Latest delay of Boeing 787 pushes back first delivery to third quarter of 2009

Boeing now expects to deliver the 787 Dreamliner between 14 and 16 months late — yet industry analysts greeted the plan as good news, saying the company Tuesday finally gave them a schedule they could believe.

The first deliveries of the strong-selling new airplane already had been postponed twice before Wednesday's announcement of a new six-month delay. But many Boeing watchers took the latest bad news as affirmation that things were no worse than expected.

"We've just heard the last 787 delay call," said Joe Campbell, a Lehman Brothers analyst. "I think they'll make this schedule from here in. They can do this."

Boeing originally planned to deliver its first 787 next month.

According to the new schedule laid out by Boeing Commercial Airplanes Chief Executive Scott Carson, the plane won't fly until October and won't be delivered until the third quarter of next year.

Boeing also said it will build the planes more slowly, so its customers will get only 25 Dreamliners next year, rather than the 109 proposed last fall. It will ramp up production to 10 per month by 2012.

That small 2009 delivery total reassured observers because it seems more realistic than the previous forecast.

Boeing "finally came up with a number that makes sense," said another prominent Wall Street analyst who asked not to be named because his investment bank doesn't permit him to be quoted in the media.

Boeing's shares rose almost $4 on the news, closing at $78.60

Company officials had previously blamed Boeing's major supplier partners in Italy; Japan; Charleston, S.C.; and Wichita, Kan.; for the delays in finishing the first airplane, which was rolled out to great fanfare last July but is still not expected to be ready to fly for another six months.

During Wednesday's conference call, 787 program chief Pat Shanahan admitted the supply chain remains his biggest worry.

"Where do I think the inherent risk is? I think it's in the capabilities of the supply chain to do the things that we need to have done," said Shanahan "That's the untested part of this production model.... That's where our energy and attention is."

Not surprisingly, local union officials had another take on the supplier situation.

Tom Wroblewski, president of Machinists union District 751, said in a statement that it was past time for "bringing the production of components to the place Boeing has called home for more than 70 years."

"Bring work back"

Likewise, the company's white-collar engineering union, the Society of Professional Engineering Employees in Aerospace (SPEEA), called on Boeing "to correct its flawed reliance on global partners and bring the work back."

"Sending engineers around the world to help suppliers simply transfers all the aerospace knowledge to other companies in other countries," said SPEEA's executive director, Ray Goforth.

Campbell, of Lehman Brothers, in an analytical note published last week ahead of the announcement, estimated that a 14- to 16-month delay would add between $3 billion and $5 billion in extra manufacturing costs and customer contract penalties.

He said the outsourcing of 787 production creates a split: Problems arise at the suppliers, but "the program fixes and ultimately the program costs mostly reside with Boeing. It's still their airplane."

Boeing will ultimately suffer a considerable hit to its bottom line from the delay.

But the impact is obscured by its accounting method, which spreads the massive costs of a jet-development program over hundreds of aircraft and many years.

Although research-and-development costs will likely increase as a result of the schedule change, Carson said, Boeing expects no change to its 2008 profit forecast, and profit growth in 2009 should also be strong.

Meanwhile, Boeing has moved to help its suppliers financially, because they ordinarily don't get paid for their work until an airplane is delivered.

In a filing Wednesday with the Securities Exchange Commission, Spirit AeroSystems of Wichita, which makes the forward fuselage and cockpit of the 787, said Boeing has agreed to pay in advance for the 45 nose sections the supplier had originally contracted to deliver in 2008. Spirit will get about $387 million this year.

Under the original contract, Spirit wouldn't have been paid until the plane was certified.

But with the delays stretching past a year, all the major suppliers balked at Boeing's request to continue producing parts without any money coming in for the work, as if they were subsidiaries of Boeing.

"For Spirit it's great," said the Wall Street analyst who requested anonymity. "For Boeing, it keeps the supply chain going and motivated."

Help for partner

That was part of the reason Boeing last month bought out Vought's share of the Charleston 787 fuselage-assembly plant, providing financial relief to the Dallas-based partner that still builds the rear fuselage sections in Charleston.

The suppliers didn't get all the blame in Tuesday's conference call by Boeing executives, though.

Boeing recently discovered in a structural test that the center wing-box — a heavy piece that holds the wings — needed to be redesigned.

Shanahan blamed "an analysis error" for the problem, which caused a month's delay in finishing the plane's midsection.

Cai von Rumohr, an analyst with Cowen & Co., said the center wing-box error is "kind of a biggie," and that until the airplane flies, "there's still residual risk."

Shanahan said that Dreamliner No. 1 is slowly nearing completion, with the wings nearly ready and the forward fuselage progressing.

"As my boss tells me, don't confuse effort with results. Get the airplane built," he said. "I feel confident about the path forward."

Shanahan said he has built extra margin into the new schedule to cover unforeseen problems. The ramp-up of production to 10 a month will be prudent, and Boeing may increase that rate later.

Ultimately, Boeing must pay its airline customers for the 787 delays. It will take years to work out the penalty payments.

John McMahon, chief executive of Irish airplane-leasing company Genesis, said that given the looming global economic downturn, some airlines will find "it may not be such a bad thing" that their high-priced new assets are pushed out a year.

Airlines who wanted new planes for growth will be harder hit than those who want to replace older planes, whose lives can be extended, McMahon said. But all will likely complain bitterly to Boeing of the harm they are suffering.

Last chance?

Is this latest revision of the schedule Boeing's last chance to get the Dreamliner right?

In reality, no. The Dreamliner is the only midsize new airplane on the horizon. Airbus' A350 won't be delivered earlier than 2013 and likely will be later.

"It can't be a last chance," said a senior executive with an international airline that has 787s on order, speaking on condition he not be identified. "What other choices do we have to get airplanes in 2011 or 2012?"

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