Boeing 787s see light of the day amid inventory problems

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The first Boeing 787 Dreamliner delivered to All Nippon Airway (ANA) leaves the hangar at Boeing's Everett factory, north of Seattle. The Japanese airlines will utilise the Boeing airplanes on domestic flights in September. Photo - Robert Sorbo/Reuters

Boeing 787 Dreamliner fitted with Rolls-Royce engines, are scheduled to deliver to its first customer All Nippon Airways, after getting the nod from the US government this week.

Boeing completed all flight tests required for type certification required for the all-new jetliner. The US aircraft maker insists the new airplane is fuel efficient, with massive maintenance cost improvements, and more environmental friendly thanks to the use of new technologies including composites, electric systems, advanced aerodynamics and the latest advancements in propulsion.

The Boeing 787 Dreamliner features a wide array of passenger amenities including larger windows, cleaner air, higher humidity and a lower cabin altitude ? all features lived up to expectations during the trials.

However, Boeing insists it is not overwhelmed with the release and expects to spend most of 2012 winding off the record inventory that was built during three years of delays to the world?s first composite-plastic airliner.

Boeing amassed $16.2 billion worth of inventory related to the Dreamliner. Majority of the almost-finished jets are scattered in leased space across an adjacent airfield in outside the Everett, Washington and in a facility in Texas. The almost-finished jets lack seats, lavatories, have black plastic covered over the windows and concrete blocks hanging from the wings to keep them from tipping over before engines are installed.

Most of the planes are sitting for weeks as each needs different fixes for completion. Boeing had to build a temporary factory inside a leased hangar in Everett to handle the extra load.

BALANCE SHEET

Boeing?s working capital, as a percentage of revenue, is approaching 50 percent, from less than 25 percent in 2009, which shows that Boeing has more money tied up in inventory. The Credit-default swaps tied to Boeing bonds, which rise as investor confidence falls, closed at 84.5 basis points since 2009, according to data compiled by CMA.

Boeing gets help in carrying out the production system of 787 using suppliers around the world. Airlines generally pay about 60% of the price of a plane at the time of placing an order and full payment after delivery.

Boeing expects to reduce its inventory once the deliveries progress with program accounting. The company?s operating performance and cash management provide a foundation to support the 787 and 747-8 development programs. However, it is unlikely that the program will show any positive remarks on the gross margin on its initial 1000 jets.

Profitability is the most important aspect in the context of investment for Boeing. The Dreamliner is Boeing?s fastest-selling jet, which racked up more than 800 orders before it even flew. The planes have an average catalog price?of about $202 million, and Boeing plans to assemble 10 a month by 2013.

INVENTORY WOES

The problem with Boeing is that it has already spent $300 million to build each 787 and will make a profit of as little as $50 million per piece for its early models.

The 45th plane will probably cost Boeing at least $184 million, according to analysts after analyzing inventory figures. This will make the average cost of the first 1,000 jets at least $116 million per plane.

About half of the 787s in Boeing?s inventory were already built last year before missing the target because of a fire during a test flight. This forced the testing to take place about 20 months instead of the eight originally planned. Workers also had to replace electrical power distribution panels with redesigned parts after the fire incident in 2010.

Other repairs include installation of a condensation- collection system that can handle extra moisture in the plane, which were expelled by composite fuselages.

The modifications forced Boeing to pare its delivery plans for this year to fewer than 14. However, Boeing is in a hurry to deliver the planes at the earliest to reduce its inventory stock. Also, most of the contracts have clauses stipulating penalties for delays, meaning Boeing needs to make up for the lost time.

Sources: Bloomberg, Boeing Media room

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