Boeing focuses on rework before talking of deliveries

Boeing's top management is unwilling to be lured into giving guidance for aircraft deliveries in 2024 until January. But it expects to have made major strides by then as it deals with two obstacles: the rework on the 737/MAX and 787, plus bringing back stability to supplier Spirit AeroSystems. President and CEO David Calhoun hopes to have these issues in the rearview mirror as quickly as possible, so Boeing can focus on the production ramp-up, he said on Wednesday during the Q3 earnings call. As reported, Boeing has lowered its full-year delivery guidance for the 737/MAX programs to 375-400 aircraft from the original target of 400-450 as rework on the vertical tailfin fitting issue and aft pressure bulkhead non-conformances take longer. “We are seeing increased stability and quality performance within our own factories, but we are working to get the supply chain up to the same standards. Our production system is poised for steady production increases, but we won’t push the system too fast to make sure that the supply base is in line with us,” said Calhoun. That’s a clear reference to Spirit AeroSystems. Although the supply chain has suffered from numerous shortfalls in the past two years, most notably with the engine makers, Boeing has found itself in more trouble as Spirit failed to produce shipsets to production standards. This has hurt the 787 program in 2020-2022 and the 737/MAX since Spring 2023. “Important to note is that in respect to our supply chain, delivery shortfalls have been driven by non-conformances, not by actual supply chain constraints,” Calhoun said. Boeing wants a steep ramp-up of the MAX production, but the supply chain needs to be ready. This is the MAX 10 during the Paris Airshow. (Richard Schuurman) The recently announced revised agreement with Spirit AeroSystems that includes a capital injection from Boeing and new prices for both aircraft programs should steer the Tier 1 supplier into steady waters. Calhoun has full confidence in Spirit’s interim CEO Pat Shanahan: “Pat Shanahan is known by the Boeing company. We have great respect for his abilities on the shop floor. We are pleased to have recently established a beneficial agreement that will enhance the stability of our production system and help us deliver on our customer commitments. (…) The commercial agreement gives them the resources and the breathing room they need to get ahead of our rate forecast. The selection of Pat gets them really focused on factory performance. I am quite optimistic and quite pleased with.” That relations with Shanahan’s predecessor Tom Gentile had been sour was evident from a remark by Calhoun, who said that Boeing has been in contact with the interim CEO more frequently in the past thirty days than it has been with the former Spirit management in the past year… Liquidating the inventory “To ensure our broader recovery and return to more normal margins, the key focus continues to be on liquidating our 787 and 737 inventory, so that we can eliminate those shadow factories and focus our resources on the production floor. All of our resources. We still plan to deliver most if not all of those inventory by the end of next year, which will set us for a strong path for 2025 and 2026,” David Calhoun said. That’s when Boeing targets 737/MAX production to reach 50 aircraft per month and the 787 runs at ten aircraft per month. The Dreamliner has just progressed from four to five aircraft this October, but the ramp-up of the 737 program to 38 will not be complete until the end of this year. This is some four months later than what Boeing said in July when rate 38 up from 31 was announced for August. For now, Boeing is confronted with more rework on the aft pressure rework. After oblong fastener holes were discovered and corrected that had been machine-drilled, the same issue was also found on man-drilled holes. This requires rework on aircraft that were already completed and thought ready for delivery. The issue affects the MAX 7 and -8 and the 737 P-8A. October deliveries will be at the same level as in September, when only fifteen MAX were delivered and the inventory grew to approximately 250 aircraft, of which 85 are for Chinese customers. Of these 250 aircraft, 75 percent need the rework. “We expect most of the MAX inventory to be delivered by the end of 2024 but more are likely to slip into the 2025 timeline,” said Chief Financial Officer Brian West. This slow-down results in fewer deliveries this year, although this will be dictated by the pace of the rework, said West. He added that the issue has resulted in a non-material financial charge. “Keep in mind that correcting non-conformances gets exponentially easier when this inventory has been delivered to our customers.” Boeing increased the accounting quantity for the MAX by 400 units in the first nine months to 11.200 units following new orders and deliveries. 787 rework progresses nicely Boeing also has 85 787s in inventory, but the rework on various non-conforming parts is progressing nicely with most deliveries expected by the end of 2024, said West. The airframer booked $244 million in abnormal costs on the Dreamliner program, in line with expectations. This brings total abnormal costs related to abnormally low production rates to just over $3.0 billion, but as rates increase, no other costs are expected after that. Deferred production costs for the 787 were reduced to $12.188 billion, down from $12.193 billion in Q2. The timeline of the 777-9 remains unchanged, says Boeing, but it doesn't comment on when final certification will start. (Richard Schuurman) The program timeline for the 777X is unchanged with a first delivery expected in 2025. Production will be resumed in the final months of this year, but when the aircraft is ready to start Type Inspection Authorization as part of the final certification phase is something that Calhoun and West leave to the FAA to decide. Another $180 million in abnormal costs was booked on the 777X program in Q3, bringing total costs to $1.0 billion by the end of this quarter. Anything else Asked by an investor if there could be any bottlenecks in the ‘anything else category’ for the MAX if you take the Spirit risks out, Calhoun replied: “That’s the money question. We think we are in sync perfectly with the constraints that we know. As far as engine constraints are concerned, we have a clear and transparent relationship as we can possibly have with GE Aerospace and CFM. The rates that we have outlined in our guidance reflect those constraints. We could go much higher much faster if it were strictly a demand question, but we have to listen to those constraints.” Calhoun said there have been issues with another supplier recently, but wished not to disclose the identity of the company. Boeing is financially assisting suppliers for a total of $2.9 billion, it says in the 10-Q report. “We are physically capacitized to do higher rates than 50 and get to 60, but I can’t call it out until the supply chain can make it. And they haven’t yet, but we still have a couple of years to make it. We will put these non-conformances in the rearview mirror and get to a stable rate 38 and build from that. We will give guidance, but only early in the next year.” Brian West said: “As Dave mentioned, the system is always maintained to be ‘hot’, to make sure that suppliers know that the demand cycle is there. How we will as we start the year we will be able to count deliveries to that 38, we will see. Job one is to get the non-conformance behind us. (…) But the underlying system is to stay at rate 38. There will be certain rate ramps that we will describe later.” That makes it difficult to predict where Boeing will be on free cash flow in 2024, but West and Calhoun said that with higher deliveries of the 737/MAX and 787 and hopefully the 777X making another step, this can only be higher. The target of FCF of $10 billion in 2025-2026 remains unchanged. Calhoun summarized Q3 like this: “We knew 2023 would be a bumpy ride. We have more work to do, but overall, we are making progress in our recovery and we are on track to meet the financial goals we set for this year and for the 2025-2026 timeframe. A timeframe I refer to as stability. (…) Month-to-month and quarter-to-quarter can be difficult to predict, but we are focused on the long term. We are taking tough actions now to make sure the long term is strong.”

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