Boeing warned of one more delay and another $1 billion cost over-run, this time to the new model of the 747 jumbo jet, which had been expected to fly next month ahead of the troubled 787 Dreamliner.
Boeing announced this morning one more delay and another $1 billion cost over-run, this time to the new model of the 747 jumbo jet, which had been expected to fly next month ahead of the troubled 787 Dreamliner.
The first new 747-8 now won’t fly until next year, despite confident assertions by the head of the program just six weeks ago that he would have three of the jets flying by year end.
Boeing will take a $1 billion charge to its third-quarter earnings to reflect growing production costs and slow demand for the new version of its 747 jumbo jet.
Program chief Mohammad “Mo” Yahyavi said on a 747-8 production line tour at the end of August that he expected the three flight test airplanes to roll out at intervals of 20 days apart this fall, with all three set to be in the air by the end of December.
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Two days earlier, on August 24, the full Boeing board had visited the Everett plant, and Yahyavi said he had given them the same briefing and forecast the same flight schedule.
And on August 31, Boeing chairman and chief executive Jim McNerney asked during a teleconference specifically about the 747-8 program, said, “The program is going well.”
Boeing said it now expects the first flight of the 747-8 Freighter early next year. Flight tests will follow and first delivery of the 747-8 Freighter is now expected in the fourth quarter of 2010.
Already losing money
Due to previous delays and costs increases caused by wing design changes a year ago, the 747-8 program was already in a loss position — meaning Boeing currently projects it will lose money on the plane without further firm orders.
With the latest charge, the total projected loss on the program is at least $1.7 billion. That loss projection is based solely on production costs and omits some $3 billion to $4 billion in research and development expenses.
Approximately $640 million of the new charge reflects higher estimated costs to produce 747-8 airplanes at both Boeing and supplier facilities, the company said, adding that “late maturity of engineering designs has caused greater than expected re-work and disruption in manufacturing.”
Boeing spokesman Tim Bader said the “root of the problem” is that the re-work caused engineering to be late, and that in turn delayed implementation of the re-work in the production system.
In addition, the mix of older 747 structure with newly designed elements has caused engineering problems.
Boeing engineers created the entirely new sections — such as the wings — using the latest digital computer-modeling tools, while retaining the older blueprints for sections of the jet that remained unchanged.
In August, Yahyavi had acknowledged challenges in the areas of the structure that were modified but still kept some of the old design. However, he said Boeing had overcome those issues.
Tuesday, spokesman Bader cited problems arising from the use of mismatched design tools as part of the new delay.
“The build-up of tolerances between structure designed with older tools and the new design tools has caused fit-up issues that have been discovered and are being resolved in the final assembly process,” Bader said in an e-mail.
The remaining $360 million of the charge is due to what Boeing’s press release calls “challenging market conditions” and the company’s consequent decision to slow down a planned ramp up of production.
Customers in no hurry
The first 747-8s are freighter aircraft, and this market has faltered badly in the past year.
In June, Japanese air freight company Nippon Cargo Airlines (NCA), one of two 747-8 launch customers with an order for eight jets, announced that its fleet expansion plans were on hold, a step necessary “for NCA to survive.”
Boeing has been reallocating early delivery slots on all its programs as airlines worldwide seek to defer planned capacity increases. On the 747-8, with just 105 firm orders booked, there’s much less scope to shuffle the delivery order.
So Boeing will now maintain the 747-8 production rate at 1.5 airplanes per month nearly two years longer than previously planned, deferring the planned increase to 2 per month.
In a note to clients, Morgan Stanley analyst Heidi Wood said the charge heightens existing concern over Boeing’s cash flow, since the company will have to pay “supplier penalties and additional development costs” on the program over the next several years.
Boeing said it will provide more details on the 747-8’s problems only when it reports third-quarter results on October 21.
Dominic Gates: 206-464-2963 or firstname.lastname@example.org