Friday, August 29, 2014

Boeing Struggles to Find Buyers for Early Version Dreamliners: Aerospace Company Has Tough Time Unloading 787s Built at the Height of Its Problems With Plane Design and Supply Chain Snafus

The Wall Street Journal
By Jon Ostrower

Aug. 29, 2014 5:32 p.m. ET

For sale: about 10 new Boeing Co.787 Dreamliners that no one seems to want.

Even as Boeing racks up record orders for its commercial jets, the plane maker has a pack of its flagship Dreamliners that it is struggling to move off the lot. Two customers this month canceled orders for nine of the planes, and finding new buyers could be tough without steep discounts, analysts say.

The problem: the jets come from a batch of early 787s built in 2009 and 2010 during the depths of Boeing's struggles with Dreamliner design and supply chain problems. Dubbed by some industry insiders as the "terrible teens," the jets are the 10th-to-19th and 22nd Dreamliners built. They have early design shortcomings that make them less efficient than more recently constructed units.

Boeing has largely recovered from its early stumbles with the Dreamliner, which boasts a lightweight composite fuselage and advanced electronics systems that has drawn huge interest from airlines. The 787 has amassed more than 1,000 orders faster than any other widebody jet in history, and more than 180 have been delivered since the first one entered commercial service in September 2011.

Asked about the cancellations of the "teens" jets, a Boeing spokesman said "requests to change orders—be they accelerations of deliveries, deferrals, option exercises or cancellations— are a daily part of our business."

"Demand for the 787 remains high—and when we have cancellations we begin marketing those airplanes to other customers," he said.

Each Dreamliner is expensive to build, but the earliest planes were the costliest as Boeing ironed out kinks in its design and manufacturing process. The first three 787s were so heavily modified after being repeatedly assembled and disassembled that Boeing wrote them off as a $2.7 billion research-and-development charge in 2009.

Even by mid-2012, when Boeing had worked through the worst of its production glitches, analysts estimated that each Dreamliner cost as much as $242 million each to build. That compares to a list price of $218.3 million before customary discounts, that can cut the sales price by about half.

Manufacturing costs for each new 787 that Boeing delivers continue to exceed the sales price, analysts say, but costs have come down considerably. Boeing counts the Dreamliner program as profitable based on accounting that spreads estimated costs and revenue out over many years, effectively taking credit for future profits in today's earnings.

All but one of the teens jets were built before Boeing engineered an increase in carrying capacity into the 787, starting with the 20th plane. That means the early version jets can't fly as far as those built later, plus they burn more fuel.

A Boeing spokesman wouldn't comment on the potential pricing of the early version jets.

Some of the first 20 or so planes have been sold successfully, including Nos. 20 and 21. Remaining teens Dreamliners have changed prospective buyers several times.

Some were originally intended for Chinese carriers, and later designated for airlines in Japan and Morocco.

In 2012, Indonesian discount airline Lion Air Group ordered five of the planes, and Russian carrier Transaero Airlines ordered four, according to two people familiar with the deal. Financial terms weren't disclosed.

This month, Lion Air said it canceled its five orders. A spokesman didn't respond to a request for comment. On Thursday, Boeing said another four 787 orders had been canceled, which a person briefed on the matter said were the teens jets ordered by Transaero. The Russian carrier didn't respond to a request for comment.

Currently LATAM Airlines Group, parent of LAN Airlines, has orders for two of the 11 teens jets, with a Korean buyer taking a third, according to people familiar with company plans.

Analysts say Boeing could still find buyers for the other planes.

Michel Merluzeau, managing partner at G2 Solutions, an aviation consultancy, said the remaining jets' performance limits and potentially low resale value could deter airline buyers. The jets still might find a place carrying VIPs for business-jet operators or governments, which tend to be less sensitive to the plane's performance issues.

"There's a price at which these planes can trade," said Howard Rubel, aerospace analyst at Jefferies LLC.

Meanwhile, the remaining teens Dreamliners sit unfinished on Boeing's Paine Field Airport. Each is fitted with two 17,000-pound yellow blocks under each wing where the engines would go, to keep the jets from tipping back on their tails.

- Source:   http://online.wsj.com

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