Boeing posts strong 2012 first-quarter results

Chicago-based Boeing, the world’s largest aerospace company, posted an exceptionally strong first-quarter results which beat Wall Street analysts’ forecast and saw its net income for the quarter soaring by a staggering 58% from US$586 million a year ago to US$923 million this year. The better-than-expected results came as the company recorded a US$0.11 per share positive impact from the release of a litigation reserve, a remarkable quarterly performance from its defence unit which was boosted by the Saudi Arabian order for 84 new F-15SA fighter jets, as well as a higher commercial deliveries at its commercial airplanes unit.

Earnings per share (EPS) surged by 56% from US$0.78 per share in the year-ago quarter to US$1.22 per share this year, or US$1.11 per share excluding the release of litigation reserve, beating the Wall Street consensus of US$0.94 per share. Revenue rose by 30% to US$19.4 billion in the first-quarter of this year from US$14.9 billion in the prior year period, also beating analysts’ forecast of US$18.4 billion. The company raised the full-year 2012 earnings per share (EPS) guidance to US$4.15-US$4.35 per share as a result of the release of litigation reserve.

Driven by a 32% rise in deliveries at its Boeing Commercial Airplanes (BCA) unit from 104 airplanes a year ago to 137 airplanes this year, the world’s second-largest plane-maker enjoyed a reversal of fortune in operating cash flow (OCF), with the metric improving significantly from -US$953 million in the year-ago quarter to this quarter’s US$837 million. Free cash flow (FCF) also improved dramatically from -US$1.37 billion in 2011 first-quarter to US$413 million in 2012′s first three months. Operating margins, meanwhile, increased by 1.4% to 8.1% from 2011 first-quarter’s 6.7%, which were weighed by the early 747-8 and 787 deliveries that carry low profit margins and hence have a dilutive impact to the operating margins results.

“Strong core operating performance from our production programmes and services businesses continues to drive expanded earnings, revenue and cash flow for Boeing. We also grew our record backlog with more than 300 firm orders for our new 737 MAX, a contract award for 84 new F-15s for Saudi Arabia, and other key wins. Our outlook for the year remains positive, and our team is focused on meeting our commitments to customers, profitably increasing commercial airplane production and delivery rates, and building on our strong position in defence, space and security markets,” Boeing president and chief executive Jim McNerney said.

At its Boeing Commercial Airplanes (BCA) unit, revenues rose by a staggering 54% from US$7.1 billion in 2011 first-quarter to US$10.9 billion in the first-quarter of this year, buoyed by an aforementioned rise in commercial deliveries. The company delivered 5 Boeing 787s and 6 747-8s during the first-quarter, including the first two General Electric (GE) GEnx-1B-powered 787s to Japan Airlines (JAL) and the first 747-8I Intercontinental to a VIP private customer, while booking 412 net orders, including 301 for the re-engined 737 MAX narrowbody aircraft, consisting of 201 737 MAX 9s from Indonesian low-cost carrier (LCC) Lion Air and the remaining from Oslo-based LCC Norwegian Air Shuttle (NAS). Commercial backlog during the quarter soared to a record US$308 billion with more than 4,000 airplanes.

As a result of increased deliveries, earnings at the commercial airplanes unit doubled from US$509 million in 2011 first-quarter to this year’s US$1.08 billion, whereas operating margins improved by 2.7% to 9.9% this year from 7.2% prior year period primarily owing to higher 737 and 777 deliveries and despite the margin dilutions arising from early 747-8 and 787 deliveries.

At the Boeing Defense, Space & Security (BDS) unit, revenue rose by 8% from US$7.6 billion in the year-ago quarter to US$8.2 billion this quarter, in which the initial revenue from the Saudi Arabia F-15SA contract, coupled with C-17′s international sales, helped propel Boeing Military Aircraft’s (BMA) revenues 27% higher to US$4.3 billion than a year ago. However, this was partially offset by a 23% decline in the first-quarter revenue of Network & Space Systems (N&SS) from US$2.3 billion last year to US$1.8 billion this year.

Nevertheless the total earnings at Boeing’s defence unit, Pentagon’s second-biggest weapon contractor after Lockheed Martin, rose 11% from US$671 million a year ago to US$742 million this year, as a 44% rise in Global Services & Support (GS&S) earnings to US$232 million and a 18% rise in BMA earnings to US$437 million helped offset the 48% decline in Network & Space Systems (N&SS) earnings to just US$73 million from US$141 million in the year-ago period. This achievement was indeed remarkable given the declining defence budgets in Western powers in an effort to trim national deficits and bring their fiscal houses in order.

Image Courtesy of Boeing

737 MAX
The re-engined 737 MAX is continuously being optimised as time progresses (“Boeing continues to optimise 737 MAX“, 9th Apr, 12), with the Chicago-based airframer confirming the elimination of vortex generators on its tail, an 8-inch (20.32 cm) extension to the nose landing gear and a new nose landing gear door design, an electronic bleed air system in addition to a fly-by-wire spoilers in order to trim weight.

“The 737 MAX is on track to deliver substantial fuel-savings to customers starting in 2017. We’ve made several design decisions that support the performance targets for the MAX and evolve the Next-Generation 737′s design within the scope of the 737 MAX programme,” Boeing Commercial Airplanes (BCA) 737 programme vice president (VP) and general manager (GM) Beverly Wyse said.

“We also continue to do work in the wind tunnel to affirm the low- and high-speed performance of the 737 MAX design. Based on design work and preliminary testing results, we have even more confidence in our ability to give our customers the fuel savings they need while minimising the development risk on this programme,” Boeing 737 MAX programme chief project engineer (CPE) and deputy programme manager Michael Teal said.

“Any new technology incorporated into the MAX design must offer substantial benefit to our customers with minimal risk for the team to pursue it. On the 737 MAX we are following our disciplined development process and continue to work on an airplane configuration that will provide the most value for our customers,” Teal reiterated.

Boeing also disclosed that the company is studying different winglet options for the 737 MAX that will further reduce drag, cut the re-engined narrowbody’s block fuel burn, as well as further boosting the 737 MAX’s already increased range.

According to Orient Aviation‘s multiple sources at the Chicago-based airframer, Boeing is currently evaluating different kinds of winglets and raked wingtips at different wingspans.

However, Orient Aviation‘s sources at Boeing caution that the wingspan of the blended winglet-equipped Boeing 737-800 at 35.8 metres (117.5 ft) is already encroaching at the upper limit of US Federal Aviation Administration (FAA) gate type A, and adopting a raked wingtip with a longer wingspan such as the P-8A Poseidon’s one with a wingspan of 37.64 m (123.6 ft), will lead to a re-categorisation of the 737 MAX s Airplane Design Group (ADG) 4 aircraft instead of ADG Group 3 aircraft, which will require the larger gate type B at US airports, where many small US airports do not have or will have to upgrade the existing airport facilities to handle a larger wingspan.

The US FAA defines Group 3 aircraft as those with a wingspan between 79 and 118 ft whereas the Group 4 aircraft as those with a wingspan between 118 and 171 ft.

While it is not immediately clear which winglet options and wingspan Boeing will eventually settle on at press time, either should Boeing be able to convince the Geneva-based International Civil Aviation Organisation (ICAO) to lift its ADG Group 3 upper limit by 2 metres (6.56 feet) to accommodate the longer wingspan, or should Boeing successfully find a winglet that allows the 737 MAX to retain its existing ADG Group 3 classification, yet reducing drag and improving block fuel burn, then it is likely that the range increase currently planned for the 737 MAX variants will get a further boost.

The range of a 162-seat 737 MAX 8 will see a 405 nautical miles (nm) increase in its range to 6,426 km (3,470 nm), whereas both the 126-seat MAX 7 and 180-seat MAX 9′s ranges will be 3,800 nm and 3,430 nm, respectively.

This is likely to make the MAX 7 and MAX 8 slightly ahead of their Airbus counterparts in terms of range, while the MAX 9 will be slightly inferior, a previous Orient Aviation study has found.

Meanwhile, Boeing has refuted the claims that it is evaluating a 71-inch Pratt & Whitney (P&W) geared turbofan (GTF) for the 737 MAX, of which industry talks of a second engine option have been rife lately.

“Right now, as I think we’ve announced many, many times, we are working exclusively with CFM on the MAX, and we’re very happy with the development there. We’re confident that we can meet the targets that our customers need and that we’ve promised them. So that’s our plan going forward,” Boeing president and chief executive Jim McNerney stressed.

Yet Orient Aviation‘s sources at the world’s second-largest plane-maker insist that talks between Pratt & Whitney (P&W) and Boeing are continuing, while pointing out the fact that General Electric’s exclusivity on the 737 programme applies to all current and future derivatives of the 737 family, unless there is a rebranding of the airplane, which is highly unlikely to take place.

747-8, 777X
On the 747-8, Boeing has delivered the first 747-8I Intercontinental aircraft to a VIP private customer in the Middle East during the quarter while delivering the first example to German airline Lufthansa on 25th April.

The company noted that the fuel burn of the 747-8F freighter is 1% better than expected, the company’s vice president (VP) in marketing Randy Tinseth said. The dispatch reliability of the 747-8F freighter is “slightly below” the 97.9% dispatch reliability achieved by Boeing 777 after 1 year of entry into service (EIS), a flightglobal report says.

“The 14 freighters now in service with 5 customers are performing extremely well. Progress on the production side is steady, too, as we continued to transition to reach a production rate of 2 airplanes per month this summer,” Boeing president and chief executive Jim Albaugh said.

“The 777 was kind of our benchmark programme so everybody internally compares themselves to the 777 because it was such a great introduction. We’re not at that point, but we’re very close,” Boeing director of 747-8 support and services Leslie Lauer told flightglobal.

In the meantime, Boeing says the 747-8, of which its General Electric (GE) GEnx-2B engine missed its engine specific fuel consumption (SFC) by 2.7%, along with the 2.3-2.7 tonnes (5,000-6,000 lbs) overweight on initial airframe since the revised wing design after 2005, or 8-9 tonnes overweight when compared to the original wing design in 2005, will meet specifications from 2014 onwards.

“The planes delivered so far have been performing very well in service, about 1% better than we thought. They are giving double-digit gains in fuel burn (compared with the models they replace) and are on a path to getting back to catalogue commitments in 2014,” Boeing spokesman Jim Proulx said.

“The early deliveries are short of our commitment on fuel burn. With the improvements we have committed on the airplane, we will do that [meeting specifications],” Boeing 747-8 vice president and general manager Elizabeth Lund acknowledged.

“The GEnx-2B only has one PIP [performance improvement package] and we just call it the GEnx-2B PIP (no 1 after it). The GEnx-2B PIP combines the learnings from both GEnx-1B PIPs – so the improvements are focused on the high pressure compressor, combustor, high pressure turbine and the low pressure turbine. We anticipate ~1.6% improvement in SFC [specific fuel consumption] with the GEnx-2B PIP,” General Electric (GE) spokeswoman Deborah Case told Orient Aviation.

As the 747-8I Intercontinental enters into service with Lufthansa expecting to deploy the aircraft to Washington DC, Bangalore, Delhi, Chicago and Los Angeles, and with the airplane expected to meet specifications from 2014 onwards with a weight increase already implemented that will enhance the aircraft’s payload/range capability, as well as studies to unlock the 3,300 gallons trim tank in its horizontal stabilisers, the potential pent-up demand for the 747-8I Intercontinental, especially those airlines waiting for the aircraft to enter service first before making a decision on an order, may be soon to be realised.

Indeed, Boeing may be close to clinching a major deal on selling a satisfactory number of 747-8I Intercontinental to a “well-respected” carrier at the upcoming Farnborough Airshow, which Orient Aviation‘s sources declined to reveal its identity. Though Orient Aviation‘s sources at one of the possible 747-8I Intercontinental buyers, Hong Kong-based Cathay Pacific Airways, have denied that an order for very large airplane (VLA) is imminent, pointing to the carrier’s consecutive miss in revenue growth targets in the past few weeks and its chief executive John Slosar’s revelation that Cathay may have to park planes and reduce flights should the weakness in revenue growth continue.

While the 467-seat 747-8I Intercontinental will be a good airplane filling the market niche between the 365-seat 777-300ER and the 525-seat Airbus A380 superjumbo, the internal competition between a four-engine 467-seat 747-8I and the proposed 407-seat 777-9X will have to be dealt with carefully, or at least should be sold concurrently to match some airlines’ unique needs, as the revamped 777-9X looks destined to be an ultra-efficient derivative that may sway away carriers that want the 777-9X’s larger revenue cargo volume, the sellable underbelly cargo space after fully loading passengers’ luggage, more flexibility and potentially better fuel efficiency.

“Obviously you don’t want to have airplanes on top of eachother. You want to have them spaced, and I think with the product line that we envision going forward over this next decade, we’ll have about a 15% difference in seat count among the different models that we will probably go forward with,” Boeing Commercial Airplanes (BCA) chief executive Jim Albaugh acknowledged. The seat count difference between the 407-seat 777-9X and the 467-seat 747-8I will be 12.8%.

Image Courtesy of Boeing

Boeing is now eyeing a launch of the 777X after securing the authority to offer (ATO) from its board of directors by the end of this year or early-2013, and a number of airlines have already expressed strong interests in the aircraft.

“We’re working towards being in a position toward the end of this year to talk to our board. That’s assuming the business case closes, that’s assuming the technical trades are ones that close,” Boeing Commercial Airplanes (BCA) chief executive Jim Albaugh said.

“Our teams have been in dialogue with the Boeing team for some time now, it’s really very interesting to see this new aircraft if it will come out. It would be an excellent aircraft to have in Emirates,” chairman Sheikh Ahmed bin Saeed Al Maktoum was quoted as saying in a flightglobal report, adding the Dubai-based carrier is “very impressed” and “I think you will see a big improvement to the existing plane”.

According to Orient Aviation‘s multiple sources at the Chicago-based airframer, Boeing is eyeing a finalisation of the 777X product strategy in the second-quarter, then a launch by late-2012 or early-2013. The firm configuration will take place in 2015, followed by roll-out and flight tests of the aircraft, which the same sources say will take place at the end of the fourth-quarter in 2017 with an aggressive 9-month flight test programme that will be concluded by the end of the third-quarter in 2018. Entry into service (EIS) is expected to be in mid-2019.

The 777X plan is centred around the 407-seat 777-9X and the 353-seat 777-8X that are designed as -300ER and -200ER replacements, respectively, with the reported 9,480 nm 777-8LX “unlikely to be launched at this early stage”, the sources say (“Boeing develops 777X to challenge Airbus A350“, 9th Feb, 12).

The 407-seat 777-9X will be 76.48 metres (250 ft 11 in) long and feature a maximum take-off weight (MTOW) of 344 tonnes (759,000 lbs), powered by a 99,500 lbs GE9X engine, whereas the 353-seat 777-8X will be 69.55 m long and feature a MTOW of 315 tonnes, powered by a derated 88,000 lbs GE9X engine, the same flightglobal report said.

As the 777X product development advances, the engine battle heats up accordingly since Orient Aviation first reported that Boeing issued a 100,000 lbs (445 kN) request for proposal (RFP) to all three engine manufacturers (“Boeing eyes 787 improvements along with production ramp-up“, 11th Jan, 12).

Derby, England-based engine manufacturer Rolls-Royce is developing the 99,500 lbs RB3025 engine with a 132.5 in (337 cm) engine fan size and a bypass ratio of 12:1, as well as an overall pressure ratio (OPR) of 60:1, according to a flightglobal report. The RB3025 is expected to be “more than 10%” fuel efficient than the GE90-115B engine.

In comparison, the GE9X has stabilised and settled on a specific fuel consumption (SFC) reduction of between 9%-10%, in addition to an OPR of 60:1, according to Orient Aviation‘s sources at the world’s largest engine-maker.

For Pratt & Whitney (P&W), “Pratt keeps pointing out that there are no technical obstacles for doing a 100,000 lbs GTF [geared turbofan], but they are not really keen doing it,” one of the sources says.

787 Dreamliner – putting nightmare behind?
From a workmanship issue that was due to improper shimming which affects 55 airplanes and takes days to correct, to the first delivery of GEnx-1B-powered 787 variant to Japan Airlines (JAL), as well as the successful rate break from 2.5 units a month to 3.5 a month at the Everett final assembly line (FAL), the beleaguered Boeing 787 Dreamliner programme has achieved a lot of progress during the first quarter.

Boeing has delivered 4 more 787s to customers since the second quarter, and says it is on track to deliver 70 to 85 747-8s and 787s, half of which will be 787 deliveries.

“The workaround was quickly identified. I think it is now – has dovetailed both into change incorporation and the line. I think roughly 14, 15 airplanes have already been reworked. I think in our world, it did have a schedule impact within our month-to-month schedules, which we don’t share with you, that doesn’t impact our guidance for the year at all,” Boeing president and chief executive Jim McNerney reassured.

“We continue to increase the rate of 787 production. We expect to increase it, I should say, to 5 per month by the end of this year, which tracks to our plan to reach a rate of 10 per month in final assembly by late 2013,” McNerney reiterated.

The gross inventory of the 787 programme increased by US$1.8 billion during the quarter to US$22 billion, including a US$17 billion work-in-process (WIP) inventory. The US$17 billion WIP itself consists of US$11.9 billion of deferred production costs and represents 53 airplanes still in the production process.

“We expect gross inventory for the 787 to increase to US$24 billion by year-end 2012 as we continue ramping up production rates. But this growth will moderate as deliveries increase. The deferred production balance will continue to grow as we increase production rates and introduce the 787-9 derivative, peaking at slightly over US$20 billion and then declining after the programme achieves the planned rate of 10 per month and stabilises at that level,” Boeing chief financial officer (CFO) Greg Smith commented.

Boeing also revealed that the production cost from line number LN7, the first 787 delivered to Japan’s All Nippon Airways (ANA) to LN60, has declined by 40%-50%.

“Improving profitability on both the 787 and the 747-8 programmes continue to be a top priority for us as we proactively work opportunities to offset risks and improve margin,” Smith emphasised.

“We estimate total unit cost in first-quarter was US$291 million, which is a ~4% decline from fourth-quarter. In tracking these, we calculate that total unit cost has declined ~27% from the first delivered aircraft (estimated total cost of ~US$400M) to ~US$291M in first-quarter 2012. We also estimate that deferred production by unit declined by an average of $10M per quarter from $216M in Q3 2011 to $196M in Q1 2012. We expect the $10M increment to accelerate as the year progresses according to some unknown slope of the learning curve. However, this slope will not be linear until deliveries begin to sequence properly which is currently not possible given the varied levels of change incorporation required on the first ~66 airplanes, and the introduction of the South Carolina final assembly line,” Credit Suisse said in a research note to clients, while raising 2012′s 787 delivery target from 35 to 42.

“Progress also continues at the Everett mod centre to complete work on the airplanes that have come off the line but require further change incorporation work. With dedicated resources in place, we are using proven, repeatable processes to track the scope of work required on each airplane, maximise learning and reduce cycle time. As a result, we are seeing performance improvements with each airplane delivery,” Boeing president and chief executive Jim McNerney commented.

“I think our confidence grows every day, quite frankly, in our ability to deliver the learning curve that underlies our plans. I think we do have a high degree of confidence that the mid-60s line number will be – will have the production lines flowing exactly the way we want it. And the change incorporation side of Everett is also performing well on those planes that – where we did have a significant amount of rework. And that is going well, too. I mean, as we modify more planes, there’s a learning curve involved there, too. And we are on track with both the regular production and the modification. I would also add that Charleston looks very good, and we – you’re going to see the rollout of the first airplane later this week and delivery this summer. And I think the learning curve progress in both places are giving me more and more confidence every day that the costs that underlie our plans are going to be met,” McNerney said.

Image Courtesy of Jon Ostrower

Not all Wall Street analysts are convinced yet.

“Boeing indicated that actual unit costs have declined by 40-50% from the first unit delivered (unit #7) to the unit currently coming off the line (unit #60). This reflects a reduction from roughly $500M to $250M now, equating to 13-14% learning, below the level necessary to reach break-even 787 cash flow in 2015,” UBS analysts wrote in a research note.

“Our analysis indicates that in order to hit its guidance for positive 787 cash flow by early 2015, Boeing will need to bring its 787 manufacturing cost down roughly 50% faster than it did on 777. Specifically, we estimate Boeing’s unit cost will need to drop from roughly $240M currently to roughly $110M in 2015 (constant dollars) with its cumulative average cost dropping at a 24% rate with each doubling in production (24% learning curve). Under this scenario, we estimate Boeing’s 787-related cash flow at a use of roughly $6B over the next three years. This includes a use of $3-4B in 2012 with $4-5B inventory build partially offset by $1-2B in net customer deposits,” UBS analysts said.

“Boeing has made progress on unit costs in recent quarters, but we believe this must pick up to meet the year-end 787 inventory target of $24 bn. We estimate the current unit cost is over twice the assumed program average of ~$110 mn, so there is a long way to reach the crossover point, which management expects in 2013/2014. Progress should accelerate, however, particularly as the rate ramps, since higher production should allow Boeing to leverage a cost base that is already largely in place. The impact of this operating leverage should be amplified on unit deferred production costs since the program costs that appear on the income statement will increase one-for-one with rates, with all of the benefits to show up in deferred production. We believe this can help reduce unit excess over average costs from the current level, which we estimate exceeds $100 mn, to zero by the end of 2014,” JP Morgan said in a research note to clients.

According to Orient Aviation‘s sources at the Chicago-based airframer, 787 line number LN64 started final assembly early last week and LN66 was in pre-assembly area, whereas LN65 was in the company’s final assembly line in North Charleston, South Carolina.

While the LN66 was indeed the airframer’s internal target for 100% completion rate with no travelled work, Orient Aviation‘s sources at Boeing caution that this may slip slightly, but LN66 will remain “more or less” 100% complete.

According to a Seattle Times report, the mid-fuselage section for LN67 will still have 5 out of 4,000 tasks incomplete, which Orient Aviation‘s sources say as “negligible”.

In the meantime, as Boeing envisions more improvements along with the production ramp-up to 10 units per month by the end of 2013, there has been some progress being achieved on the incremental improvements on the 787′s engines.

“While Boeing has not released NAMS [nautical air mile] data yet, the GEnx-1B PIP 1 exceeded GE’s expectation in SFC [specific fuel consumption] and was more 1.6% improvement in SFC. GE has not reduced the PIP 2 target – It has always been an additional 1% improvement on top of the improvement from the PIP 1,” General Electric (GE) spokeswoman Deborah Case said.

“PIP 1 [is] focused on changes to the low pressure turbine with hot section durability improvements [while] PIP 2 [is] focused on improvement in fan, high pressure compressor, combustor and high pressure turbine for aerodynamic and flow path enhancements,” Case elaborated.

According to Orient Aviation‘s sources at the world’s largest engine-maker, the initial GEnx-1B Block 4 has missed its engine specific fuel consumption (SFC) by “close to 3%”, with the performance improvement packages PIP 1 and PIP 2, the GEnx-1B will be around 0.4% above the originally targeted specification.

In contrast, the Rolls-Royce Trent 1000 Package A engine has missed the original engine specific fuel consumption (SFC) by 4.3% and the Package B will exceed the original SFC target by 2% and the Package C engine upgrade will be “within 1% of specifications”.

Looking ahead, Orient Aviation thinks risks still remain on the 787 programme, especially on the production ramp-up to 10 units a month by the end of 2013, and that it is too early to declare success at this early stage, given the remaining work still has to be done. These include the June commencement of operations of the 787 surge line at Everett, the rate break to 5 units per month by the end of the year, the entry into service (EIS) of the 787-9 in early-2014, successfully meeting the original manufacturer’s empty weight (MEW) by LN90, the launch of the 787-10X and beyond.

That said, should Boeing’s plan to task Salt Lake City and Italy’s Alenia with the production of 787-9′s horizontal stabilisers, coupled with other plans to reduce risk and improve the 787′s performance, be executed flawlessly alongside the production ramp-up, then Boeing will be in a good position to make progress on the development of a double-stretched 787-10X aircraft.

The 323-seat 787-10X will have the same maximum take-off weight (MTOW) as its smaller sibling, 787-9, at 250.8 tonnes (553,000 lbs) with a range of 6,750 nm for Rolls-Royce-powered aircraft or 6,700 nm for GE-powered aircraft. It will feature a 5.5 m (18 ft) stretch in the 787-9′s fuselage with a 5 frames front stretch and a 4 frames aft stretch.

The maximum landing weight (MLW) of the 787-10X will be 201.8 tonnes (445,000 lbs) and a maximum zero fuel weight (MZFW) of 192.8 tonnes (425,000 lbs), Orient Aviation‘s sources at Boeing say.

Firm configuration of the aircraft is planned in mid-2014 and the detailed design in first-quarter of 2015 through the third-quarter of 2016, whereas roll-out is in first-half 2017 with a still fluid entry into service (EIS) date in either 2018 or 2019, the same sources say.

In doing so, not only could Boeing complete its product line-up with a competitive offering whose operating costs will be 50% lower than the A340-600, according to Boeing Commercial Airplanes’ (BCA) senior vice president (SVP) of marketing Mike Bair, Boeing could also utilise this opportunity to improve the overall margins of the 787 programme alongside the increasing number of switch from the smaller -8 variant to the larger, more capable -9 variant.

From an engineering resource’s perspective, the foundation for most of the stretching work has already been laid with the -9 stretch and hence this could keep the dilution in engineering resources to a minimum and enable scarce engineering resources to work on the 737 MAX and 777X derivative programmes. Financially the 787-10X will require minimal investment, the most expensive of which will be the new autoclaves while utilising the existing final assembly facilities as Boeing officials indicated the capacity of the 787 production system to 12 airplanes per month and beyond.

Lufthansa, Air Lease Corporation (ALC) have already expressed interests in the double-stretched variant, with intra-Asian and Australasia routes operated by large Asian carriers being the mission eyed as well.

“[If Boeing] launch[es] the airplane, we could be a definitive launch customer for the -10, in tandem with some -9s. So that’s in the oven,” chief executive of Air Lease Corporation (ALC) Steven Udvar-Hazy commented.

“[It depends on] Boeing’s ability to translate talk into a firm commitment to build the -10. It still serves probably 85% of the long-range routes and will have really good economics on seat mile costs and more cargo with the stretch both in front of and in the back of the wing,” Udvar-Hazy added.

Therefore, in Orient Aviation‘s opinion, launching the 787-10X would actually improve the profitability of the delay-plagued programme, while complementing the 777-8X that is designed for longer haul missions, provided Boeing execute the 787 production ramp-up smoothly and retire a significant risk in the introduction of 787-9 and the production ramp-up process.

Outlook
The strong first-quarter financial results are generally seen by the Wall Street as one-off and skewed, with the effect of a dilution in margins brought by more 787 and 747-8 deliveries expected to become more prominent before rebounding in 2013 in terms of profitability.

Nevertheless the remaining course of 2012 is bright for Boeing, with 737 MAX seemingly having an imminent order from United Continental Holdings after leaving talks with Boeing’s transatlantic arch-rival Airbus and continuously converting the 737 MAX commitments into firm orders.

“Customer response for the 737 MAX remains very positive. We continue to convert existing commitments to firm orders as planned, with a total of 451 recorded to date,” Boeing president and chief executive Jim McNerney said.

Above all, Boeing seems to start to be learning from the 787 experience, with the 787 production ramp-up and improvements progressing well, maintaining a strong programme discipline on the 737 MAX while bringing the re-engined products to the market on schedule and on specifications, and in particular, in Boeing’s consideration in building the 777X’s large carbon fibre reinforced polymer (CFRP) wing in-house.

“Boeing is reportedly considering building a new wing plant for carbon-fiber composite wings on 777X, suggesting it would keep this work in-house rather than the outsourcing approach it took with 787. On the 787, Mitsubishi makes the wing. However, with the 777X, the wing would be much larger and would create transportation difficulties if too far from final assembly,” Credit Suisse analysts wrote in a weekly aerospace and defence update.

As Boeing’s research and development (R&D) expense continually declines following the swathe of entries into service (EIS) of new aircraft or aircraft variants, this gives Boeing tremendous flexibility in carrying out the developments of the 737 MAX, 777X and the 787-10X while studying options going forward for an eventual 737 replacement or a small twin-aisle.

“I think job 1 is to get the MAX in the marketplace. And as you point out, the MAX-9 and the A321 do fill a lot of that mission. Now admittedly, I think there – when you compare it only to a 757, there is a – you’ve either got to stress this – the – A3 stretch in the sense of stretch economically or mission-wise the -9 or the A321 into some of the thicker routes that the 75 is involved with. And I think we’re trying to think through exactly how to fill that market. But the largest part of that segment is going to be filled by the larger versions of the narrowbody. But there’s some product planning we have yet to do to do it, and we’ll announce that in due course,” Boeing president and chief executive Jim McNerney said.

While a bright future indeed lies ahead of Boeing, its management and others should be careful in not declaring success at an early stage, bearing in mind of the painful lesson learnt from the 787 Dreamliner programme. After all, as Boeing Commercial Airplanes (BCA) chief executive Jim Albaugh puts it, Boeing “over-promised” and “under-delivered”. And the black eye earned over the course of seven 787 delays and billions in cost overruns may just stay on for a little bit longer.

Image Courtesy of Boeing