Analyst's 787 doubts burn Boeing

Boeing's stock tumbled 3.4 percent Monday after a Wall Street analyst asserted the 787 Dreamliner program is running into delays and cost increases.

Boeing sharply rejected some specifics in the analyst's report, downplayed others as nothing new and reiterated the new airplane program remains on schedule.

One serious issue cited — a vibration problem with the large cargo lifter that will transport 787 parts around the world — has been fixed, a Boeing spokeswoman said.

She dismissed another item in the report as coming from "a rumor mill."

Wachovia Capital Markets senior analyst Joe San Pietro cited "contacts deep within Boeing's supply chain" in contending that problems with overseas suppliers are endangering Boeing's aggressive schedule to deliver the 787. He downgraded the stock.

San Pietro's report said the first center wing box — the key structural element of the center fuselage that holds the wings — delivered last week from Fuji in Japan to Global Aeronautica in Charleston, S.C., was sent without the wiring, hydraulics and many of the fasteners that were to be pre-installed.

"This is now requiring a scope rework between Boeing and Global Aeronautica, as GA would be forced to become responsible for supplying the innards," San Pietro reported.

San Pietro said Boeing's other 787 partners also have fallen behind schedule, especially Mitsubishi, which is making the wings in Japan; and Alenia, making the rear fuselage in Italy.

"Alenia ... appears to be the major culprit at this time, and we understand that Boeing has sent an army of engineers to help get the program back on track," he wrote.

San Pietro said he was told "the suppliers are unhappy with the costs of maintaining schedule" and are demanding more money from Boeing.

He said that, having outsourced the fabrication of most of the 787's airframe, "Boeing has no internal capability to manufacture the major components" so it lacks leverage to oppose such demands.

"This could result in additional increases in R&D costs if the suppliers get their way," he wrote.

Boeing spokeswoman Yvonne Leach confirmed the issue with the wing box. She also recalled that Boeing admitted last fall it was struggling with supply-chain issues and that 787 program chief Mike Bair in December had publicly conceded "the Italians are behind schedule."

Last year, Boeing increased its research-and-development budget by almost a billion dollars, largely to cover increased spending on the 787.

In October, Boeing Chief Executive Jim McNerney characterized that move as "aggressive contingency planning."

"That's what's happening now," said Leach, referring to the wing box arriving in South Carolina without systems installed.

"We knew not everything would be perfect for airplane number one. We built contingency plans, and that's what we are funding and authorizing so we can get back on schedule."

Leach declined to comment on whether Global Aeronautica or any other suppliers were pushing to renegotiate contracts.

One important item in the Wachovia report is no longer valid, Leach said.

She admitted San Pietro was correct in his claim that certification of the Dreamlifter, the converted air freighter meant to transport pre-made 787 sections around the globe, has been delayed by "vibration issues" during test flights.

However, she said, Boeing solved the problem by removing the Dreamlifter's winglets and changing the way the fuel load is distributed.

"Those two things together eliminated that issue," she said, "It's gone."

Boeing used the Dreamlifter to make that first delivery from Japan to South Carolina last week without certification.

Leach said the Federal Aviation Administration approved Boeing's certification plan to use initial delivery flights with real loads as part of the testing.

"Actual payloads are better than anything simulated," she said. "The FAA bought off on that plan."

Leach said certification of the Dreamlifter remains six to eight weeks out, approaching three months later than originally expected.

But this won't affect the schedule to build the Dreamliner, she said. The first one is still set for rollout and first flight this summer.

"Since [the FAA has] approved those early delivery flights, that's still OK," Leach said.

She rejected San Pietro's assertion that two Asian airlines "have been told" to expect a delivery delay slippage. The first 787 is supposed to be delivered to All Nippon of Japan in May 2008.

"Boeing has not had any kind of communication with any of our customers to indicate we are going off that date," Leach said.

"I think he's referring to a rumor mill."

After San Pietro downgraded the stock from "market outperform" to "market neutral," Boeing shares fell $3.03 to close at $85.60.

"Long term, we believe that the B787 should be a home run for Boeing once it passes through this teething stage," San Pietro's report concluded. "However, given the current sensitive market environment (investors are still smarting from the A380 delays), we believe an admission of any delays by Boeing would put pressure on the stock."

Just a report of problems is enough.

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

Air-traffic alliance

for Lockheed, Boeing

Lockheed Martin and Boeing have formed an alliance to offer air-traffic management systems as travel is forecast to jump in the next 18 years.

The venture is part of a five-year agreement that will jointly bid for Federal Aviation Administration contracts using new technologies developed by the partners, Lockheed's Judy Marks said on a conference call.

That technology is expected to be available around 2012, said Marks, who heads Lockheed's transportation and security division.

The companies didn't initially invest any money in the alliance, Lockheed spokeswoman Anna DiPaola said. She declined to comment on the potential value of opportunities they plan to pursue.

The FAA spends about $2.5 billion a year on upgrades.

Air traffic, hurt by the Sept. 11 , attacks, is forecast to increase two- to threefold by 2025, the companies said.

The Lockheed-Boeing venture is focused on improving data sharing among air-traffic computer networks, increasing the number of planes that can take off and land and making U.S. systems work with those being developed in Europe, Boeing spokesman Daryl Stephenson said.

Bloomberg News

Aircraft-leasing

firm wants 39 jets

Boeing said Monday that giant aircraft-leasing company GE Commercial Aviation Services booked a 39-jet order in 2006, one listed as from an unidentified buyer until now.

The order for seven wide-body 777-300ER jetliners, eight 777 freighters and 24 single-aisle 737-800s is worth $5.3 billion at list prices.

After standard discounts, the actual purchase price is about $3.2 billion, based on estimates provided by aircraft-valuation firm Avitas.

Deliveries of the aircraft will begin in 2008 and extend through 2010.

Times business staff and

The Associated Press