Sunday, February 26, 2017

Analysts predicts all Dreamliners will be built in North Charleston within a decade

The first 787-10 (above) made its debut earlier this month, the same day that President Donald Trump visited Boeing South Carolina. Whether the "Dash 10" will be the only Dreamliner made exclusively in North Charleston is a matter of speculation among Boeing watchers.

While Boeing Co. says it will wait to decide whether to increase production of its 787 Dreamliner, analysts are predicting slow sales of the twin-aisle plane eventually will force a production cut — ultimately leading the aerospace giant to move all final assembly to the North Charleston campus in the next decade.

"It's a very reasonable scenario," said Richard Aboulafia, vice president of analysis at Teal Group in Fairfax, Va. "Consolidation, given the likely falling production rates, makes sense."

Boeing currently assembles a dozen Dreamliners each month, split between plants in North Charleston and Everett, Wash. Greg Smith, Boeing's chief financial officer, told industry analysts last week that the company will make a decision this year on whether to boost 787 output to 14 per month.

"Today, that looks good, but we're monitoring it," Smith said at the Barclays Industrial Select Conference in Miami.

Dennis Muilenburg, Boeing's president and CEO, told analysts last month the company doesn't see production dipping below its current levels.

"Our confidence in being able to continue to operate at 12 a month is high," he said. 

More than half of Boeing's 1,207 Dreamliner orders were booked during the program's early years of 2004 to 2008. Sales have topped triple digits just once since then, in 2013, and there were 58 net orders in 2016 — down from 71 a year earlier. So far this year, there have been seven orders. Low fuel prices have airlines delaying purchases of the lightweight wide-bodies that have list prices of $224 million and up.

Meanwhile, the current production rate is cutting into a backlog of about 700 orders. That pace equates to less than five years of work.

Smith is confident sales will pick up when airlines start to replace aging planes in the new decade. There is "a big replacement cycle in wide-bodies coming," he told the analysts, "so we need to get through this transition and these areas of softness."

Boeing executives have repeatedly stated they do not see Dreamliner production rates declining. But some analysts are skeptical.

Buckingham Research Group, in a bearish report released this month, said weak orders will eventually lead Boeing to cut Dreamliner production to seven per month and "consolidate on one production line — likely North Charleston."

Buckingham thinks Boeing will stick with its current 12-per-month rate until the backlog reaches about three years, likely in 2019 or 2020. That's when the group expects production will be cut and a single line established.

Scott Hamilton, an aerospace analyst and editor of Leeham News and Comment, called Buckingham's prediction "eye opening."

"This is the most bearish forecast of any analyst," Hamilton wrote in his newsletter, adding that he sees an eventual rate cut to 10 per month. Hamilton said this month's vote by Boeing workers in North Charleston to reject union representation could influence the company's decision to shift Dreamliner production to South Carolina.

The argument for a single production line is bolstered by speculation that Boeing eventually will scrap production of the 787-8, the oldest and smallest member of the Dreamliner family, in favor of the more popular 787-9 and 787-10 siblings.

Uresh Sheth, a New York investment banker who tracks Dreamliner production on his "All Things 787" website, said he sees 787-8 deliveries dropping to the single digits in future years. Hamilton said ditching the costly 787-8 would boost the program's profit margin.

Saj Ahmad, chief analyst for London-based Strategic Aero Research, has predicted for years that Boeing eventually will move all Dreamliner production to North Charleston.

"The 787 rate would have to drop below seven units a month for Boeing to expedite that consolidation," Ahmad said. "In my view, the rate will stay between seven and nine airplanes a month, from the start of the next decade. But any rate decline from the 12-per-month today will be done piecemeal, not in one fell swoop."

That's because suppliers need long lead times to adjust their own production levels, he said, "and there isn't a single 787 supplier making any such inference right now along those lines."

Ahmad points out that Everett also makes Boeing's 767 and 777X models, making North Charleston — which only assembles the Dreamliner — the most practical site for a single production line.

"Boeing would be better off moving the work there because the North Charleston plant isn't geared up to building anything else right now," he said.

Another likely scenario if orders continue to lag and the 787-8 goes away, Ahmad said, is a production split with Everett building the 787-9 model and North Charleston workers focusing on the larger 787-10, which is being built exclusively at the South Carolina site. The first "Dash 10" rolled off the production line last month, with test flights to follow this spring and the first delivery scheduled for 2018.

In the short term, Ahmad said he thinks Boeing will keep the production rate where it is.

"I’m not convinced Boeing will go beyond the 12-per-month rate and burn the backlog further if orders don’t come in big numbers," he said. "All that would do is force a sharper, more costlier rate cut later on."


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