Cost overruns tarnish jump in Boeing profits

EVERETT — A lower tax bill, decreasing production costs and higher production rates boosted the Boeing Co.’s profits this quarter.

The 52 percent jump in the aerospace giant’s profits during the past three months was partially offset by cost overruns on the KC-46 aerial refueling tanker program.

Investors weren’t impressed by Boeing’s earnings report Wednesday morning, and the company’s stock initially traded down.

The Chicago-based company paid $272 million to resolve problems related to the tanker’s wiring systems and installation. Nonetheless, the program remains on schedule, Boeing CEO Jim McNerney said during a conference call with investors on Wednesday. “The issues at hand are well-defined and understood.”

The KC-46 is based on Boeing’s 767 and assembled at its Everett facility. Four test planes are currently in production, and the first test flight of an interim non-military platform, the 767-2C, is scheduled for late in the third quarter of this year, said Greg Smith, Boeing’s chief financial officer.

Boeing bid “aggressively” to get the KC-46 program contract from the U.S. Air Force, and never expected to make money on the tanker’s design phase, he said.

That will come down the road as the tanker goes to full production.

McNerney’s and Smith’s comments during the call emphasized that the company is focused on improving production rate and reducing costs.

“The focus keeps turning more to ramping up production and getting airplanes out the door to customers,” said Christian Mayes, a stock analyst with Edward Jones &Co. in St. Louis, Missouri, who rates the stock a hold.

The big headline — a 52 percent jump in quarterly profits — lost much of its luster when investors learned that the company got about $524 million in tax benefits this quarter, he said. “It was helped a lot by one-time tax benefits that are not likely to re-occur.”

Boeing did also increase deliveries and lower production costs during the second quarter of the year. McNerney and Smith highlighted improvements on the 787 Dreamliner, which is assembled in Everett and North Charleston, South Carolina.

Traveled work on fuselage sections has decreased by 30 percent after spiking this spring, Smith said.

“We’ve got to continue to come down the learning curve,” and Boeing is taking steps to stabilize production rate, he said.

Boeing expects to deliver 110 Dreamliners this year. It delivered the first 787-9 earlier this month to launch customer Air New Zealand.

Boeing’s rival, Airbus Group NV, recently renewed the competition for the smaller capacity twin-aisle jetliner market when it committed to developing the A330neo, an overhaul of its existing A330. The new widebody airplane will compete with Boeing’s 787 family. After its introduction this month at the Farnborough International Airshow, the A330neo drew 121 orders and options to buy from customers, according to Airbus.

Despite the strong showing, McNerney dismissed any threat the A330neo poses to Boeing sales, saying the American airplane maker’s catalog beats the competition across the twin-aisle market.

“These aren’t pancakes we’re dealing with,” McNerney said. “These are airplanes that produce a lot of value and they’re good.”

Boeing continues to feed its backlog of 5,200 airplane orders worth about $440 billion at list prices, which are often negotiated down.

Replacement demand has been fueling many recent orders, spurred on by high fuel prices and low interest rates for buyers. Those two factors are prompting many airlines to replace older airplanes with more fuel-efficient ones that generate more revenue per passenger seat.

“This industry has not seen this kind of replacement economics since the 707” was introduced in the late 1950s, Smith said.

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.

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