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Boeing Confirms End of 787 Dreamliner Production in Washington State

By Adam Levine-Weinberg – Oct 4, 2020 at 10:07AM

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The cost-cutting move signals weakening expectations for future wide-body jet demand at Boeing.

The COVID-19 pandemic just claimed another victim in the aerospace industry: Boeing's (BA 2.01%) experiment with building the 787 Dreamliner wide-body jet in two different facilities. On Thursday, the aircraft manufacturer confirmed recent news reports, saying that it will end 787 production at its main wide-body plant in Everett, Washington, by mid-2021. Its newer factory in North Charleston, South Carolina will become its sole 787 assembly plant thereafter.

This long-rumored move represents a major blow to Washington's aerospace industry. It also suggests that Boeing does not expect 787 production to return to 2019 levels at any point in the foreseeable future.

COVID-19 forces a rethink at Boeing

Just last year, Boeing increased production of the 787 family of small and medium wide-body jets to meet high demand. During 2019 and early 2020, the company built 787s at a rate of 14 per month, up from 12 per month previously. This marked the highest production rate for a wide-body jet in history.

Even before COVID-19 devastated the global airline industry, there were signs that this production rate was unsustainable. The sharp negative impact of the pandemic on long-haul travel aggravated the growing supply demand imbalance. As a result, Boeing has sharply curtailed its 787 Dreamliner production plans over the past year. It has already reduced output from 14 per month to 10 per month, and it plans to cut back to just six per month by sometime in 2021.

A Boeing 787-9 flying over a river

Image source: Boeing.

During Boeing's second-quarter earnings call, CEO David Calhoun said that in light of the decline in production, the company would "prudently evaluate the most efficient way to produce the 787 to include the studying the feasibility of consolidating our 787 production into one location." That evaluation led to this week's decision to end 787 production in Everett next year.

The case for South Carolina

Based on management's comments on the Q2 earnings call, it seemed more likely than not that Boeing would consolidate 787 production to a single facility. And given the choice between Everett and North Charleston, it was almost a foregone conclusion that the latter plant would keep the 787.

For one thing, labor costs are lower in South Carolina than at Boeing's facilities in the Seattle suburbs. Perhaps even more importantly, the Everett plant is unionized, unlike Boeing's South Carolina operations. A desire to reduce the union's negotiating leverage was a key reason for Boeing's decision to open a second 787 production line in North Charleston more than a decade ago.

Aside from labor-related factors, key parts of the 787 Dreamliner's fuselage are assembled at Boeing's North Charleston production facilities. For 787s assembled in Everett, those fuselage pieces must be flown across the country using modified Boeing 747s (known as Dreamlifters), adding costs. The Dreamlifters also aren't big enough to carry certain fuselage sections for the largest Dreamliner variant: the 787-10. That's why the 787-10 is built exclusively in South Carolina.

Decision highlights weak recovery prospects

In the early days of the pandemic, Boeing's management appeared to believe that business would go back to normal -- more or less -- within a few years. The company's move to consolidate all 787 production to South Carolina points to a far gloomier outlook.

The North Charleston plant can build seven or perhaps eight 787 Dreamliners per month at present. Ramping up production to higher levels would presumably require additional investment. Meanwhile, the Everett plant will be severely underutilized for the foreseeable future. The plant will be down to building just five or six aircraft per month by this time next year, compared to nearly 20 per month just five years ago.

Investing precious capital and hiring new workers to enable higher production rates in South Carolina when tooling, factory space, and a highly competent skilled workforce already exists in Everett wouldn't make much sense. But if Boeing doesn't expect to build more than eight 787s per month for many years to come, that would clearly justify consolidating final assembly in a single location.

Unsustainable expansion by airlines that could barely make money when industry conditions were favorable drove the 787 production boom in recent years. The pandemic has taught those carriers a tough lesson, forcing them to retrench or even go out of business. Airlines will have to cut money-losing wide-body flights or shift them to cheaper-to-operate large narrow-body jets like the forthcoming Airbus A321 and its long-range variants. Boeing investors need to brace for lower 787 production for a long time. The revolutionary jet's best days may already be behind it.

Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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