Tough quarter

In my most recent weeks of travel and meeting with reporters and with customers, the questions I most often heard had to do with the impacts of both the ongoing machinists strike at Boeing and the current economic situation.

Our 2008 third-quarter financial results released today provide some answers. Obviously, with production stopped since early September, the strike has affected all of our commercial production lines - and even some of our defense programs. At Commercial Airplanes, we’ve also been challenged by an ongoing supplier issue involving galleys for some twin-aisle airplanes.

As a result, our commercial deliveries for the quarter were reduced by 23%. Commercial Airplanes revenue was down 16% and operating earnings declined 58%. Overall, Boeing’s net income declined 38% as revenue fell 7%.

Despite those issues, and the challenging global economic environment, our products and services continue to be in high demand. The third quarter saw 149 airplane orders (625 during the first 9 months). That increased our commercial backlog to a record $276 billion – an 8% increase this year.

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After a successful first flight in July, the 777 Freighter continued its flight test program in the third quarter.

We also had some significant accomplishments during the quarter, including completing 787 pressurization and landing gear tests, start of flight control tests, and beginning final assembly of the fourth flight-test 787. We also began building the first 747-8 Freighter and continued flight testing of the 777 Freighter. In Renton, BCA handed off the first assembled P-8A Poseidon to IDS and also completed the first BBJ-3, and Boeing Commercial Aviation Services delivered its 25th 747-400 Boeing Converted Freighter to UPS

We’re proud of these accomplishments, but we’re well aware of the challenges ahead, including our customers’ access to airplane financing. To that end, Boeing Capital is working closely right now with our customers.

With all that, though, the strike remains one of our top near-term issues. It bears repeating that no one wins during a strike. I think our CEO Jim McNerney put it best this morning when he said, “Simply put, we want this strike to end. And we’re committed to working with the union leaders and federal mediator to reach a settlement.” He emphasized that we worked hard to avoid a strike and want to end it as soon as possible.

Tomorrow, federally mediated talks with the IAM will resume. To summarize what we heard this morning, our hope is to resolve the strike – but in a way that rewards our employees while retaining Boeing’s ability to compete in a challenging market and economy. As was discussed during the earnings call, our team believes that our offer was industry-leading, especially when viewed in light of recent developments in the economy.

Next week we’ll begin main-table negotiations with SPEEA, which represents about 21,000 Boeing engineers and technical professionals. We look forward to respectful, productive talks that lead to a fair agreement there as well.

About our backlog - so far in 2008, we’ve had 2 cancellations and about 80 deferrals with no issues in reassigning the deferred aircraft to other customers. But increasing risks remain right now as a result of the financial and market turmoil.

It’s been a difficult time. As mentioned this morning, uncertainties caused by the strike mean we won’t be able to assess the impact on our schedules and deliveries until it ends. Right now, we think the strike will result in at least a day-for-day impact to our commercial programs, but we won’t know for certain until it’s over.

That’s why you saw no financial guidance today. And even when the strike is over, there will be a ramp-up period before we recover the momentum we had before the work stoppage.

In the meantime we’ve been working to better organize our factories for the ramp-up that will continue once we return to work, because, as Jim McNerney said, we remain focused on improving our competitiveness longer-term. That’s something that’s especially important in the current environment.

Comments (6)

Chris C (South Africa):

The amount of interest, enthusiasm and debate surrounding the next-generation, highly-efficient 747-8 family is simply stellar. The 747-8I is an incredible airplane and will be a big success, period. With 106 firm orders, and a further 4 commitments, for the new 747-8I/-8F to date, the programme is in a very healthy, sound position, considering it is less than 3 years since official launch.

Whilst Jim McNerney indeed did indicate at the start of this year that he would like to have at least 2 new -8I customers before year-end, no one could’ve predicted this financial crisis the world is currently gripped by, or how the oil price would soar to record highs of over USD $147bbl before settling to lower levels, which absolutely affected sales campaigns for airplanes larger than 400seats. Market enthusiasm for the -8I continues to be strong, but until markets stabilize, we will not see the predicted influx of orders for the -8I until next year. In simple terms:

1. No order threshold required for 747-8I to be built. Committed to build 1 or 100. Customers are the focus at BCA therefore BCA are building the finest commercial airplanes in the world, such as the 747-8I.
2. The 747-8I will be a big success. Lufthansa fully and firmly committed to the -8I, other airlines very “excited” still about the -8I. VIP customers lining up for the airplane.
3. In hindsight, better planning on the programme would’ve avoided embarrassing delays and frustrating cost increases, but the end product will still be a remarkable 747.

Congratulations on achieving 95% engineering completion for the -8F, as well as starting production on the airplane.

Well done on the great "vote of confidence" as well from American Airlines with the order of up to 100 super-efficient 787-9s.

P.Sumantri (France):

I have been reading this blog since long time. Frankly, it is quite interesting and it's not a surprise that you've got so many hits.

Keep on doing the good job!

Now, let's go back to aviation industry's situation. While the consequences are quite hard, the strike is only marginal compared to what the industry must face in the coming months.

The current financial and economic turmoil has two obvious impacts. The first one is the impact on aircraft financing and the second one in on air travel demand. These issues will likely put pressure on aircraft deliveries in the coming two years or more.

Next year deliveries must be secured. That's sure, because parts of aircraft that are to be delivered till end of 2009 are already built or being built.
But, the industry can still reduce the delivery level in 2010. I think there is a very high probability that the combined Airbus & Boeing production output in 2010 be lower than this year (taking into account the effect of strike).

Some aerospace suppliers already announced lower production rate. This confirms the trend mentioned above. This quarter is the first of several tough quarters the industry will have to face.

Please visit my blog "Vero Venia"

Norman (Long Beach, California, United States):

In the midst of the now world wide recession and the ongoing IAM strike, it's been tough.

Though things are tough Boeing has been well managed and they know what to do and what projects to pursue, even though their are long delays with the 787 in development, Boeing is in a far better position than it was in the early decade concerning the Sonic Cruiser as a replacement of the 767 and the 747 500X/600X earlier on. Projects like the third generation 737 and the 777-300ER and the big orders for the 787 including the forty-two orders just days ago from American Airlines have kept Boeing on top.

Paulo M (Johannesburg, RSA):

A about a decade a ago, I thought Boeing was a pretty good indicator of where the United States economy was headed. Today, the picture is significantly different. Although Integrated Defense Systems still receives most of its revenues from work done predominantly for US government customers, Commercial Airplanes has done exceedingly well in positioning itself for growing business outside the US. People should realise that for what it is.

Today, other industries have replaced Boeing in that 10-year old vision. Unfortunately, some have faired real bad. Where Boeing was once ridiculed as 'Derivatives 'R Us', others have been caught up in situations that require patience and leadership that can be found in that country. There will be sacrifice, so that survival ensures that many more battles can be fought another day.

This is not to say that many expect other countries to weather the storm and sustain world growth. In the very least, companies like Boeing can survive with the least possible damage.

Now, naturally, planes like the 747 have new life, and new - or reborn - purpose. The 737 Next-Generation Family looks fantastic. The company itself looks sharp and focussed. Were it once looked shaky, we see intelligent strategies, like ETOPS - lead by the 777, paying off nicely. ETOPS is great, but then so is the 777 - and soon, the 787.

This strike has come at the start of what is expected to be a tough period for the entire industry - not just Boeing. The reality is that the longer it lasts, the shakier things become.

The only reason why Airbus has not suffered the same fait is because management there bungled up a position of perceived advantage, and the A380 zapped billions into oblivion.

Airbus simply will not survive a strike right now.

TC (Mt. Vernon, WA):

Four out of five VLA-VIPs choose the 747-8i.
It's the cool plane to have.

Jerry (New York, N.Y. USA):

Thanks for the optimistic outlook. Boeing has been logging on successes but the strke and the price of the stock has hurt longterm shareholders.

Despite the enthusiasm, the investors headwinds have been turbulent and we are confused why the Labor negotiations have taken so long with so much controversy.

Two months prior to the IAM negotiations, BA started to evaluate the Labor situation and came forth with a Proposal. It is obvious, that the proposal was rejected soundly and a strong effort has been made to present issues which were important.

Boeing is now in mediated negotiations and starts negotiations with SPEEA tomorrow. It sounds like two against one.

I realize that there is a news blanket on these negotiations, but we investors are party to this conflict and we are being hammered. The stock has lost over 60% from its high less than a year ago. We read angry responses from Labor and wonder when and if this situation will return to normal and the Company can go back to its normal work.


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