From September, Boeing will cut production of the slow-selling 747 jumbo jet in Everett to one jet every two months. As a result, the jet maker will book an $885 million pretax write-off when it announces financial results on Wednesday.
Hit by a protracted slump in the air-cargo market, Boeing announced Thursday it will cut production in Everett of the slow-selling 747 jumbo jet down to one airplane every two months, beginning in September.
The jet maker will consequently book an $885 million pretax write-off when it announces financial results Wednesday.
Boeing had previously announced its 747 production rate would drop from 1.3 per month today to one per month in March.
“We expect some impact on employment,” said spokesman Doug Alder. “We’ll try to mitigate that by placing employees in other jobs across the other jet programs.
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“But we’re first going to handle that by reducing the number of executives and managers,” he said.
Boeing did not provide an estimate for the likely number of job losses from the roughly 2,000 people who work on the 747.
However, Alder said that “it’ll be more at the management level and less so in manufacturing.”
He said the management reduction has already begun by combining various parts of the 747 and 767 operations.
“Many of the groups have operated jointly for several years, including HR, Finance, Engineering and the Delivery Center/Flightline teams,” Alder said.
More recently, the teams that assemble the tails of the 767 and 747 have begun to work together in the 747 area.
“To reduce costs and increase competitiveness where it adds value, the 767 and 747 programs will continue to selectively combine more teams over time,” Alder said.
At the beginning of the year, the 747 had an order backlog of just 20 jets.
“Global air-passenger-traffic growth and airplane demand remain strong, but the air-cargo market recovery that began in late 2013 has stalled in recent months and slowed demand for the 747-8 Freighter,” said Ray Conner, Boeing vice chairman and chief executive of Boeing Commercial Airplanes, said in Wednesday’s announcement.
Although the company remains confident in the 747-8’s future, expecting operators will want to replace late-model 747-400 freighters, the company must take “the prudent step to further align production with current market requirements,” he said.
Ken Herbert, a financial analyst with investment bank Canaccord Genuity, said that while this rate cut was “not unexpected,” the timing is likely to further undermine investor confidence, already shaken by fears that the commercial-airplane cycle has peaked and may turn sharply down.
“Even though it’s the 747 and everybody expected this, the timing is obviously not ideal considering the jitters in the marketplace right now about the health of the commercial-aerospace cycle, and Boeing and Airbus in particular,” Herbert said.
The prime market for the 747 is for the freighter model, which is the largest air-cargo jet in service and is used on intercontinental routes.
However, a marked slowdown in international trade — including China — is prolonging the slump in this segment of the air-cargo market, according to Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA).
“The air-cargo business is suffering from the effects of market weakness in major trading economies,” Herdman wrote in an AAPA analysis this month.
Greg Smith, Boeing’s finance chief and executive vice president of business development and strategy, said the company is “closely monitoring the air-cargo market” in hope of additional orders.
Cutting the rate of production extends the period over which a given number of jets are built, and so extends the overhead costs of production.
If a rate is cut in half, the time taken to build a jet is doubled, and so many of the overhead costs during this manufacturing period are also doubled.
It’s this cost increase that requires Boeing to acknowledge the extra $885 million in its accounting.
The company said that after a tax reduction for the loss is factored in, the write-off will amount to $569 million, or $0.84 per share, and will not affect the company’s 2015 revenue or cash flow.
Boeing will announce its fourth-quarter financial results and provide guidance for 2016 on Wednesday.
More than 1,500 of the iconic 747 jumbos, with their instantly recognizable forward hump, have been delivered since the first one flew in 1969. However, the plane’s life is clearly fading.
This month, Air France retired its last 747, and later this year Cathay Pacific and Saudia, the national airline of Saudi Arabia, will do the same. Only 221 of the jets remain in service.
The 20 remaining orders on the books include several of dubious solidity.
Four orders are down to Russian carrier Transaero, which has ceased operations and is facing bankruptcy.
Another two are for Nigerian carrier Arik Air, which ordered the planes in 2011 but reportedly wants to switch the order.
Some earlier cancellations have left Boeing with four remaining 747-8 “white tails,” aircraft already built and sitting at Paine Field without a customer.
That includes one painted in Seahawks colors, said spokeswoman Karen Crabtree.
Last September, the slowed manufacturing rate prompted a major supplier — Triumph Group, which had built the huge fuselage panels — to cut its losses and exit the program, leaving Boeing to take over that work.
Boeing has a pending order from the U.S. government for several 747-8s for delivery in 2018 to replace the president’s current Air Force One planes.
The production cut will help stretch out production into that time frame. It cannot go on much longer.