787 does better than they dreamed

Boeing South Carolina’s first 787-9 made its public debut in North Charleston on Monday.

With 30 million passengers and 400 million flight miles under its belt, the 787 Dreamliner is performing even better than advertised, prompting optimism about this year’s ramp-up in production and the program’s move toward profitability.

“The airplane’s performance, to be candid, is better I think by and large than we sold it at,” Boeing CEO Jim McNerney said during a conference call in which the company announced record annual revenues of nearly $91 billion with hardly a slowdown in sight for the coming year.

The 787 is Boeing’s newest and fastest-selling plane. It’s made at plants in North Charleston and Everett, Wash.

McNerney said customers have been “very pleased with the operating costs (and) the fuel savings” of the 787 line, which is made of lightweight, carbon composite materials that have saved airlines 1 billion pounds of fuel since the first delivery in 2011.

“Starting with the hard-fought technology gains of 787, we have built a substantial technological lead in commercial aviation, particularly in the high-value, twin-aisle market,” McNerney said, adding that the Dreamliner is “providing game-changing efficiencies and capabilities.”

Chicago-based Boeing delivered a record 114 Dreamliners during 2014, and at least 120 deliveries are scheduled for the coming year. That goal is part of Boeing’s overall plan to deliver between 750 and 755 commercial planes in 2015, boosting the division’s revenue by at least 8 percent over last year.

Boeing and European rival Airbus are benefiting as airlines around the world go on a shopping spree, helped by rising demand for travel and cheap financing. Boeing posted 432 net orders for new planes in the fourth quarter and 1,432 for all of 2014, pushing its backlog to nearly 5,800 commercial planes with a record value of $440 billion. That backlog represents about eight years’ worth of production, McNerney said.

“Replacement demand remains an important market driver with airlines continuing to introduce newer, more efficient airplanes with superior economics and a rapid return on investment to replace older, less-efficient models in service,” he said, adding that low fuel prices have had little impact on airlines’ fleet plans.

The 787’s popularity — 228 have been delivered to 29 customers as of the end of 2014 — is prompting Boeing to invest billions of dollars over the coming year in research and development and capital expenses to grow the program. That includes an expansion at the North Charleston site to accommodate a boost in production from three Dreamliners per month by this year to five per month in 2016.

The money also will pay for continued development of the stretch 787-10, which will be made solely at the North Charleston plant. The preliminary design review for that plane was completed last year, McNerney said, with the first delivery scheduled for late 2018 or early 2019.

The Dreamliner program, once beset with production and supply-chain problems, has stabilized and the per-unit costs have started to drop, finance chief Greg Smith said.

“We continue to see progress in key operational performance indicators as we further implement production efficiencies and stabilize the overall 787 production system,” he said. Production costs for the original 787-8 model have declined 30 percent over the last 175 deliveries, while 787-9 costs are down 20 percent since the first delivery of the longer version last year.

Smith said the Dreamliner program will be cash-flow positive — meaning the planes cost less to build than what they’re sold for — by the end of 2015. Boeing will start to pay down more than $26.1 billion in deferred costs once 787 production hits 12 per month — with five of those coming from North Charleston — in 2016.

Saj Ahmad, chief analyst at StrategicAero Research, said the Dreamliner “is not proving to be the financial burden many had thought it would be after its troublesome birth.”

“Yes, the 787 will be scrutinized because of the increased deferred production costs,” Ahmad said. “But the fact that Boeing is still ramping up production as planned and pushing out inventory, it was little wonder that the company intimated that the 787 could be cash-positive this year.”

Ahmad said Boeing has been showing financial resilience despite production cost challenges. “Boeing is laser-focused on not just driving down costs, but also cranking up profitability on each unit delivered as it looks to attain a record $95 billion or more this year in orders,” he said.

McNerney said he expects Dreamliner orders will pick up toward the end of 2015 and into 2016 “as we get a little closer to the end of the decade and people begin to pick up options.”

Howard Rubel, senior equity research analyst at Jeffries, told CNBC on Wednesday that Boeing’s “backlog, its market position, product — a number of things” are setting it apart from Airbus.

“Get on an airplane and you’re sitting next to anybody and everybody,” Rubel said. “There’s not a lot of room, so there’s still pent-up demand for that. Lower fuel prices translate into greater income for people that want to fly and lower costs for the airlines, which at some point will stimulate some lower fares in some markets.”

The outlook came two days after Boeing workers in North Charleston pulled the local factory’s first 787-9 from the hangar. It will be delivered to United Airlines.

The company also is adding engineering, research and manufacturing jobs in North Charleston to support the 737 MAX program.

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