Price War, Plane Transitions Put Boeing In Financial Crunch (excerpt)
(Source: Seattle Times; published April 1, 2016)
By Dominic Gates
Boeing has begun a major cost-cutting drive, citing stiff price competition from Airbus. Yet the financial stresses come not just from its European archrival, and some of them are self-inflicted, analysts say.

When Boeing Commercial Airplanes chief Ray Conner in February warned employees that jobs would be cut this year — anywhere from 4,000 to 8,000, as it turns out — he cited intense pricing pressure from Airbus.

Yet the financial stresses come not just from the European archrival, and some of them are self-inflicted, analysts say.

Boeing has “a lot of challenges on a lot of fronts,” said Bank of America aerospace-industry analyst Ron Epstein.

Boeing could see lower profit margins over the next few years as income declines from its longtime moneymakers, the 737 and 777 jet programs, with little prospect that the 787 Dreamliner can fill the gap.

While the 737 and 777 programs transition to new models between now and the end of the decade, they’ll generate significantly less cash.

Production of the 777 in Everett is set to drop next year from 100 jets per year to about 80, which “is a big deal, because it’s so profitable,” Epstein said.

And as Boeing in Renton moves from the current model 737 to the new 737 MAX, the process is likely to hit some glitches and slow production, he said.

Though the 787 Dreamliner program is ramping up, it won’t come close to making up the cash shortfall. Boeing lost about $6 million on every Dreamliner it delivered in the last three months of 2015.

Epstein said Boeing would need to make an average profit of about $30 million per airplane on the next 900 Dreamliner deliveries just to pay off the production costs it has deferred into the future.

“Is that doable? There’s a prevailing view it’s not,” Epstein said. At some stage, he said, Boeing is likely to take a write-off on the 787, hitting its profits.

Aviation analyst Richard Aboulafia of the Teal Group points out that the 787’s lack of profitability, due to past production glitches, is “absolutely nothing to do with Airbus.”

“That’s a little gift the previous CEO (Jim McNerney) left behind,” he said. Aboulafia agreed with Epstein that new CEO Dennis Muilenburg may have to bite the bullet and declare a loss on the 787. (end of excerpt)


Click here for the full story, on the Seattle Times website.

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