Boeing Margins Taking a Nasty Hit From 787: Airlines Demanding Billions for Delays

Will Boeing's (BA) profits on its not-so-aptly named Dreamliner be limited by refunds due angry airline customers who’ve had to wait for the snake-bitten jet? Airlines want billions in compensation, the Wall Street Journal reported.

The details are private. But carriers such as United Continental Holdings (UAL) will demand payment.

Partially offsetting the anticipated claims could be what Pat Shanahan, Boeing's GM of airplane programs, said last week could be savings in production efficiencies of a billion dollars or more. And with more than $11 billion in cash and short-term investments in the bank, positive free cash flow, and rising net income, the aerospace giant should be able to handle reasonable compensation claims.

The Boeing Company Stock Chart

The Boeing Company Stock Chart by YCharts

But the givebacks will hurt margins. The current generation of the Dreamliner 787-8 has a list price of $193 million per plane. Excluding the fact that purchasers get a discount, the 860 firm orders for the plane imply $165.98 billion in gross revenue over the coming years. And as it rolls out the next iteration of the plane, the 787-9, the list price jumps to $227.8 million each, again with discounts.

Boeing hopes to be producing five 787s per month later this year - double current production. And that rate is to double again by the end of 2013 to 10 per month. That's almost $2 billion per month in gross revenues from a single model.

But either Boeing is getting crummier at making its bread-and-butter 737, or the 787 program, as it expands, is expected to be a drag on profit margins, perhaps both due to poor underlying profitability on the Dreamliner and to the prospect of refunds to customers who’ve had to wait unduly for the fuel-efficient jet.

Boeing expects to deliver between 585 and 600 planes in 2012, up from 477 last year. That should be great for margins, but it won’t be. Operating margins in the airliner business are expected, instead, to go down, to between 8.5% and 9%, from a healthier 9.7% for 2011. Ouch

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.



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