Boeing projects strong profit for 2008 despite 787 troubles

All the problems in getting the 787 Dreamliner flying aren't keeping Boeing's profits from taking off.

The company again delivered solid financial results Wednesday, and executives projected a 10 percent jump in profit this year and a further 20 percent jump in 2009.

"The company is forecasting all of the profit expectations anybody would have hoped for," said Lehman Brothers analyst Joe Campbell.

Notwithstanding higher research-and-development costs for the 787, fewer 787 deliveries in 2009 and an expected zero profit margin on those deliveries, "the company seems confident about that. This is good news," Campbell said.

If the first quarter's profit level is maintained through 2008, nonunion and white-collar employees will get two weeks' extra pay through the company incentive plan in February, said spokesman Todd Blecher.

Boeing said net profit for the first three months of 2008 rose 38 percent from the year-ago quarter, while revenue edged up 4.1 percent to $16 billion.

In response to the rosy outlook, the stock rose more than $4 to close at $82.09.

Boeing last month announced a further delay to its flagship new airplane program, pushing out the first 787 delivery to the third quarter of 2009, some 15 months beyond the original plan.

Nonetheless, Chief Executive Jim McNerney said on a conference call with analysts and media Wednesday that the 787 remains "a breakthrough new product, years ahead of its competition."

He said the struggle to get the 787 supply chain working has strained Boeing's internal resources, and he expressed frustration at the ever-rising bill for developing the jet.

"We have been forced to keep an experienced set of engineers on [the 787] that had been planned to go off to other programs, [including] the 747-8. That increased costs, as we scramble to find the engineering capacity we need," McNerney said.

"I'm not happy and [Boeing Commercial Airplanes chief] Scott Carson is not happy with our inability to get our arms around predicting the development costs."

Still, McNerney said, "We've learned a lot and have the scars to prove it."

Boeing also laid out how the growing costs of the Dreamliner's delays affect its finances.

Analysts estimate the delays will cost the company between $3 billion and $5 billion. Yet Boeing avoids entering any loss on its books because it spreads that extra cost over many years; on past programs, typically the period spans production of the first 400 aircraft.

But unlike previous programs, where Boeing expected 100 or so orders booked by first delivery, the Dreamliner already has 892 firm orders and is expected to have 1,000 by first delivery.

That means Boeing will have the luxury of spreading the cost over more than 400 airplanes should it need to, though Boeing Chief Financial Officer James Bell said he won't decide on the precise accounting number for some time.

Bell said Boeing has already incorporated into its financial guidance an increase of some $400 million in extra R&D costs this year, as well as most of the payments it must make to suppliers to compensate them for revenue they've lost due to the delays.

For example, according to a Securities and Exchange Commission filing, Boeing has agreed to pay Spirit AeroSystems of Wichita, Kan., more than $350 million this year for 45 Dreamliner nose sections, even though Spirit will deliver only 11 or so because of Boeing's assembly delays.

The money Boeing must pay to its airline customers can't be figured until precise delivery dates are finalized for each airplane, Bell said.

For now, he said, Boeing will assume that all 25 Dreamliners due to be delivered in 2009 will be produced at zero profit.

Yet, the finance chief still expects that in the long production run ahead, the company will make plenty of money on the airplane.

"It is typical for new commercial programs to start with very low margins that increase over time as we go down the learning curve," said Bell. "With 892 orders since launch, we firmly believe that the 787 will deliver significant value over its life to both customers and shareholders."

During the conference call, analyst Heidi Wood of Morgan Stanley asked McNerney to justify spending on a second development program, the 747-8. This new model of the venerable jumbo jet has won only 105 orders to date; all but 27 are for the freighter version.

McNerney conceded Boeing had to redesign the 747-8 wing, a large project that Wood estimated could balloon total development costs to more than $3 billion. Is it worth spending that much without more sales of the airplane?

McNerney said Boeing is in "serious talks" with eight to 10 prospective customers for the 747-8 passenger version.

"We remain very comfortable that this will be a profitable program, and the business case remains strong," McNerney said.

The CEO also addressed concerns over the defense side of the company, which has seen its revenue growth stall and last month lost to Northrop Grumman and Airbus parent EADS a massive contract for Air Force refueling tankers.

McNerney pointed to the defense division's profit margins of 11.4 percent last quarter; continued funding of big programs like missile defense and the Army's Future Combat Systems; and prospects for jet fighter sales abroad.

McNerney said the division had won nine contracts out of 11 major military competitions in 2007.

"That is one hell of a record," McNerney said. "Admittedly we've lost one or two since. Now it's nine out of 13."

As for the Air Force tanker award to Airbus, McNerney remains hopeful Boeing's protest of the decision will succeed.

And if not, he said, "its loss should not have an adverse impact on our overall outlook."

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