeing classifies the gap between what it currently costs to build a Dreamliner and the program's average estimated costs as "deferred production costs."

It has made aggressive efforts to reduce the aircraft's costs by reorganizing its plants for greater efficiency and renegotiating contracts with suppliers and its labor unions. But it projects that deferred costs for the aircraft will rise to $25 billion before it breaks even on the Dreamliner's average costs and the program starts to dig itself out of the hole, likely around 2015.

The comparable hole for Boeing's last new twin-aisle jet, the 777, first delivered in 1995, was about $3.7 billion, adjusted for inflation, Boeing data show.

Chief Financial Officer Greg Smith said in October that Boeing no longer considered deferred production costs a useful indicator of the Dreamliner program's progress. But analysts say it remains the clearest measure of the 787's cash consumption.

Boeing says it plans to increase production, which is now 10 jets a month, to 12 a month in 2016 and 14 a month by the end of the decade. And, it said that as output accelerates, it will plug the $25 billion gap more quickly.

In October, Boeing increased its estimate of deferred-production from $20 billion, citing higher costs to introduce the 787-10 and changes in its factories to increase production. In December, the company detailed plans to add capacity at its factory and flight line in North Charleston, S.C. in 2014 and 2015, according to documents from the U.S. Army Corp of Engineers.

For the Dreamliner's customers, the payoff has been quicker. The jet's carbon-fiber fuselage, next-generation engines and advanced electronics were designed to lower airlines' costs.

The chief executive of LOT Polish Airlines, another Dreamliner customer, said last month that the 787's cost savings were central to the airline's restructuring efforts and attracted lucrative premium and business-class travelers, helping the carrier narrow a projected operating loss for fiscal 2013 to $6.6 million from $47 million. LOT also said it was compensated by Boeing for Dreamliner troubles, but didn't disclose the amount.

Dreamliners flown by United Continental Holdings Inc., the plane's sole U.S. operator, have been roughly 6% more cost-efficient per seat to operate in 2013 than the equivalent-sized Airbus A330s flown by several other U.S. airlines, according to an analysis by aviation consulting firm AirInsight of the carriers' filings with the Transportation Department. Such figures are often revised as airlines provide additional information.

A United spokeswoman said the 787 "offers vast improvements from previous generation aircraft" and helps hedge against fluctuating fuel prices. As the only aircraft of its size that can fly nonstop for more than 14 hours, it is opening new routes to Asia and Africa, she said.

Crawford Hamilton, a senior marketing executive at Airbus, said its A330 is 6% cheaper to operate in total than the Dreamliner when factoring in the A330's lower purchase and lease costs.

Though safety investigators in the U.S. and Japan have yet to pinpoint what caused the lithium-ion batteries aboard two Dreamliners to overheat last January, they lifted the grounding in April after Boeing made changes in the battery system that included a steel containment box and a new venting system. Since then the number of Dreamliners in service has doubled to more than 100.

In July, an Ethiopian Airlines 787 parked at London's Heathrow Airport caught fire. No one was injured, but the damage was extensive. Investigators have focused their inquiry on emergency-locator beacons made by another company and installed on thousands of airplanes world-wide

The Dreamliner still faces more routine technical problems. Top officials from long-haul low-cost airline Norwegian Air Shuttle ASA were in the U.S. Tuesday to discuss with Boeing the carrier's continuing headaches with the Dreamliner. The airline says it spent 101 million Norwegian kroner ($17 million) to lease replacement aircraft that burn more fuel and to provide accommodation, food and drink for delayed passengers. 


Source:  http://online.wsj.com