Boeing builds on dream as 787 output improves Company still losing money on Dreamliner, but expects to turn corner by end of this year

Production costs are coming down for the Boeing 787 Dreamliner (above).

Production efficiencies are making it less expensive to build Dreamliners at Boeing Co.’s campus in North Charleston, and that has the aerospace giant sticking with its prediction of turning a profit on the 787 wide-bodies it sells starting later this year.

The company also said it expects to at least match its goal of delivering 120 Dreamliners in 2015. Boeing delivered 64 of the 787s during the first six months of this year, on pace to set an annual record.

“I’d say we’re well on track to hit our objective,” said Gregory Smith, chief financial officer. “But, again, the back half (of 2015) will be important for us.”

Dennis Muilenburg, Boeing’s new president and CEO, on Wednesday presided over his first quarterly earnings conference call since taking over for retiring Jim McNerney on July 1.

Muilenburg reported that a record 197 commercial airplane deliveries helped boost Boeing’s revenue by 11 percent year-over-year to $24.5 billion in the second quarter. Earnings, however, dipped by a third during the same period largely because of a $536 million after-tax charge tied to its military tanker program.

Boeing continues to lose money on every 787 it sells, but Muilenburg said he expects that to change by the end of this year when the cost of building a Dreamliner trends lower than the amount of money Boeing will get for the plane when it’s delivered.

However, the overall program will be far from profitable because of delays, overruns and deferred costs.

Muilenburg said he hopes to chip away at the $27.7 billion in deferred Dreamliner costs — expected to rise before the end of this year — when the company boosts production to a dozen 787s per month in 2016. That production will be split evenly between Boeing’s North Charleston and Everett, Wash., plants.

The deferred costs are an accounting method that lets Boeing pay for some of the high expenses of starting a new airplane program with money it makes later on when that program’s production stabilizes. Muilenburg said deferred production costs in the third quarter will roughly match the $790 million recorded in the second quarter, “before a healthy decline in the fourth quarter.”

Part of the reason for the expected financial improvement is the popularity of the 787-9, a newer and longer version of the 787-8 that kicked off the Dreamliner program. The 787-9, which will account for half of all Dreamliner deliveries this year, benefited from efficiency gains and lessons learned during production of its older sibling, and its per-unit costs have declined 30 percent during the 34 deliveries made since its 2014 debut.

By contrast, it took more than 200 deliveries of the 787-8 — which first rolled out of the North Charleston plant in 2009 — for costs to decline by about the same percentage.

“As we get into next year and keep going down that learning curve, we will see higher levels of profitability on the Dash-9,” Smith said.

Muilenburg said production of the 787 is “now balanced between the Dash-8 and Dash-9, and this is a testament to the progress the team is making while increasing the Dash-9 up to full-rate production.”

While 787-8s have made up 90 percent of the 292 deliveries to date, they account for less than one-fourth of Boeing’s six-year Dreamliner backlog.

Deliveries of the final Dreamliner model — the 787-10, which will be built exclusively in North Charleston — will begin in 2018. It will be the longest and most fuel-efficient of the Dreamliners, which are made of lightweight composite parts.

Muilenburg said the 787’s “capabilities continue to draw strong interest from airlines around the world,” but he and Smith declined to set a higher goal for yearlong deliveries.

Uresh Sheth, a New York investment banker who tracks Dreamliner production, said on his “All Things 787” website that Boeing is on track to deliver as many as 136 of the 787s this year.

“If all the 787s projected for delivery are actually delivered in the third quarter, we can see 45 787s going into customers’ hands ... which is a huge number,” Sheth said. “Deliveries are expected to trail off in the fourth quarter ... with no more than 27 possible 787 deliveries.”

Saj Ahmad, chief analyst with StratAero Research, said delivery execution will be the key to Boeing reducing deferred costs in the Dreamliner program.

“Once more 787-9s start rolling off the Everett and North Charleston sites, the pressure on costs will ease,” Ahmad said, adding that Boeing’s entire commercial airplane division “is rapidly pushing out jets at a rate unseen before.

“Given the robust deliveries in the quarter and a rise in revenue over the same quarter a year ago, the company is on track to deliver the backlog and pull in strong margins on its commercial programs,” he said.

Boeing’s eight-year production backlog of commercial airplanes now stands at 5,700 aircraft worth $431 billion. That includes a backlog of about 835 Dreamliner planes.

Reach David Wren at 937-5550 or on Twitter at @David_Wren_