Boeing said Wednesday that without new orders, it may cut 777 production in late 2017 to as low as 42 jets per year. That possibility was raised even as its quarterly earnings performance prompted Boeing to slightly raise its outlook for this year, boostingits share price.
Reacting to growing industry expectation that 777 jet production in Everett will have to be reduced further than previously stated, Boeing said Wednesday that the worst-case scenario is a rate cut to 42 jets per year from the current 100 jets per year.
Chief Executive Dennis Muilenburg said in a teleconference that a decision will likely be made by year-end whether to cut production below the previously announced target of 66 deliveries, or 5.5 jet deliveries per month, in 2018.
His comments came as Boeing reported a buoyant current financial performance, beating analyst forecasts. Third-quarter profit rose 34 percent, mainly due to a large positive tax adjustment but also indicating lower costs and increased productivity.
Muilenburg said the company still hopes to win more 777 orders this year, and depending on the outcome of several sales campaigns, it may maintain that planned 5.5-per-month rate or cut it to as low as 3.5 jets per month.
If that happens, he said, the financial impact would be “offset by other actions.”
Though he gave no details, presumably one element would be cutting jobs in Everett to match the reduced production rate.
The most vulnerable to layoffs if production falls are the machinists who build the airplane. Roughly 3,400 mechanics work directly on assembling the 777 in the Everett factory, and hundreds more work on fabricating the tail of the jet in Frederickson.
When asked about possible employment cuts, Muilenburg said “head-count variations are a natural part of our business.”
“We’re dealing with market realities around competitiveness and a challenging market environment,” he said. “We’ll continue to take the right actions to make sure we’re a profitable business.”
Heading above 900 jets per year
Muilenburg said that if needed, a further 777 rate cut would be implemented “in late 2017 or early 2018.”
The 777 production rate is under severe pressure due to a downturn in the global airplane business that has particularly hit sales of large widebody jets.
Figures cited by Muilenburg suggest that the 777 production gap Boeing needs to fill with new sales looms even earlier than suggested in a Seattle Times story Monday.
He indicated a shortfall of 13 airplanes next year and 26 airplanes in 2018, rather than a shortfall of 37 planes all in 2018.
Ken Herbert, industry analyst with investment bank Canaccord Genuity, noted that Boeing said nothing about 2019 and 2020, where the 777 production schedule is even less full.
“That’s where you will see even more pressure around the transition to the 777X,” Herbert said. “You’ve got a very profitable program seeing probably a greater than 50 percent cut in volume. It’s a big deal.”
The softness in the widebody market also threatens Boeing’s plan to take the 787 Dreamliner production rate up to 14 jets per month at the end of the decade. It needs more orders to do that.
Muilenburg said Boeing has another six months before it needs to make that 787 rate decision.
And he emphasized that in contrast to the widebody-jet segment, the 737 narrowbody jet program is solid, despite doubts in the industry that the very high production rates contemplated for that jet will be attained.
Muilenburg said that even at the rate of 57 jets per month scheduled for 2019, Boeing is still oversold on the 737.
And thanks largely to that program, he said that even if the widebody programs are cut, Boeing deliveries will rise from a record 762 jets last year to more than 900 jets toward the end of the decade.
He said any necessary cuts in widebody-jet production will only “modestly affect” profit margins and cash flow growth.
Boeing expects the current crunch in its widebody market to ease after 2020.
Muilenburg said he foresees a recovery then fueled by the need to replace older 777s, the continued growth of worldwide passenger traffic, and the opening up of new routes by the more efficient 787 and 777X models.
787 deferred costs finally fall
With Wednesday’s quarterly report, the company raised its forecast for 2016 earnings, revenue and airplane deliveries.
Even though revenue declined 7.5 percent year-over-year last quarter due to lower commercial and defense deliveries, Boeing said it earned $2.28 billion in profit, or $3.60 per share, up from $1.70 billion or $2.47 per share a year ago.
However, profit from operations was down on those lower deliveries, from $2.58 billion a year ago to $2.28 billion last quarter.
In a milestone for the 787 Dreamliner program, the cumulative total of production costs deferred into the future finally began to come down, falling by $151 million compared to three months ago.
The total had fallen in the second quarter only because Boeing decided to write off $1.235 billion of the total for the final two flight test of 787s that were so reworked they were then deemed unsellable.
This quarter, the total fell because Boeing finally has its costs down low enough that it brought in an average of just over $4 million in cash on each of the 36 Dreamliners it delivered.
It’s a start. But to break even on 787 production, the jet maker still has $27.5 billion in deferred costs to claw back over the next 800 Dreamliner deliveries — an average of just over $34 million per airplane.
(That calculation does not include the estimated $15 billion to $20 billion Boeing spent on 787 development costs.)
Still, Muilenburg celebrated the moment.
“We’ve turned the corner,” he said. “We are driving productivity increases on that line and … really making some very solid progress on driving profitability into 787.”
Boeing executives on Wednesday also raised the outlook slightly for the full year.
They expect full-year earnings from core businesses to range between $6.80 and $7 per share, a 70 cents increase entirely due to the previously unannounced tax benefit.
Boeing forecast revenue between $93.5 billion and $95.5 billion, an increase of $500 million from its previous prediction.
The company said it expects to deliver 745 to 750 airliners this year, up five jets from its previous prediction.
The company delivered 563 nonmilitary planes in the first nine months of 2016, including 188 in the third quarter.
Herbert, the analyst, said Muilenburg’s adamant assurances that any cuts in widebody production would not impede Boeing’s march toward bigger margins and cash flow reassured investors and boosted the share price.
Boeing’s stock closed Wednesday up $6.52, or 4.69 percent, at $145.54.