Downward Pricing Pressure Adds to OEMs’ Woes

 - April 24, 2009, 8:59 AM
James Bell, Boeing executive vice president of finance and CFO

Indices used by airframe manufacturers to adjust the prices of airplanes on order have proved unhelpful lately to the OEMs, as the global recession suppresses commodity and retail prices along with wages. In Boeing’s case, margins dropped 7 points, to 4.9 percent in the first quarter, largely due to the unfavorable movement within the economic indices it uses to set increases in prices for its airplanes, according to Boeing CFO James Bell.

“Our commercial airplane contracts have escalation provisions which state prices in current year dollars at the time of contract signing and allow for economic adjustments to be paid by customers at time of delivery,” Bell explained during this month’s quarterly earnings call. Although the change does not affect current-year revenues because Boeing’s contracts call for prices to freeze about 11 months before delivery, it does affect future-revenue forecasts, he explained. “Lower revenue forecasts reduce program accounting gross margins during the quarter for our profitable programs and increase the loss recorded on our 747 program,” the CFO added. 

According to Bell, revised price escalation estimates cost the company $235 million in the first quarter, $180 million of which it attributed to a reach-forward loss associated with the delays in the 747-8, now scheduled for service entry during next year’s third quarter.

“Had the twin-aisle production decision been the only impact this quarter, we would have maintained our earnings per share guidance,” said Bell. “However, the lower escalation forecasts had a sizeable impact on our results, which is the principal driver of our reduced EPS guidance.” Boeing last month revised its 2009 earnings guidance to between $4.70 and $5.00 per share from $5.05 to $5.35 per share.