Rising costs hit Boeing's Dreamliner programme

The outlook for Boeing Co., which is striving to retake the top spot in the commercial airliner business, clouded a bit on Wednesday when the company warned of rising costs in its key 787 Dreamliner programme.

The Chicago-based aero-space company said supplier delays and problems getting the weight of the 787 within specified limits would add hundreds of millions of dollars this year and next year to the cost of developing the aircraft.

"We are at that point in the 787 development programme where weight is a dogged issue," Chief Executive James McNerney said during a conference call with analysts. "We know what we have to do there. We know how to build this airplane."

McNerney said Boeing still expects to deliver the first 787 on schedule in 2008.

Boeing first warned of problems with the 787 in July at the Farnborough International Airshow in Britain. But analyst Robert Stallard of Banc of America Securities predicted that McNerney's update on the 787 "could cause angst" among investors and it did, pushing the stock down $2.73, or 3.3 per cent, to $80.86.

Nervous

Stallard noted that Wall Street is nervous about aircraft delays following the "debacle" at Airbus, where top executives have lost their jobs over repeated hold-ups in the European planemaker's A380 jumbo jet programme.

The 787 "has always been a very aggressive programme, and any signs of any chance at all of a delay or performance shortfall is going to be regarded as a risk," said Richard Aboul-afia, an aerospace consultant with Teal Group. "But they also said 'on time and on spec'."

The 787 news overshadowed what otherwise was a positive third-quarter earnings report for Boeing.

Although the company said net income fell 31 per cent from a year ago to $694 million, the drop off was the result of previously disclosed costs associated with ending its money-losing Connexion in-flight internet service. The per-share results of 89 cents easily topped the Wall Street consensus forecast of 63 cents and even with the added 787 spending, the company upped its 2007 profit and revenue guidance.

Meanwhile, revenue increased almost 19 per cent to $14.74 billion as aircraft sales jumped 45 per cent and its order backlog grew to a record $229 billion, including a record $154 billion backlog of commercial aircraft orders. Boeing said it now has firm orders for 432 Dreamliners from 34 customers.

Cornerstone

The fuel-efficient 787 is the cornerstone of Boeing's effort to overtake Airbus, the world leader in commercial aircraft production. With Airbus struggling with the 550-seat A380, some analysts think Boeing could reclaim the top spot by 2008.

The extra spending needed to keep the 787 programme on track will help increase Boeing's research and development costs to between $3.1 billion and $3.2 billion this year and $3.2 billion and $3.4 billion next year - well above the previous forecast of $3 billion per year.

About half of that spending is going toward developing a stretch version of the 747. "This should not be viewed as a negative and in fact improves the odds of post-2009 market gains versus the A380," analyst Byron Callan of Prudential Equity Group wrote.

Boeing raised its 2007 earnings forecast by 20 cents a share to between $4.45 and $4.65, and upped revenue forecast to a range of $65.5 billion to $66 billion.