Boeing books big 3Q profit, but tricky 777 transition looms

Boeing Co. leaders Wednesday shared their view of a bright future for the aerospace giant company: annual deliveries pushing 900 aircraft and profit margins around 15 percent by the decade’s end.

Getting there will require successfully navigating market challenges, though. The biggest is transitioning from the classic 777 to its successor, the 777X, amid soft demand for big twin-aisle airliners. It’s been nearly three years since Boeing unveiled the 777X, and the company is still scrambling to get enough orders for the classic models to avoid drastically slashing production rates and laying off workers in Everett.

Speaking to investment analysts and reporters Wednesday, Boeing chief executive and chairman Dennis Muilenburg said the company should have a clearer picture by early next year. That is later than what he and Boeing chief financial officer Greg Smith told crowds at separate conferences this summer, when they said they expected to know by now.

What was clear, as the company announced financial results, is that Boeing posted better-than-expected profit during the third quarter despite a decline in revenue. The aerospace giant saw revenue drop 7.5 percent to $23.9 billion in the quarter. But profit rose to $2.28 billion — nearly four times what it posted for the same period a year ago. It earned $2.81 per share, well above the $2.62 average forecast of analysts surveyed by Zacks Investment Research.

Muilenburg reiterated the company’s plan to lower 777 production in early 2017 from 8.3 airplanes a month to seven. The rate and deliveries will come down again to about 5.5 planes a month in 2018 as the company starts making test and early-build airplanes for the 777X program.

The aerospace giant still needs to sell more of the classic 777 models to keep the assembly line in Everett moving at the planned rates. Recent sales announcements — to Saudi Arabian Airlines, Qatar Airways and SWISS — narrow the gap Boeing has to bridge.

Several investment and industry analysts say the aerospace giant will almost certainly have to cut production further.

More cuts would hurt the program’s profit margin, which the company “would take steps to offset,” Muilenburg said. “At this time, we don’t envision a situation where we would need to lower production more than one or two units a month.”

If a cut is necessary, it likely would be implemented “in late 2017 or early 2018,” he said.

That could lead to layoffs.

Boeing has several 777 sales campaigns under way. Their outcomes should clear up 777 production plans “in the next several months,” Muilenburg said.

The company has been riding a boom in commercial aerospace that has broken expectations rooted in the industry’s past peak-and-valley cycles. Its backlog of more than 5,600 unfilled airplane orders is worth a combined $409 billion at list prices.

While demand remains high for single-aisle airplanes, including the Boeing 737 MAX, demand has weakened for twin-aisle airplanes, leaving Boeing to figure out how many 777s and 787s it can build in the next few years.

The company is not alone. Rival Airbus Group faces pressure on the A330 and other widebody airplanes. On Wednesday, Airbus reported that third-quarter earnings dropped from 376 million euros during third quarter of 2015 to 50 million euros, about $55 million, this year.

The European airplane maker chalked up its lower earnings to higher taxes, fewer A330 deliveries, supplier difficulties and pricing pressure.

Boeing still has time to determine if it will ramp up 787 production to 14 a month by the end of the decade, as initially planned. Earlier this year, Boeing executives acknowledged that there might not be enough demand to step up from the current 12 a month — which is split between seven in Everett and five in North Charleston, South Carolina.

Boeing continued to trim the cost of building a Dreamliner. Deferred production costs fell by $150 million to $27.5 billion during the quarter, which saw the company assemble the 500th 787. That is a smaller quarterly decrease than the nearly $1 billion reduction reported in July. Nonetheless, Boeing is moving in the right direction and generating more cash from the 787 line.

Cash flow is what drives Boeing’s stock value, Douglas Harned, an analyst with Bernstein Research, wrote in a note to investors earlier this month.

The company expects a strong finish to the year with greater profit driven, in part, by delivering more jetliners in the next couple months than previously expected. The company now expects to deliver 745 to 750 commercial airplanes in 2016, an increase of five over its prior projection.

Boeing raised projected full-year earnings from core businesses to between $6.80 and $7 per share, an increase of 70 cents due to a one-time tax adjustment that had not been previously announced. The new forecast is for revenue between $93.5 billion and $95.5 billion, an increase of $500 million. Analysts had expected about $94 billion, according to FactSet.

The company’s defense side posted steady results, though slightly below the performance of Boeing’s military business in 2015.

Boeing’s stock closed on Wednesday at $145.54 per share, up 6.5 percent.

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

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