Dreaming big likely to lift Boeing’s profits

TUI Group, one of the world’s largest leisure travel companies, is among the air carriers favoring larger, and eventually more profitable, Dreamliners. TUI has ordered one 787-9 model with an option to buy another.

As the mix of Dreamliners in Boeing Co.’s production backlog shifts away from the earliest and smallest 787-8 model toward the newer and larger 787-9 and 787-10 variants, the company’s fortunes on the money-losing program could take a dramatic upturn, a Deutsche Bank analyst said this month.

By the end of this decade, Boeing could turn its current $20 million loss on every Dreamliner it sells into a profit of up to $56 million per plane, analyst Myles Walton wrote in a research paper for the bank’s investors.

On Tuesday, JPMorgan Chase analyst Seth Seifman joined Boeing’s bullish boosters, saying the Dreamliner program likely will swing from a $2.5 billion loss this year to a $1.7 million profit in 2017. Seifman also cited the heavier mix of big Dreamliners in the backlog as a key reason for the shift.

That’s good news as Boeing prepares for its quarterly earnings announcement next week. Wall Street analysts expect the company to announce earnings of $2.07 per share — a 5 percent increase over the previous quarter’s earnings.

“The company’s strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, solid stock price performance, impressive record of earnings per share growth and compelling growth in net income,” Seifman said in his report.

Dreamliners made in North Charleston and in Everett, Wash., will be driving much of Boeing’s future revenue growth, the analysts said.

The biggest profits will come once the North Charleston plant delivers the stretched 787-10 model, the program’s longest and most fuel-efficient version, beginning in 2018. The campus off International Drive, which makes the 787-8 and 787-9 along with Everett, will be the sole production site for the 787-10.

“The influx of 787-9s and 787-10s into the delivery mix through the end of the decade creates an opportunity for cash margins on the 787 to approach those of mature production programs by the end of the decade,” Walton said.

One of the reasons is that over the next five years the cost to build the larger Dreamliners will be 10 percent to 20 percent higher than the 787-8, but those bigger planes will sell for 20 percent to 40 percent more money.

Airlines also are buying more of the larger Dreamliners. While 787-8s have made up 90 percent of deliveries to date, they account for less than one-fourth of Boeing’s six-year Dreamliner backlog. For the first time in the program’s history, monthly deliveries of 787-9s topped 787-8s in June.

Boeing also is applying lessons it learned from earlier production to lower costs on its newer models. The 787-10, for example, is a straightforward stretch of the 787-9, which means design and engineering can easily translate between the two models.

“We are leveraging the advanced design and disciplined development system of the 787-9 to create the 787-10 with high commonality and unprecedented efficiency,” Beverly Wyse, vice president and general manager of Boeing South Carolina, told The Post and Courier last month.

As production efficiency increases over the coming years, the per-unit cost to build Dreamliners will decrease, Walton said in his report, adding that Boeing will boost 787 deliveries by 40 percent through the end of this decade.

The North Charleston site, for example, is producing roughly four Dreamliners per month, with a scheduled increase to seven per month by the end of this decade to match Everett’s production.

Walton estimates it currently costs $163 million to build one 787-9. By 2020, the production costs should decrease to $115 million per plane. With an estimated sale price of $156 million by 2020, the 787-9 should bring a profit of more than $40 million on every sale.

The 787-10’s performance should be even better — an estimated sales price of $180 million minus production costs of $124 million for a $56 million profit per aircraft.

Those profit margins match the type of money Boeing makes on its most mature programs, such as the 777 and 737, according to the report.

Walton acknowledged there is reason for skepticism.

“There have been disappointments in the past regarding the company’s targeted costs on the 787,” Walton said in his report. “However, as the company hits cash-flow positive on the 787 in 2015 for the first time and, in particular, as the deferred production balance on the 787 peaks and comes down in 2016, investors are more apt to believe.”

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