Big headaches for Boeing as Dreamliner deliveries remain halted

Boeing Co updates

For the past two years Boeing has relied on its Dreamliner passenger jet, the company’s popular widebody aircraft, to deliver sales after the grounding of the 737 Max following two fatal crashes.

Now the tables are turned. The Max, the workhorse of the Boeing family of jets, is back in service and the group is filling a backlog of orders, while deliveries of the 787 Dreamliner remain halted after production setbacks.

The 787 glitches have grown to the point that Boeing has warned it may record a forward loss on the Dreamliner programme, possibly on Wednesday when the company reports second-quarter results.

But the issue raises what S&P Global analyst Christopher Denicolo called the “however-many-billion-dollar question”: why is Boeing having problems manufacturing this plane?

The Chicago-based company said this month that the majority of the more than one hundred 787s already produced will not be delivered this year — contrary to assurances made by chief executive David Calhoun in April.

Boeing also cut the wide-body jet’s production rate earlier in July to fewer than five a month, which together with the company’s warning suggests a forward loss will be declared on the programme.

This means the 787 programme will lose money for the 1,500 aircraft that have been delivered or have firm orders in its current block, either because costs are higher or sales lower than the company anticipated.

Boeing has already recorded forward losses on four programmes: $6.5bn on the twin-aisle 777X, $5.1bn on the KC-46A refuelling tanker for the US Air Force, and $486m on the Air Force One US presidential plane.

A forward loss on the 787, which generates more deliveries than those other programmes, would likely put pressure on the company to continue delivering the 737 Max jets to drive future earnings and bring in cash.

Analysts say something must have changed to cause the glitches in a programme that has run smoothly for years.

Either the US Federal Aviation Administration is finding flaws with the production of Boeing aircraft as it looks harder at everything the manufacturer does following the two fatal 737 Max crashes or the company has changed its production process.

“This is not a brand new programme,” said Credit Suisse analyst Robert Spingarn. “So either [the FAA are] looking more closely at it . . . or was it Boeing changing their approach to how they build aircraft? Introducing cost-efficient production to save money, and there are unintended consequences with the product?”

Morningstar analyst Burkett Huey added: “What I think the market wants and is looking for from Boeing is a return to normalcy. A return to a company that is selling aircraft that work, and there aren’t headaches coming out every two months . . . What these forward losses are evidence of is precisely the opposite.”

In 2019 and 2020, Dreamliners continued to bring in cash after regulators worldwide grounded the Max over safety concerns. But now Boeing is struggling to deliver the jets.

Boeing delivered 14 Dreamliners in the first half of the year compared with 158 in 2019 and 53 in 2020, when it comprised the bulk of the company’s commercial deliveries. This compares with the delivery of 113 737s in the first half of the year, 127 in 2019 and 43 in 2020.

The company stopped deliveries of the Dreamliner in October while the FAA investigated how workers had installed the wrong-sized shims — thin pieces of material used to create a better fit — in joints between fuselage sections on some 787s. Separately, some aircraft did not meet engineering specifications for skin flatness.

Boeing resumed making deliveries in March, only to halt them again in May after the FAA requested more data on how the manufacturer planned to inspect the planes.

Then, on July 13, Boeing said it would “temporarily” drop the production rate to fewer than five a month after it discovered a new flaw: problems with the fit and finish of the nose of the plane and cockpit, built by its supplier Spirit AeroSystems.

“We will continue to take the necessary time to ensure Boeing aeroplanes meet the highest quality prior to delivery,” the company said.

If Boeing does decide to announce a forward loss on the 787 this week, it would allow incoming chief financial officer Brian West, who starts in August, to avoid delivering bad news after he starts.

West can also point out the positives. The company has all the liquidity it needs. It raised $25bn from the bond market in April last year to see it through the Covid-19 crisis, leaving it free to eschew pandemic-related aid from the government.

And it is still clinging on to investment grade credit status, albeit at the lowest rating in the band, triple B minus with a negative outlook, according to S&P Global, with $63bn in debt.

On top of this, Wall Street analysts polled by FactSet are predicting a return to profitability in the third quarter. The company reported a $537m net loss in the first quarter, its sixth straight quarterly loss, with the Wall Street analysts forecasting a 77 cent loss per share in the second quarter.

They estimate that free cash, or operating cash minus capital expenditures, will turn positive in the fourth quarter.

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