Boeing Warns Of USD$2 Billion In Charges

July 21, 2016

Boeing's second-quarter results will include more than USD$2 billion in charges related to the 747, 787 and KC-46 tanker aircraft, the company said.

The combined charges of USD$2.05 billion address high-profile problems such as dwindling demand for very large aircraft such as the 747 and a hangover of nearly USD$30 billion in deferred costs from producing the 787.

They also reflect Boeing's problems with KC-46 tankers for the US Air Force.

In its announcement, Boeing reaffirmed its forecast for full-year revenue and cash, but said it will update its earnings per share outlook on Wednesday.

"These are the right, proactive decisions to strengthen our business going forward," chief executive Dennis Muilenburg said in a statement.

The 787 charge of USD$847 million after tax stems from two test planes made in 2009 that remain unsold.

The costs will be reclassified and shifted from 787 inventory to research and development expense, helping to reduce the deferred cost balance, Boeing said.

The 747 charge of USD$814 million after tax reflects anticipated weak demand for air cargo shipments. A year ago, Boeing cut production of the 747-8 to six per year, citing the weak market. At the time, it said it expected the market to improve by 2019, allowing it to lift output to 12 a year. Those assumptions now appear unlikely to happen, the company said, meaning fewer 747-8 freighter aircraft are likely to be produced.

Last week, Airbus said it was cutting production of the A380, also because of weak demand for large aircraft.

The KC-46 tanker charge of USD$393 million after tax covers delays in deliveries and hardware issues that the company had already announced. Boeing said the charge did not include costs for potential compensation the US Air Force is seeking for the schedule delay and initial operational deficiencies of the aircraft.

Richard Aboulafia, an aerospace analyst at the Teal Group in Virginia, said the issues arose from de-emphasis of engineering at Boeing. Still, he said, "they are starting to deal with the problems that have been in the works for some time now."

(Reuters)