Boeing earnings hurt by 777 production slump
Boeing Co. may signal that production slowdowns will spread to the 737, the world's best- selling airliner, when the planemaker reports profit tomorrow.
Boeing announced plans two weeks ago to cut monthly output of the widebody 777 by 29 percent starting in June 2010. The company is expected to follow with a similar move for the narrowbody 737 this year as airlines defer and cancel orders from Boeing and larger rival Airbus SAS amid slumping travel demand and a lack of financing, say analysts Joseph Nadol of JPMorgan Chase & Co. and Peter Arment of Broadpoint AmTech.
Chicago-based Boeing's first-quarter results will include a charge of 38 cents a share for weaker-than-projected pricing and shrinking 777 production, as the cost per plane rises with fewer jets to absorb fixed expenses. The recession's effect on output may overshadow developments on the 787 Dreamliner, now almost two years behind schedule.
"The 787 is a secondary catalyst now," said Arment, who is based in Greenwich, Connecticut, and rates the stock "neutral."
Jefferies & Co. analyst Howard Rubel predicts that Boeing, the world's second-largest commercial-plane maker, may say later this year it will reduce the 737's monthly rate by 20 percent from 31 planes now. The company said in an April 9 statement it is cutting output of the 777, its most profitable model, to five planes a month from seven and delaying plans to boost production of the 767 and 747-8 jumbo jet. Boeing spokesman John Dern declined to comment ahead of the first-quarter report.
Earnings per share may have fallen 43 percent to 92 cents, according to the average of 19 analysts' estimates compiled by Bloomberg. Thirteen analysts have a "hold" rating on Boeing stock, eight recommend buying and five urge selling.
Boeing fell 13 cents to $36.35 at 11:06 a.m. in New York Stock Exchange composite trading. The stock has lost 54 percent in the past 12 months, compared with a 40 percent decline in the Standard & Poor's 500 Stock Index and a 41 percent drop in the S&P Aerospace & Defense Index. Boeing has fallen about 45 percent since Chief Executive Officer Jim McNerney, 59, took the helm in July 2005.
The global recession has damped air-travel demand and dried up financing options, forcing airlines to defer orders and manufacturers to consider cutting production. Airlines worldwide may lose a combined $4.7 billion this year as passenger traffic is likely to drop 5.7 percent and cargo traffic by 13 percent, according to the International Air Transport Association.
Suppliers will look to Boeing's comments tomorrow as they study their own production plans and release forecasts during the next few weeks. Some contractors who had hoped to recover in the first half of this year from the two-month strike that idled Boeing factories in late 2008 will be hurt as early as the third quarter by the planned production cuts, said JB Groh, an analyst at D.A. Davidson & Co. in Lake Oswego, Oregon.
"Boeing's the dog that wags the tail of all the suppliers," Groh said, adding that he expects companies to lower their profit forecasts. "Any thoughts of having a good earnings year in 2009 are out the window."
Suppliers are also being hurt by lower output at companies that build smaller jets, including a reduction of more than 30 percent in production at Textron Inc.'s Cessna and a 22 percent cut in large-cabin aircraft by General Dynamics Corp.'s Gulfstream.
Providence, Rhode Island-based Textron, whose Cessna unit is the world's biggest business-jet maker, may say April 29 that profit fell 94 percent to 6 cents a share, according to analysts' estimates. Rockwell Collins Inc., which builds cockpit instruments, may report a 6 percent decline to 97 cents a share when the Cedar Rapids, Iowa-based company reports results on April 28. Landing-gear builder Goodrich Corp., based in Charlotte, North Carolina, may announce a 12 percent drop to $1.07 a share on April 23.
The majority of Boeing's first-quarter charge will come from the money-losing 747-8 program. Accounting rules require the expense, estimated at 31 cents a share, to be taken in the just-ended quarter.
The recession is adding a new threat to the Dreamliner, already delayed by parts shortages and defects, redesigns and problems with vendors who shipped incomplete sections. The aircraft is now scheduled to enter service in the first quarter of 2010 rather than May 2008. Carriers have dropped 32 Dreamliner orders this year as international traffic has dried up. The aircraft is still Boeing's most popular new-jet sales campaign ever, with 886 purchase agreements.
It's "increasingly possible" that the Dreamliner's maiden flight could be delayed again, slipping into July rather than taking to the air this quarter, JPMorgan's Nadol wrote in an April 15 note.
"The first-delivery target of February 2010 is highly ambitious," he wrote. "We are still looking for a late second- quarter first delivery, and even there, our confidence level is not high."
Boeing may also face "substantial earnings headwinds" because the military side of the business was the "chief casualty" of the U.S. Defense Department's new budget plan, Nadol said. The agency aims to curtail spending, in part by terminating the $87 billion ground-vehicle portion of Boeing's Future Combat Systems.
To pare expenses, Boeing is slashing about 10,000 jobs this year, or 6 percent of its workforce, and has warned of further cuts next year as production drops.
The company plans to deliver 480 to 485 aircraft this year while Toulouse, France-based Airbus expects to ship 483 planes.
"There's a whole host of things that aren't going as they should," Jefferies' Rubel said. "There's a number of blemishes on Boeing today, but eventually some of those will go away."