Boeing Takes $1 Billion Charge against 747-8, First Flight Delayed
Boeing announced today that it would take a pre-tax charge against third-quarter financial results of approximately $1 billion “due to increased production costs and the difficult market conditions” associated with the 747-8 program. Rather than flying three prototypes of the model’s cargo version by the end of this year, as program head Mo Yahyavi had predicted in late August, the company now says it won’t fly the first airplane until early next year. Schedules now call for first delivery in the fourth quarter of next year, rather than the third, as previously anticipated, while first delivery of the passenger version remains slated for the fourth quarter of 2011.
Some $640 million of the charge reflects higher estimated costs to produce 747-8s at both Boeing and supplier facilities, according to the company. As the program assembled major components of initial 747-8 freighters during the third quarter, it became clear that late maturity of engineering designs has caused greater than expected re-work and disruption in manufacturing, added Boeing. As a result, the program absorbed further human resources and higher supplier expenses.
The remaining $360 million of the charge relates to “challenging market conditions” and the company’s decision to maintain the 747-8 production rate at 1.5 airplanes per month nearly two years longer than previously planned, deferring an increase to two per month. Higher allocation of fixed expenses and volume-based penalties to suppliers are the main drivers of the additional costs.
Because the 747 program stands in a loss position, the company will immediately record costs in the third quarter for future 747-8 deliveries.