Boeing Stalls Again

Boeing (BA) reluctantly announced yet more delays for its 787 Dreamliner. The same old supply chain problems were blamed. Deliveries are now expected to start late 2009 and not late 2008. Everyone seems to think that Airbus may have a window of opportunity to catch up; but that still seems remote given the relative time frames.

The late delivery penalties seem to be rearing their collective heads. If Boeing is late delivering the aircraft, clients can and probably will demand penalties. These will be absolute cash costs either in outright payments or discounted pricing which will reduce profit margins. Airline operators will not sit idly by and not realize the supposed savings of the new equipment. They have demanding shareholders also.

A quick check of Boeing's investor relations web site could not find any information on the size or scope of the so called penalties. At this point there are 817 orders for the 787. It is reputed to be the fastest selling new aircraft in the history of aviation.

Good hype. So how bad will the hits be if the penalties become a factor. The penalties are probably embedded into the various purchase and sale agreements and may be viewed as commercially sensitive and proprietary information. However if they become financially functional Boeing's numbers will be different.

If financial institutions need to report on contingent liabilities from guaranties and other exotic structures, Boeing should be required to do the same when there is a financial impact to failure (default risk if you will).

Boeing executives may claim they do not anticipate events that would trigger the penalties. But every time they delay the test flight and subsequent deliveries the penalties become more real. In the meantime as they dig their way out of the problem, watch for expenses increasing in 2008. While they have claimed that 2008 would not have a significant impact from 787 sales they will be trying to dodge the penalties and just get the sucker moving properly and that means you spend lots of money. Will the R&D budget suck a lot of cash out this year?

Boeing has a big sell job on their hands. Earnings guidance may have intermittent tap dancing episodes.