Boeing boosts R&D spending to keep programs on track

As it announced strong quarterly earnings today, Boeing also projected large increases in spending this year and next on development of the new 787 and on the forthcoming jumbo jet derivative 747-8.

The boost in research and development spending — the second in as many quarters — hiked the R&D budget to almost a billion dollars more than forecast just five months ago.

The extra money for next year includes funding to pay extra mechanics in Everett, if needed.

Yet with revenue and profits for the quarter strong, executives still confidently raised 2007 profit forecasts. And they tried to dispel any suggestion that the bump in 787 costs meant the program is running into the kind of trouble afflicting Airbus.

In a teleconference with analysts, chief executive Jim McNerney characterized the increased R&D spending as merely "aggressive contingency planning."

"We are trying to witch-hunt the issues in this program right now," he said.

The reassurances convinced most analysts, but the market reacted more negatively and shares closed down 3 percent at $81.12.

McNerney said the airplane's weight "remains a dogged issue," and a team dedicated to resolving it is working both within Boeing and with the major partners. Also, he said, Boeing has needed to help out its supplier partners with production issues.

But these problems were anticipated, he said, and haven't reached a level to perturb the 787 program, which has achieved huge sales success with 455 customer orders and commitments to date.

McNerney said the 787's "projected economics are significantly better than any airplane program I have been involved with."

"Notwithstanding some upward pressure on research and development," he said, "I don't see a fundamental change in an outstanding business case because of what we're talking about here today."

After the earnings call, 787 program spokeswoman Yvonne Leach confirmed that the program remains on schedule for first flight in late August next year and first delivery to All Nippon Airways of Japan in May 2008.

She also said that one of the contingencies McNerney spoke about was the potential to shift some systems installation work from the partners to the Everett final assembly plant, a possibility that program chief Mike Bair has previously raised.

But Leach said this is still just a contingency.

"No work has actually moved to Everett yet," she said. Boeing has however "authorized us to hire mechanics in final assembly if we do find that systems work is traveling to Everett. We don't know yet if that is actually going to happen."

That work might move to Everett "only temporarily," until the production system is mature and running well.

Most analysts seemed to take the added spending in stride.

"We would much prefer to see the company spending extra money on R&D versus letting the program slip," wrote Bank of America securities analyst Robert Stallard in a comment on the Boeing results. "However, we are conscious that investors are nervous following the Airbus A380 debacle."

The A380 superjumbo from Boeing rival Airbus has now been delayed at least two years beyond its original schedule, the slippage blamed largely on problems with the complex wiring of the systems installed inside the giant airframe.

Boeing's chief financial officer James Bell addressed investor fears directly during the conference call, drawing a bright line between the Boeing 787 and Airbus A380 development programs.

"If some of the concern is being driven by what you see out there in other places, you have to understand there are distinct differences in what we are doing here," Bell said. "We don't have the complexity on our airplane that you see on the behemoth that the A380 is. We have a fifth of the electrical wiring."

Analyst Cai von Rumohr of investment bank Cowen and Company downplayed the market reaction.

"While some investors will be 'spooked' by rising R&D, we think Boeing wouldn't have bought stock aggressively in the third quarter and raised 2007 guidance if it felt that 787 was becoming a problem," wrote von Rumohr in a research note.

And Byron Callan of Prudential Securities noted that half the latest addition of R&D money is to develop a stretch passenger version of the 747-8 jumbo jet, which could win sales from the A380's delays.

"This should not be viewed as a negative and in fact improves the odds of post-2009 market share gains versus the Airbus A380," Callan wrote in a note to clients.

Net earnings for the quarter of $694 million, or $0.89 per share, well exceeded Wall Street expectations as profit margins in the commercial division approached 10 percent.

A one-time charge to terminate the Connexion inflight Internet service reduced earnings by 22 cents a share.

The latest guidance adds $450 million in projected R&D spending this year and $500 million next year compared to a projection given in May. Total projected R&D is now $3.2 billion this year and $3.3 billion in 2007.

But the increased cost of R&D and of some raw materials such as titanium was more than off-set by increased revenue from deliveries and by productivity gains inside the Puget Sound area jet factories.

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