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Japan Airlines focuses on debt, not 7E7

By Bloomberg News

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Also yesterday, rating agency Moody's Investors Service said it was downgrading some of Boeing's debt, partly because of the development costs of the 7E7.

At Japan Airlines, "Fixing our finances is the priority right now," said President Katsuo Haneda. The world's second-largest carrier wants to wait before considering proposals from both Boeing and rival Airbus to replace older aircraft.

Earnings at Japan Airlines have been hurt by a slump in demand for travel because of this year's outbreak of SARS and the war in Iraq that prompted people to stay at home.

The carrier last month widened its annual loss forecast for the year ending March 31 to $605 million.

Japan Airlines, which says it operates more Boeing 747s than any other airlines, is one of Boeing's biggest customers. It was widely expected to be a so-called launch customer for the 7E7 plane.

"Japan Airlines is clearly a logical candidate for the aircraft at some stage, so perhaps they're engaging in a bit of interesting negotiation by appearing not to be too keen," said Tim Coombs, managing director of Aviation Economics, a London-based consultancy.

Boeing said Tuesday that it will proceed with plans to develop its first new jetliner in 13 years, the 7E7 Dreamliner, giving its sales staff approval to begin asking carriers around the world for orders. Boeing hopes the aircraft, which can carry as many as 300 people using at least 15 percent less fuel than comparable planes, will help it challenge Airbus.

Japanese aerospace companies, including Mitsubishi Heavy Industries, Kawasaki Heavy Industries and Fuji Heavy Industries, will build the wings for the 7E7 and other parts equivalent to about 35 percent of the aircraft.

This is the first time the wings for a Boeing aircraft will be made outside the U.S.

"Because Japanese industrial companies are risk- and revenue-sharing partners for about a third of the 7E7, people have been expecting that Japan Airlines" will be the first buyer of the aircraft, said Zafar Kahn, an analyst at SG Securities in London.

Still, Boeing is in talks with Singapore Airlines and Cathay Pacific Airways about making them the first customers for the 7E7, Mike Bair, Boeing's senior vice president for 7E7, said yesterday.

Separately yesterday, Moody's cut the rating on about $15 billion of long-term Boeing debt by one level, to A3 from A2.

The downgrade reflects the "persisting pressures on demand for commercial aircraft, and the expectation" that pressure will continue for the next few years, Moody's said.

Airbus will overtake Boeing this year in deliveries and the lower debt rating reflects concerns Boeing's "steady erosion in market share" won't be reversed, Moody's said.

"As far as I can see, in the future, these two players will probably share the market, give or take a few percentage points," said Tassos Philippakos, senior vice president of Moody's corporate finance group.

Money needed to build the 7E7 also "will continue to drain company profits and cash flows" as development is expected to cost several billion dollars over several years, Moody's said.

Development costs for the new jet could exceed $5 billion but wouldn't likely be as high as the $10 billion estimated by some analysts, Philippakos said.

Moody's will monitor those costs when considering future ratings, he said.

Standard and Poor's Ratings Services yesterday reaffirmed its A rating on Boeing's debt, which had been lowered from A+ on May 15.

The 7E7 is Boeing's "best prospect" to regain the market share lost to Airbus in recent years, analyst Roman Szuper wrote in a note.

Moody's also expressed concern about the potential effect of government investigations into Boeing's defense unit and recent management changes including the departure of Chief Executive Phil Condit and Chief Financial Officer Mike Sears.

Copyright © 2003 The Seattle Times Company