Worst delay ever, but Boeing insists new 787 won't be hurt in long run

The six-month delivery holdup that Boeing acknowledged Wednesday for its new, much-anticipated 787 Dreamliner is the worst delay to a jet program in the company's history.

But Boeing's leadership insisted the global network it has created to supply the plane's major pieces is not badly broken.

Executives said that as soon as the mechanics in Everett sort out assembly problems with the first 787, they will move beyond the production tangles that have left Boeing playing catchup on work its suppliers hadn't done.

The first 787 now won't be delivered to All Nippon Airways (ANA) of Japan until late November or December next year. And the Dreamliner won't fly for the first time until next spring.

News of the delivery delay came as little surprise. Last month, the company postponed the plane's first flight by six to 10 weeks, which compressed the flight-test schedule into five months and left most observers expecting further slippage.

"I'm relieved," said Morgan Stanley analyst Heidi Wood.

"Boeing needed to stop being obstinate about something that was very unrealistic and put more cushion into the system," she said. "If they had stayed obstinate into 2008, they risked almost a crisis of their reputation."

The first flight was originally planned for late August, then slipped to September, and just a month ago was pushed to November/December. The target for flying the first 787 has now moved to the end of the first quarter of next year.

The 787 has 710 orders from 50 customers, making it the fastest-selling new jet ever. About 15 of those airline customers will see their delivery dates pushed back, including ANA, a series of Chinese airlines and Northwest.

Too late for Olympics

The Asian airlines had all wanted the jet in time for the Beijing Olympic Games next August.

Those airlines and others may seek compensation from Boeing for the delayed deliveries. But telling the customers now allows them to plan for 2008, averting a bigger embarrassment, Wood said. Airlines may decide to lease other planes in the meantime.

On a day of disappointing news, Boeing executives put on a stiff-upper-lip display of optimism.

"We remain confident in the design of the 787 and the fundamental innovation and technologies that underpin it," said Boeing Chief Executive Jim McNerney. "Our enthusiasm and expectation for its ultimate success is unchanged."

Boeing Commercial Airplanes CEO Scott Carson offered repeated assurances that "this new plan is achievable."

The only previous Boeing jet-program delay of any significance occurred when the 747-400 update to the jumbo jet was delivered in February 1989, three months later than scheduled.

Until now, headlines about airplane-program delays have been a European specialty.

The Boeing announcement came just five days before rival Airbus is to deliver its first A380 flagship superjumbo jet to Singapore Airlines. That airplane is arriving two years late, with disastrous consequences to Airbus' bottom line.

The long A380 delay caused Airbus to slash projected profits through 2010 by $6 billion.

Boeing's problems are well short of that.

Chief Financial Officer James Bell said the 787 delay will have no material impact on earnings, and the company will maintain its previous profit forecasts.

Although 30 to 35 Dreamliners that should have been delivered next year are now pushed into 2009, Bell said the impact on earnings is negligible because the first planes on any program produce little profit.

Wood said Boeing typically is very conservative in its financial projections, allowing plenty of cushion for negative developments.

Still, Boeing's stock dropped nearly 3 percent on the news, closing at $98.68. The drop lopped more than $2 billion off the company's market value.

Still plenty of risk

If this delay is not the last, the reaction could be harder.

"The market was willing to give Boeing four to six months. If it goes beyond six months, I don't think the market will be as forgiving," said analyst Scott Hamilton of Leeham.net. "There are still huge hazards facing Boeing until they can demonstrate that they can produce the airplane smoothly. They are not anywhere near out of the woods."

A silver lining to the delivery delay is it allows Boeing to put a month or so of breathing room back into the flight-test program, which had been so compressed as to leave no buffer to deal with any big issues that might emerge during test flights.

But Boeing may just have shifted some of the pressure from the flight-test phase to the production ramp-up that follows. Despite the delays, Carson said, Boeing will largely stick with the "aggressive" production schedule it had laid out.

It intends to proceed with plans to build about 40 planes by the new target date of first delivery in late 2008. And it still plans to make 109 Dreamliners through the end of 2009, just three short of its prior goal.

"They were too aggressive on the flight-test plan and they moved to conservative," said Morgan Stanley's Wood, "We've still got aggressive on the delivery schedule."

"A lot of risk"

"There's a lot of risk," said aviation analyst Richard Aboulafia of The Teal Group. "I see as much risk with the production ramp-up as with the entry into service."

Boeing's decision to build almost as many airplanes as originally planned by the end of 2009 is intended to minimize the impact after the first delayed deliveries.

In a statement, Geoff Dixon, CEO of Australian airline Qantas, said Boeing assured him Wednesday that despite delays for the initial planes, Qantas would still get all of its first 15 Dreamliners by the end of 2009, as previously scheduled.

Qantas is one of the largest customers, with a total 65 firm orders.

Last month, Boeing had outlined two serious issues: extensive problems in finishing the assembly of the first 787 and a delay by Honeywell in finalizing the flight-control software.

In a teleconference Wednesday, Carson said the latter issue is now less pressing, because the extra six months before first flight will provide the time for Honeywell to catch up.

Still hugely problematic, though, is Dreamliner No. 1, which rolled out to great fanfare in July, then was partly dismantled so work could resume on installing the many missing inside components.

The problems stem largely from work not done as planned by Boeing's major partners before large pieces of the structure arrived in Everett. Those problems were compounded by continuing shortages of fasteners and other small parts.s

Boeing executives offered assurances that once past these "startup" problems, the major suppliers can catch up and meet the new schedule.

"The issues we are seeing are tied to the rework in the first airplane, not to fundamental issues in the production system," said Carson.

""It's starting up the supply chain, rather than a fatal flaw in the supply chain," said CEO McNerney.

As of Sunday, the first airplane is resting on its wheels again, as seen during the rollout, after spending much of the past three month held up by jacks. The primary structure has been completed and mechanics are doing interior and systems installation, Carson said.

Out of sequence

Out-of-sequence work will continue to be an issue right through to assembly of airplane No. 28, he said, but at least it will be planned for.

After the first airplane, Carson said, the big structural pieces arriving in Everett "won't be coming with surprises."

Asked about reports that work at the two Charleston, S.C., plants, where the rear of the airplane is built, has been hampered by inexperienced workers, Carson defended the plants' operators, Vought of Texas and Alenia of Italy.

"There's no fundamental flaw in Charleston," he said. "If there's a lesson learned it's that you start earlier and you do a little more training with our people helping them learn the production process."

McNerney also defended the 787's globalized manufacturing plan — major pieces are built in Italy, Japan, Wichita, Kan., and Charleston — though he indicated some dissatisfaction with how the work was divided between Boeing and its partners.

He said he might have "drawn the lines differently with 20/20 hindsight."

"Yeah, there's some learning there," McNerney said. "Would we change the strategy? The answer is no."

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