Daily Management Review

Slow Sales New Challenge for Boeing's 787 Dreamliner


Slow Sales New Challenge for Boeing's 787 Dreamliner
After having faced challenges since its early days with production delays to batteries that smoked and burned, Boeing Co's high-tech 787 Dreamliner is now facing a challenge of slowing sale.
The troubles for the Dreamliner resulted in the grounding of the worldwide fleet for months in 2013.
Boeing spent nearly $30 billion it has spent on production and not yet accounted for in its earnings and thus the company needs to sell dozens of 787s to help recover the amount. However there is a slump in the industry. Some analysts and investors are of the view that without more 787 sales in the near term, Boeing will have to take a sizable charge to write off some of the 787's deferred costs because the sales of Boeing and Airbus wide body jets have fallen 51 percent since 2013.
The 787 however remains popular. This is because compared to a conventional, aluminum plane, there is a reduction of as much as 20 percent in the airline fuel costs due to the lightweight composite airframe and new engines that are the new additions in the 787. The airplane is able to offer passengers large windows, less noise and a more comfortable cabin environment and helps airlines to fly their planes for longer routes than previous jets of the same size.
Boeing has been the fastest-selling wide body plane when it came to market and it has been able to sell 1,154 such airplanes so far. However Boeing is required to effect sale of a total of 1,300 planes, the number that the company uses as the basis of deferring the charges in its accounting.
Many airlines do not need to order more Boeing airplanes now as they had stocked up on 787s before the 2008-2009 financial crisis. Low fuel prices have allowed airlines to keep flying older and less efficient planes even as Airbus's cheaper A330 has also chipped away at 787 sales.
Aengus Kelly, chief executive of AerCap Holdings, which has the world's largest leased wide body fleet says that: "Airlines are coming back to us and saying they would like to extend their leases for two or three years," on older planes.
"That's a direct result of low oil," he told Reuters.
While claiming that it stands behind its numbers, Boeing has not commented on a report earlier this year that the Securities and Exchange Commission is looking into its accounting for 787 costs.
"Our accounting is compliant with GAAP," Chief Financial Officer Greg Smith said last month, referring to generally accepted accounting principles.
While the aerospace and defense index climbed more than 5 percent, Boeing’s stock has fallen more than 8 percent this year and this has made some investors wary of Boeing stock. Short sales of Boeing are at a record high. The stock closed down 1.7 percent at $132.09 last week at the end of trading.
To hit its target of selling roughly as many as it builds, Boeing needs to book orders for about 120 this year. Including a recent order from China Eastern Airlines, so far it has sold a net total of 12.
"Would we ever order the 787 again? Sure. Will we order it this year? Not a chance," said an executive with a leasing company that has 787s in its portfolio.
He said that there are simply too many wide body jets for the demand right now.
AerCap has placed all but a handful of the total of more than 80 Dreamliners to lease. It would buy more "if the price is right. But if it isn't right, I wouldn't bother," Kelly said.
The company expects to "recover 787 deferred costs in the current accounting quantity of 1,300 planes," and the company had "a healthy sales pipeline this year" said Boeing spokesman Paul Bergman.