Boeing doesn't know yet how long 787 fix will take

When might the 787 Dreamliner fly and what's the cost to fix it and get it in the air?

That was the big question dominating an early-morning earnings teleconference Wednesday between Boeing CEO Jim McNerney and Wall Street analysts, who expressed concern about the new jet program's profitability.

McNerney said Boeing is still assessing how long it will take to fix the structural flaw that has grounded the jet. The company won't have a new schedule or an estimate of the added costs until "later this quarter," he said.

That extends the time frame for providing answers. A month ago, Boeing said it hoped to have a new schedule for first flight and delivery within "several weeks."

"We are working through this matter as quickly as we can but will not sacrifice quality for expediency on such an important effort," McNerney said.

The focus on the 787 meant that Boeing's buoyant quarterly earnings got scant attention during the conference call.

Its second-quarter profit rose 17 percent to just shy of $1 billion on revenue of $17 billion.

Boeing has about $5 billion in cash on hand, and profit margins were healthy at about 10 percent in both the defense and commercial-airplane divisions. In the midst of a steep and broad economic downturn, it maintained its financial forecast for the year.

And despite more than 70 jet-order deferrals in the last three months, and the announced cut in 777 output next year, McNerney said he expects to hold 737 production steady in Renton.

But the good news was overshadowed by worries over the 787. McNerney offered what reassurance he could.

He said Boeing has identified and analyzed the structural problem at the wing-to-body join, duplicated it on a computer model and selected a preferred solution.

The hangup, he said, is that it's difficult to implement the fix — especially on those planes already built — because of the inaccessibility of the place inside the wing where the modification has to be made.

In addition, he said, Boeing engineers are using "an abundance of caution" to ensure other stress issues are not created by the modification.

A Seattle Times story published Wednesday before the earnings release cited two engineers who identified the problem as delamination of the composite-plastic material at a stress point at the end of the long rods, called stringers, used to stiffen each wing.

The engineers estimated that the fix could delay first flight four to six months even if the fix works, potentially pushing first flight into 2010.

When asked directly about that prediction during the conference call, McNerney stuck to his answer that no new schedule is yet available.

The engineers cited in the Times story described the Boeing fix as a redesign at the wing-to-body join that involves only a handful of additional parts at the end of each stringer, but is nevertheless complex to implement.

McNerney emphasized that the problem is limited to the join and that the whole wing doesn't need a redesign.

"There is nothing we have learned to lead us to believe that this is anything but a local issue, which can be addressed with a local fix," McNerney said.

Boeing also punted on the financial impact of the new 787 delay, saying the answer cannot be known until the new plan is determined.

On the earnings call, Barclays Capital analyst Joe Campbell asked Chief Financial Officer James Bell the question in plain English:

"Are you sure that you're not losing money on this thing?"

The concern is that Boeing, despite the huge order book for 850 Dreamliners, may not be able to make enough money on each plane to recover over time all the added costs piling up: the extra research and development needed to solve the current problems, the late penalties that will have to be paid to customers and suppliers, and the cost of holding all the expensive inventory for months longer without any income.

Bell disclosed that Boeing has in its inventory almost $8 billion worth of 787 structures work — completed and partially built airplanes — for which it can receive no income until the jets are delivered to customers. He said this 787 work-in-progress inventory is growing at a rate of $800 million per quarter.

In response to Campbell, Bell conceded that the new 787 delay "puts pressure on the profitability of this program."

"We've always been concerned with the cumulative impact of the schedule delays and the pressure it puts on cost," Bell said.

"We also have been concerned with the delays to our customers and how that converts to penalties or the settlements we have to work through with them."

But Bell said Boeing expects to create efficiencies over the expected long production run of the 787 that will reduce costs and increase profit per plane to cover all the extra expenses.

"We still believe the program to be profitable," Bell said.

In an interview later, Campbell said that in rough numbers, using the figures released Wednesday, Boeing will have spent up to $13 billion on inventory buildup by the time it starts delivering the 787s. It has maybe an additional $8 billion to $10 billion sunk into research and development, and it's on the hook for a few billion dollars more in customer and supplier penalties.

Campbell estimates that the overrun on costs attributable to the delays up until now is around $6 billion.

But that doesn't include the additional costs being incurred due to the wing-to-body flaw.

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