Analysis: As parked 787s multiply, Boeing cash drain worries grow
EVERETT, Wash./NORTH CHARLESTON, South Carolina
EVERETT, Wash./NORTH CHARLESTON, South Carolina (Reuters) - Paine Field Airport, next door to Boeing Co's (BA.N) widebody plant north of Seattle, is getting crowded as 10 new 787 Dreamliners flank the runway, sparkling with contrasting and colorful liveries, including Poland's LOT, Britain's Thomson Airways and China Southern Airlines (600029.SS).
It is a similar story several thousand miles away, outside the company's North Charleston, South Carolina final assembly building, where space is taken up by four 787s destined for Air India AIN.UL.
A month after the global fleet of the carbon-composite jets were grounded as U.S. and Japanese regulators carry out investigations into overheating batteries, the parked airliners are a stark symbol of deepening problems this is causing Boeing.
At Paine Field in Everett, Boeing plans to move some of its other planes around to make room for new 787s coming off its two production lines, and says it has room to store all the 787s it is making.
But Boeing is finding it increasingly difficult to convince Wall Street that its balance sheet is not going to be strained by the crisis. Until the Dreamliner is cleared to fly again, which could be several months, Boeing will be starved of delivery payments but still has to keep producing and maintaining the 787s it is making.
The world's largest planemaker is being hit on a number of financial fronts, as well as suffering potential damage to its brand image. It is unable to deliver the five Dreamliners being produced per month, missing out an about $200 million in final cash payments from customers every month the 787 is grounded, while it has to pay out millions of dollars to clean, maintain and insure the parked planes. The delay may also force Boeing to postpone plans to double production by the end of this year.
Meanwhile, it is spending as much as $1 billion a month to keep the production line running, according to Russell Solomon, an analyst at Moody's Investors Service, as the 787 program is still in the early, cost-heavy stage.
On top of that, it will have to pay the extra costs of putting engineers to work on the battery problem and the expense of reworking the 100 or so Dreamliners that have so far rolled off the production lines once it resolves the problem. Wall Street initially pegged those costs at $350 million to $625 million, but as investigations drag on with no clear indication of a fix, analysts have held back on updating those figures. The longer the delay, the more complex and expensive the fix is likely to be.
"They've got all that carbon fiber sitting on the ramp, when they'd like to have the cash," said Carter Leake, an analyst at BB&T Capital Markets. "This is going to be a slow slog for a long time."
The company's $13.5 billion in cash and short-term investments provide a cushion, as does the $3.7 billion in free cash flow generated in the fourth quarter of 2012, but both will be eaten away each month the plane is grounded.
So far, analysts and one source familiar with Boeing's thinking do not expect the cash squeeze will prompt Boeing to borrow more, even at current low interest rates. The company itself said only that it has not adjusted its cash management strategy.
Boeing's cash flow could be cut by as much as $1.5 billion over six months if the 787s are still unable to fly, analysts said.
"The longer the plane is grounded, the greater the risk of the company's 2013 cash flow meaningfully declining," said Solomon at Moody's.
So far, Boeing's stock has held up at around $75, higher than for most of last year, and customers are expressing faith in the plane and its maker. Airlines are being notified of late deliveries, but none has canceled any orders.
The shares have fallen 3 percent since the 787 grounding in mid-January, compared to an 11 percent gain for Airbus parent EADS (EAD.PA).
Boeing says it is still too early to quantify the financial impact of the grounding, and its 2013 financial forecasts excluded 787 costs.
Bob Crandall, former head of American Airlines and an industry figurehead, said Boeing will suffer, but most airlines would not be overly fazed by delivery delays, as they can lease replacement jets and bill Boeing for it, or factor those costs into discounts on future plane purchases.
"It's a shame, and will inconvenience airlines and passengers, and hurt Boeing financially. But progress and safety are the two games in play," he said.
"They (Boeing) will fix the problem and get the planes back in the air. It will cost them money, but nobody in the aviation community will fault them," he added. "Aviation progresses by constantly learning, and here the lesson is about the nature of lithium batteries."
Favorable market conditions are helping Boeing and its rival Airbus sell and produce record numbers of jets, worth about $88 billion last year, said Richard Aboulafia, a senior aerospace analyst at the Teal Group in Fairfax, Virginia.
High oil prices are prompting airlines to order new fuel-efficient planes, and low interest rates make the purchases easier to finance them and make the loans attractive to investors looking for yield. "You could not ask for those three variables to get any better for airplane output," he said. But, he added, it's unclear how long it will last.
The U.S. and Japanese investigations into burning lithium batteries are moving slowly, and there is no sign of a resolution.
The longer that goes on, the longer deliveries are pushed back. More importantly, it suggests that the work Boeing will have to do to rectify battery problems on the more than 100 Dreamliners it has already produced could be significant and will hamper its efforts to ramp up production.
Two weeks ago, Chief Executive Jim McNerney said Boeing was sticking with the ambitious plan - hatched long before the current battery problems came to light - to increase 787 production to seven a month by mid-year and 10 a month by the end of 2013.
Boeing spokesman Charles Bickers said that is still the plan, and it is too early to know what the financial impact of the 787 grounding will be.
The steep ramp-up is crucial to the profitability of the 787, as the lion's share of outlays happen early in a plane program. The quicker Boeing can refine the process and ramp up production, the quicker it will reach the target of 1,100 planes, the point where it calculates it will break even on the program. At planned production rates that is already a decade away.
"A slowdown would be crushing," said Leake at BB&T. "As long as the program accounting assumptions don't change, Boeing can keep booking the same margin in the current production block. But once production rates change or slow, their assumptions on both revenue and cost will have to change."
Revenue will likely go down as Boeing will have to offer aggrieved customers more concessions on future purchases to keep them happy, while it loses hundreds of millions of dollars in "progress" payments, which airlines pay as planes near completion. At the same time, costs will stay higher for longer than Boeing has been counting on.
Boeing's credit rating is not immediately under threat, but the trend is concerning analysts.
"If the grounding persists for many more months, planned increases in the monthly production rate look increasingly suspect - and expensive, possibly further eroding Boeing's otherwise strong credit profile," said Solomon at Moody's.