Challenging year behind us, ahead of us

Clearly, today’s Boeing earnings report for the year-end and 4th quarter 2008 reflects the consequences of not achieving our objectives at Commercial Airplanes.

While Boeing posted a profit - $2.7 billion - for the year as a whole, we’ve also announced a $56 million company loss for the 4th quarter (largely as a result of a 4Q BCA loss of $968 million), on a 27% decline in revenue.

As discussed by company executives today, the machinists strike and the resulting factory shutdowns cut our anticipated commercial airplane deliveries in the quarter. The strike also impacted our customers and suppliers - issues that we’re working to resolve today.

But the challenges go far beyond the strike’s effects. Maybe it’s best summarized by saying 2008 was a tough year, with some good performance offset by a worsening economy, missteps in quality and production, and scheduling setbacks on the 787 and 747-8 programs.

So while we’re executing most of our programs well, we’re challenged by those few that aren’t. One that deserves a bit of discussion today is the 747-8 Program. For several years I had the privilege to be part of our effort to market and develop the -8, so I know how hard everybody is working.

However, we’ve suffered delays from unanticipated design changes, struggled with limited engineering resources, and then we had the strike. Those factors added up to our announced a $685 million “reach-forward” loss for the 747 Program. In plain language, that means that as things stand right now we expect to spend more than we’ll earn on many of the 747s yet to be delivered.

That’s the bad news. But I do see opportunities. Our market outlook continues to forecast demand for 980 airplanes in the 747-and-larger category over a 20-year period. Only a fraction of those have been ordered to date. That means there’s significant market upside potential.

I can also tell you that Boeing is focused like never before on boosting our productivity and on becoming even more efficient in everything we do - and those efforts will help drive down our costs.

photo

Full production in progress in Everett: A rare look at a fuselage move in the factory last week as a 767 section “flies” above 747s in final assembly.

I’m sure no one needs reminding that this is a challenging year in our business. Market dynamics change almost daily. Airlines are cutting employment, reducing capacity and taking losses. Airplane lessors are facing financing hurdles. In the face of those factors, our job is to help our customers succeed. And to do that we need to execute our programs and deliver airplanes.

I expect that 2009 will be a time for finally taking those big steps in execution. The 787 Dreamliner is scheduled to enter flight test in the 2nd quarter as we move toward first Dreamliner deliveries next year. We’ll start delivering the 777 Freighter this quarter. And we’re making great progress with the 747-8 Freighter. Overall our outlook is for between 480 and 485 airplane deliveries in 2009.

Yes, we’re concentrating our energy on righting our short-term challenges. But at the same time we’re focused on positioning our company for long-term competitiveness, with our eyes on the opportunities that are out there. As I said earlier this month, we are indeed living and working in interesting times.

Comments (6)

Norman (Long Beach, California, United States):

I think much of the layoffs will come from the Long Beach plant as the C-17 line winds down. The layoffs in Washington State is not good news for the 787 as it still has a long back order list and the 747-8 as it gets further delayed.

Though this is going to be a tough year in 2009, it is good news that their is still a strong demand for aircraft the size of the 747 and larger in the Market Outlook and also, planes to replace the 737 and 757 as read in the early January edition of AW&ST, I am also happy that the 787 will fly this year and enter service early next year.

P.Sumantri (France):

Air travel shrank in the last quarter of 2008, this market contraction may well continue in 2009. For instance, IATA forecast 3% decline in passenger traffic in 2009. This reality is opposite to the growth assumptions on which orders were made for aircraft to be delivered this year and next. It is now clear that there are more aircraft than needed in the worldwide fleet. Deferrals and cancellations are very likely for aircraft to be delivered in 2nd half of 2009 and beyond.

In the past, during a downturn airlines used to retire old aircraft and replace them by more fuel efficient ones. In today conditions, the situation is a little bit different.
First, airlines' financing capability is reduced to nil because they are losing money and because of the current credit crunch. Taking delivery of a new aircraft can be more expensive than losing pre-delivery deposits.

Second, fuel price is relatively low. It went down to around 150 cents per gallon from the peak at 400 cents in June 2008. There is no more incentive to take delivery of new and more efficient aircraft. This is true at least for the short term.
Third, current economic outlook is bleak. Airlines profitability is going down. IATA forecast US$2.5 billion total loss for 2009. In these circumstances, survival is airlines' biggest concern. Therefore, expansion is not at all a priority.

All indicators show that 2009 and 2010 will be two very tough years for the aviation industry.
The bad news is that air travel growth during the next decade won't be as high as some forecasters expect. Our optimistic estimates put the figure at around 3.5% average annual growth during the next decade.

Boeing's decision to improve productivity is the right one. It's a difficult decision but it's necessary. Tough times lie ahead.

verovenia.wordpress.com

Chris C (South Africa):

On the topic of the phenomenal 747-8:
“We still believe the 747-8 is a very competitive airplane with a strong future in a significant market niche. It’s worthy of investment and will provide great value for our customers,” remarked Jim McNerney, President, Chairman and CEO of the Boeing Company in this Q4 ’08 Earnings call.

Whilst there’s certainly been some huge amounts of costs involved in the 747-8 family, there’s been some significant efficiency gains for both variants. Both the -8I and -8F have achieved a further 2% efficiency gain across the board, as reflected on Boeing’s website. With McNerney referring to the -8 as a “terrific airplane the represents a good business for us [Boeing],” it’s certainly a great airplane. And whilst McNerney cautioned that if the business case for the -8 seemed no longer viable, that in the interest of the company and customers, it would have to be reviewed, but right now it’s nowhere near being non-viable.

There’s still plenty of opportunities to sell more -8Is and -8Fs, and with the order book closing in on the all-new A380 (after that’s been on offer for near a decade), I’d be deranged to think that the -8 is not viable. the customers are extremely eager for the new -8, and it represents a huge environmental boost, period.

The 747-8 family has been on formal offer for just over 3 years since official program launch, and the order book of 106 firm orders for the -8 is simply stellar! The 747-8I is an immensely capable airplane, with even Emirates commenting that the -8I is an “excellent aircraft”, and I’ve got no doubt that further orders for both variants will come in the coming months and years. I’m expecting a range increase for the -8I, and further efficiency gains to be revealed once GEnx-2B67 flight testing gets under way as well as flight testing of the formidable 747-8F. The 747-8 is the right airplane for the large airplane market, period. All the best on the on-going sales campaigns for the -8...the orders will come, despite the (laughable) critic predictions on the program.

Paulo M (Johannesburg, RSA):

When companies like Boeing cut 10,000 jobs from production, you know there are serious problems. When it's neighbours in Washington State in completely unrelated industries - Microsoft, Starbucks - are doing the same - that's unheard of.

These companies have been incredibly successful because of their leading involvement in the business of connecting us together.

Eventually, we'll all feel the effects of dwindling demand, as there'll simply be less people who can afford things.

My hope is that this stops feeding off itself. And that those fortunate enough to still have jobs - there are many - go to work positive and ready to drive efficiency, creativity, innovation and success that will eventually open up those very large doors to their co-workers.

--------------------------

On the 747-8's increasing costs. If those are tied in specifically to its improvement, the customers will come, and it will pay off. I think the worst press it has received so far is what looks like under investment in new technologies and procedures because Boeing has always said it doesn't believe in the market - or that the market is not big enough to support even one all-new VLA. That perception counts against sales efforts. It will have to prove its worth.

Alessandro (Sweden):

Sumantri, some airlines has hedgefunded fuel at a very high price compared with today, for them it´s crucial to get new more fuel efficent planes.

I have also a question, can the B748 carry a GP7200
or GE90 in one piece?

Today it´s the mighty Antonovs (22,124 and 225) and
special designed aircrafts like the Airbus Beluga and
B747LCF that can do that.

P.Sumantri (France):

Alessandro,

Fuel Hedging is a management decision to cover uncertainties in the future. It has little to do with aircraft efficiency. Like in any bet, it happens that you lose. I already lost a bottle of champagne in a bet on the 787 first flight date.

Having said the above, your view about the need of new and efficient aircraft is right.

  1. we are all responsible for the future of this planet. We need to build more Environmentally Friendly aircraft to replace the current fleet,
  2. fuel prices can go up again and thus fuel efficiency becomes airlines' economic competitive weapon.

On top of the effort to build Environmentally Friendly aircraft, the industry need to build an efficient air traffic management, a better network topology as well as better airline operational standards.

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