Boeing's Endless Nightmare

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When a company reports earnings, investors hope for good news. Often, we get bad news. But worst of all is the absence of news. Wednesday's Q2 earnings report from Boeing (NYSE: BA  ) stands out for what it didn't tell us.

The "dids" for the quarter included:

  • Revenue increased 1%, while profits grew 22% to $1.41 per share. (Which sounds like good news, but is mainly because of a large charge to earnings that Boeing took last year.)
  • Free cash flow of $707 million put Boeing back in the black for the first half, with $458 million in cash profits. (Again, bad news painted as good -- this number is way down from last year's first half.)
  • And looking further out, Boeing confirmed that it will earn about $4.85 per share on more than $68 billion in revenue this year, with free cash flow of $1.1 billion or more.

Boeing also confirmed that despite multiple problems encountered in recent weeks -- a canceled test flight of the 787 Dreamliner, significant cancellations by customers like Qantas, and anemic aircraft sales in general -- the company's order book remains largely intact. Backlog has declined 3% to $328 billion, but that's a pretty piddling drop in light of all the bad news.

But it's the no-news that's the real bad news
A few weeks ago, I mentioned that Boeing's decision to absorb a South Carolinian supplier worried me. Given Boeing's high hopes for outsourcing 787 work to suppliers like Honeywell (NYSE: HON  ) , United Technologies (NYSE: UTX  ) , and Spirit AeroSystems (NYSE: SPR  ) , the sudden decision to bring Vought Aircraft's 787 operations in-house seemed to make little sense. I worried that this foreshadowed further delays in the Dreamliner program.

It seems I was right.

Boeing declined to give a new flight date for the 787, promising only to update us sometime this quarter. CEO Jim McNerney said: "The problem [that grounded the plane in June] is localized and doesn't require a complete redesign of the wing."

However, The Seattle Times is now quoting unidentified-but-presumed-to-be-knowledgeable engineers alleging that Boeing does need to redesign at least the area where the wing connects to the fuselage, and that installing the fix on existing planes could take anywhere from four to six months.

Foolish takeaway
This confirms Morgan Stanley's fears, expressed in its downgrade last month. It confirms my own worries. And it leaves impatient customers like AMR (NYSE: AMR  ) , Delta (NYSE: DAL  ) , and Continental (NYSE: CAL  ) still trapped in their Dreamliner nightmare.

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Fool contributor Rich Smith owns shares of Boeing. Spirit AeroSystems Holdings is a Motley Fool Hidden Gems selection. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2009, at 2:29 PM, aircraftbuilder wrote:

    What should really worry you is Boeing putting its future into the hands of weak suppliers. The current Boeing management team, going back to the Conduit/Stonecipher days has woefully lost its way. You are not investing in the Boeing of old, where no task was impossible. This is the new, gutted Boeing, where the self inflicted brain drain of 1994 has so perfectly gutted all senior upper level managers who actually understood how to design an airplane and who understood the sacrosanct meaning of a schedule release date. This new version of Boeing went down the misguided path of becoming an integrator, not a designer. This huge technical company actually took the path of shedding engineers and technical people. Those pesky pieces of "overhead" that Wall Street cheered about so loudly when they were offered the early retirement packages.

    No, this is not your Fathers Boeing, this is an aborted version created in the Jack Walsh school of mismanagement (anyone check the stock price of GE lately). The chickens have finally come home to roost, this outsourcing of design and manufacturing can only go so far, unfortunately you can try to shift your costs away, but ultimately you are still liable for the final product. With this in mind, I have done far better on the short side with Boeing that you will do on the long side for the next few years.

  • Report this Comment On July 24, 2009, at 4:29 PM, noflyzone wrote:

    Food for thought:

    "A friend of mine used to be an engineer for Boeing. He recently told me that the MD guys that have taken over Boeing are really the source of most of the problems. This example is classic:

    The MD team told them to redesign the tail, it was too big. They said that the Boeing guys over designed everything. Over the Boeing teams objections, the tail was redesigned on a smaller scale. Now, apparently, in event of an engine failure, there isn't enough rudder authority, so to compensate, the only operating engine gets its' thrust automatically reduced approx 10% to help maintain directional control. (!!!!)

    He also said that GE has now told Boeing that the new engines for the 787 are missing their target by 4%. I'm not sure if he meant thrust or fuel efficiency, or both. GE has told Boeing to take it or leave it. They won't redesign anything.

    This airplane is looking worse all the time."

  • Report this Comment On July 24, 2009, at 5:29 PM, PlaneDesginer wrote:


    aircraftbuilder is correct. Too many MBAs and MD folks and not enough engineers at Boeing these days. You finance folks (who couldn't make it past Caculus) are always underestimate the task and skill of engineering new things. In this case you have the Hollywood production model proposed by the Harvard MBAs and MD folkss (a totally new production model) and the production of the world's first composite commercial jet liner. Combined to make a giant mess. The old Boeing with the proven production system and institutional memory of decades had no problem producing the 777 its first fly by wire Boeing airplane. . Now the 747-8 is piratically a new airplane with new wings and engines, and new avionics will be produced the old way with Boeing's proven production system and excellent engineering staff before the 787. So you decide which way is better, outsourcing critical skills the 787 way or making use of decades of experience with the 747-8. By the way I have degree in engineering and an MBA from Stanford. So I don't buy the argument that outsourcing key competencies is smart business

  • Report this Comment On July 25, 2009, at 1:25 PM, bigalf123 wrote:

    If boeing were to go into building houses,they would put the plubmer on the roof,the roofer in the basement,and leave the frame work to anybody that would do it for the least amount . When Mcdonnell Douglas was in trouble after James Mcdonnell died,I read an artical in a well respected investment news paper that stated that their biggest asset was the skilled aircraft builders and if they made sure to hold onto the people that worked for them, they would survive. THEY DID NOT AND THEY DID NOT. WAKE UP BOEING.

  • Report this Comment On July 25, 2009, at 4:44 PM, JoseCuervo1 wrote:

    McNerney needs to STOP all outsourcing. Maybe the CEO of Qatar Airways will stop the outsourcing if he replaces McNerney.

  • Report this Comment On July 27, 2009, at 2:36 AM, memoandstitch wrote:

    Go Boeing! Teach the airlines how it feels when your plane is delayed.

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