Houston? Boeing Has a $56 Billion Problem

Good news for Boeing (NYSE: BA  ) investors! On Wednesday, CEO Jim McNerney publicly declared that Boeing will "meet its third-quarter delivery target" for the 787 Dreamliner, confirming that 787s will begin landing at Japan-based All-Nippon Airways landing strips within the next several months.

Too little, too late.

Unfortunately, around about the same time McNerney was making his statement on CNBC, the Wall Street Journal ran a related report delivering Boeing's promise to begin deliveries to Air India (AI) as well, in the final quarter of the year. Problem is, according to AI, those deliveries should have begun two years ago. Boeing should have already delivered 20 Dreamliners to Delhi. The fact that it didn't, says the airline, has already cost Air India $1.32 billion in lost revenue -- which paints an "interesting" scenario for Boeing investors.

Consider that Boeing currently claims 847 Dreamliner orders on its books, with customers ranging from AI and ANA to Delta (NYSE: DAL  ) , AMR (NYSE: AMR  ) , and United Continental (NYSE: UAL  ) . Consider further that the Dreamliner project is already three years late. AI's losses from Boeing's two-year tardiness are probably less than other customers can claim. At a minimum, then, we can hypothesize that delays in delivery of the 787 have cost Boeing customers a combined ...

(847 planes) / (20 planes owed to AI) x (AI's $1.32 billion lost revenues) = $55.9 billion

... or roughly $56 billion in lost revenues across the dozens of customers kept waiting. What, a Fool can wonder, will happen once the Dreamliners finally do get delivered, the damages from the delays become "fixed" in time, and if its customers begin demanding compensation for their accumulated losses?

This, Boeing investors, is the $56 billion question. We've already seen Boeing come to an understanding with Spirit AeroSystems (NYSE: SPR  ) over delays in the 787 program. Perhaps suppliers such as General Electric (NYSE: GE  ) and Honeywell (NYSE: HON  ) will want compensation as well?

And what about Boeing's customers? Do Boeing's sales contracts specify liquidated damages in cases of contract breach? Might customers actually sue Boeing for lost revenues, or perhaps only lost profits? If the latter, well, most U.S. airlines eke out a living on 1% to 2% net profit margins, so maybe the damage won't be so bad after all. In Air India's case, the customer certainly has incentive to sue. Prior to returning to operating profitability in November/December 2010, AI had been losing money for years. If there's a chance AI can make Boeing cover some of those losses, I expect it will try.

Secure your tables, and return your seats to an upright position, Boeing investors. 2011 could be a rocky ride.

Spirit AeroSystems Holdings is a Motley Fool Hidden Gems recommendation., but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (8) | Recommend This Article (8)

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 February 10, 2011, at 8:46 PM, busterbuddy wrote:

    I don't know what you are talking about. You act like Boeing as booked the planes on an income statement. Don't be silly willy. Me thinks you think to much. So lets see who's right and who's Big Foolish.

    I think one the third for fourth delivery is made the stock will get above 87 and state there.

    So lets see.

    But will Boeing make the delivery as promise. Don't know. But I don't think I want to fly in one of the first 25 planes built after ya'll say hurry up, hurry up.

  • Report this Comment On February 11, 2011, at 8:24 AM, wunderbra wrote:

    The delays have also cost Continental employees- with lost revenue profit sharing and staffing reductions. Just as McNereny was crowing about the new expected delivery date, Continental was announcing staffing reductions for the 787, because they did not believe the new expected delivery date would hold. CAL had just recalled over a hundred pilots based on the new delivery date, but now must find ways to keep them busy while they wait for the Nightmare liner to show up. The foul ups at Boeing with the 787 aren't over yet! This is beginning to look more like the British Comet, than a "Dreamliner".

    Look for more delays and investors dumping Boeing. Their arrogance and bluster can go only so far.

    Where is McDonnell Douglas ( competition) when we need them?

  • Report this Comment On February 11, 2011, at 9:23 AM, mdtopper wrote:

    Sorry. Don't agree. The demand for air travel may be impacted IN PART by the availability of newer bigger planes. But whether or not the planes are or were delivered timely, the impact on each airline is far from 100% of the potential revenue. I would expect that people who wanted to travel did so anyway. And the airlines probably transported their share of the travelers and charged them. Just on different planes.

  • Report this Comment On February 11, 2011, at 9:48 AM, TMFDitty wrote:

    @mtopper: That's a fair point. I'd even go a little farther, and say that Air India has an interest in "playing up" the extent of its lost revenues to inflate any claims for damages it may make upon Boeing. (Ditto for other customers.)

    That said ... baseless or not (or only partially), the claims are still out there, and will weigh on Boeing's stock.

    TMFDitty

  • Report this Comment On February 11, 2011, at 11:51 AM, privacy1 wrote:

    Can't help but think the delays are due in part to the drama of relocating part of their operations out of Seattle.

    I can never understand why companies will use so much monies and resources to relocate operations to save a couple of dollars to get less skilled workers? It costs a lot of monies and resources to execute the move upon itself. It wastes time, and creates employee resentment. It's like the goal of some of these corporations is to get everyone on minimum wage! Soon we'll all be on minimum wage and there will be no monies circulating in the economy. I guess this is the true result of trickle down "theory."

  • Report this Comment On February 11, 2011, at 12:33 PM, gamalramo wrote:

    I have not read such a worthless analysis as the one in the article

    I could spend pages on the reaction, I will give you o nly one:

    Increasing the production rate, this is already done by Boeing. They will have 3 assembly lines for the 787, instead of the one planned originally. This means that delivery dates for planes beyond the first 35-40 plans will not have any delay. Even the ones with delay. some of them have in their contracts explicit compensation for delay that are much lower than what you state.

    I don't know who did your analysis, but it looks as if he did not graduate from kindergarden yet.

  • Report this Comment On February 11, 2011, at 1:24 PM, wunderbra wrote:

    Three assembly lines for a flawed design

  • Report this Comment On February 21, 2011, at 11:08 PM, poonjob wrote:

    AI has it's own problems, mismanagement, corruption, bad service, fat stewardesses. Them getting a few planes ain't goin' to change things. My friend who's a pilot for them even tell's his own parents, who can fly free with them, to fly another airline. The best thing that could happen to them is shut-down and start from afresh.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1439697, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:00:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement