Boeing (NYSE: BA) says there are six million parts in its largest plane, the 747-400. Half of these are fasteners. The aircraft has 171 miles of wiring. It is a wonder the plane flies safely at all.

Problems with large airplane engineering can be divided into two categories. There are those that probably pose very little threat to the ability of the plane to fly, and those that could cause a catastrophe that pilots or mechanics cannot overcome. The wing cracks in the A380 almost certainly fall into the first group, but no one knows that for certain.

Products like the A380 take years to develop. Something as obvious as wing cracks should not happen in new planes. Much older models have been known to develop mechanical problems after a plane has been in service for 20 or 30 years. That may be unacceptable to fliers, airlines and regulators, but at least it is understandable.

The A380 is one of the most complex aircraft ever built. That is not an excuse for why one of the world’s most advanced manufacturing companies cannot get the design of the wings right.

Douglas A. McIntyre

Boeing delivered 477 aircraft last year. The Airbus figure is expected to be 10% to 20% higher.

Airbus holds a lead that is likely to keep it in the top spot for some time. According to Reuters, “Boeing’s order total of 805 comes in second to Airbus’ order tally, which stood at 1,378 net orders at the end of November.”

It is impossible to know how many airlines turned away from Boeing as a source for mid-sized long-range airplanes when the Dreamliner was delayed several times, and for as long as five years. Certainly the history of the plane will be viewed as one of the great debacles in recent U.S. corporate history. Boeing broke enough promises about the delivery schedule that many of the world’s largest airlines are certain to be skeptical about delivery timetables for future Boeing products.

Boeing’s next challenges include more than delivery problems with the Dreamliner. The company has made a mistake in not replacing the aged 747. It has updated the old plane, but not enough to attract many new customers. Airbus’s 380 super jumbo is the large long-range plane of the future. The aircraft has had some quality problems of its own, but they likely are not substantial enough to delay the delivery dates for the aircraft.

Boeing made a series of mistakes with the 787, and it will not recover from them for years.

Douglas A. McIntyre

In the age of austerity and military budgets being slashed to deal with deficits, Iran has a chance of turning 2012 accidentally into the year of defense stocks. Alliant Techsystems Inc. (NYSE: ATK), General Dynamics Corp. (NYSE: GD), L-3 Communications Holdings Inc. (NYSE: LLL), Lockheed Martin Corporation (NYSE: LMT) and Raytheon Co. (NYSE: RTN) could all hang in the balance. With operations all but gone in Iraq and with the trend in Afghanistan being one of leaving, Iran is the obvious wild card.

If anything real ever comes out of Iran’s religious political leadership other than how neat it is to stone people over adultery, how it denies that alternative lifestyles exist in Iran, or about how it wants nuclear power for peace, this may end up making the sell-off seen in defense stocks a bargain of the century. If (or when) Iran ever announces that it has built a nuclear bomb, it likely is going to be difficult for Western nations to slash and burn too far on the defense spending. Before running out and loading up on warfare stocks, please remember … this is all “If, Then.”

Alliant Techsystems Inc. (NYSE: ATK) trades at $56.15 and the 52-week trading range is $51.26 to $78.17. Thomson Reuters has a consensus price target of $71.70, implying upside of roughly 28%. Alliant Tech currently has a lower dividend yield against peers with only a payout rate of about 1.4% and shares are up about 4% since the Thanksgiving break. Alliant is highly dependent on the business of selling bullets and it no longer has the booster-rocket business from Space Shuttle launches.

General Dynamics Corp. (NYSE: GD) trades at $66.15 and the 52-week trading range is $53.95 to $78.27. Thomson Reuters has a consensus price target of $76.16, implying upside of about 15%. General Dynamics currently yields about 2.9%.

L-3 Communications Holdings Inc. (NYSE: LLL) trades at $66.85 and the 52-week trading range is $58.30 to $88.55. Thomson Reuters has a consensus price target of $71.64, implying upside of only about 7%. L-3 yields about 2.7% in its dividend and shares are up about 5% from the Thanksgiving break.

Lockheed Martin Corp. (NYSE: LMT) trades at $81.25 and the 52-week trading range is $66.36 to $82.43. Thomson Reuters has a consensus price target of $80.12, implying that the stock is above a full-value price. Its dividend yield is quite high at about 5% and shares are up almost 5% since its $1.00 dividend was reflected in the stock in late November.

Raytheon Co. (NYSE: RTN) trades at $48.50 and the 52-week trading range is $38.35 to $53.12. Thomson Reuters has a consensus price target of $49.53, implying upside of only about 2%. Its dividend yield is currently about 3.7% and shares are up about 14% since the Thanksgiving break.

Unless something new comes out of North Korea, or unless there is more unrest in the Middle East, Iran is the big worry for the country today. With such high payouts from some defense contractors, it is worth wondering just how high some of the payouts can rise during the proliferation of austerity.

JON C. OGG

The aerospace and defense company is showing that it has full faith that the 787 Dreamliner is going to contribute handily to the bottom line for years and years.  Boeing’s CEO Jim McNerney announced the declaration of a $0.44 per quarter per common share dividend.

While the company announced that reports that this increase is by about 5% over its prior $0.42 dividend, there is a lot more to the story than just an ordinary dividend hike.  This was the first hike since it raised its dividend during the recession when it paid out the first dividend of $0.42 in February 2009. 

Prior to what will have turned into a 3-year dividend hiatus, Boeing used to raise its dividend annually… 2009, 2008, 2007, 2006, 2005… The last time it kept its dividend on hold for so long was when the payout was $0.17 per share per quarter from February of 2001 to February of 2004.

Boeing shares are still down close to 2% with the broader market today at $70.62 versus a 52-week range of $56.01 to $80.65.  The new adjusted yield would represent a yield of 2.5% for new investors today. Thomson Reuters has consensus estimates of $4.46 EPS for 2011 and $4.95 EPS for 2012.

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JON C. OGG

The US House-Senate budget reduction committee, or the ‘super committee’, that is charged with recommending $1.5 trillion in budget cuts over the next 10 years has just another 10 days to deliver its recommendations before automatic cuts of $1.2 trillion kick in. If the committee fails to agree on cuts, the automatic cuts fall equally among defense spending and a variety of programs that are together lumped under the heading discretionary spending.The discretionary spending cuts would likely come from federal programs that aid the poor, education, and the elderly.

No specific cuts have been identified in the legislation that created the super committee, but to achieve $600 billion in cuts over ten years is sure to cause some pain to a variety of constituencies. That amount is increased by the $350 billion in cuts already approved by Congress over the next ten years. Trying to discern where a publicly traded company might get hurt by impending cuts is, at this point, pretty much guesswork.

On the defense end, cuts are far more likely to have an effect on publicly traded companies that have significant federal defense contracts for everything from fighter planes to software. The following chart shows the top ten defense contractors in 2011, together with the total amount of their contracts, as derived from 2010 contract levels:

Privately held DynCorp International Inc. falls just above H-P, at $2.4 billion. Excluding DynCorp, the top ten contractors are slated to post sales of $47.6 billion in federal contracts in 2011. The top ten in 2010 posted sales of $68.2 billion. So far in 2011, a total of more than $196 billion in defense contracts have been awarded. The total in 2010 reached $247 billion, and that number is almost surely out of reach for this year.

Cuts to defense spending have already begun, as the US winds down its presence in Iraq and prepares to do the same in Afghanistan. Not including the wars in Iraq and Afghanistan, the Pentagon budget for 2011 reached nearly $550 billion.

Italy’s high debt yields will hurt. Italy’s recent debt auction did little to encourage those who hoped the perceptions of the nation’s finances would change rapidly with the election of new prime minister Mario Monti. As Italy raised $4.1 billion, the yield on five-year bonds rose to 6.29% from a yield of 5.32% in a previous sale in October. Italy cannot sustain borrowing at interest rates that are that high, which will cause more concern that its sovereign debt situation will worsen. Italy is often described as “too big to fail” because it is the eurozone’s third-largest economy. It is also described as “too big to rescue” because eurozone nations lack the will, and perhaps the capital, to bail out the country. The ECB has shown little interest to act as the lender of last support, perhaps afraid that it could be the instrument of moral hazard and contagion.

Boeing orders. Boeing (NYSE: BA) can brag that it is once again clearly the world’s largest aircraft manufacturer. The company reported that Dubai-based Emirates Airline announced an order for 50 Boeing 777-300ERs plus options for an additional 20 of the commercial jetliner. The order, with a value of $18 billion, makes this the single largest commercial airplane order in Boeing’s history by dollar value. Aircraft orders usually are measured based on the list price of the planes, which is misleading. Purchases the size of Emirates Airline one always are done at sharp discounts. That does not take away the substantial victory that this is for Boeing or the defeat it represents for rival Airbus.

iPhone battery woes. The release of new software to fix battery-life weakness in the new iPhone 4S does not seem to have satisfied a number of owners of the smartphone. The iOS 5.0.1. software release was to address the battery drain problem. As long as there is vocal criticism of the battery problem, Apple will face its most difficult product launch in years. iPhone 4S sales have been extremely strong. A flaw in the smartphone’s performance could hurt that.

Asia markets: Nikkei 225, up 1.05% to 8,604; Hang Seng higher by 1.94% to 19,508.

Europe open: FTSE 100 down 0.38% to 5,524 on troubled Italy bond auction; DAX down 0.41% to 6.032.

WTI crude down 0.42% to $98.54. Gold off 0.4% to $1,781. U.S. 10-year up 0.02 to 2.08%

Douglas A. McIntyre

The three-year delay in getting the Dreamliner out the door has forced Boeing to re-schedule deliveries in order to accommodate customers. When that sort of thing happens, better customers move to the head of the line. Sometimes that’s Boeing’s choice and sometimes it’s not.

In this case, China Eastern is apparently re-thinking its long-haul plans and has replaced its order for the Dreamliners with an order for 45 Boeing 737s and 15 Airbus 330s from European Aeronautic Defence and Space Co. NV (OTC: EADSY). That doesn’t sound too bad until one compares prices.

The list price for the 787-8 is $193.5 million, compared with a list price for the 737-900ER of $89.6 million. But based on an announced total of $3.3 billion for the 737s, China Eastern is paying about $73.3 million for each 737. That change cost Boeing $1.3 billion.

Besides the loss of income, though, China Eastern’s change in plans could also indicate skepticism about Boeing’s ability to get production ramped up quickly enough for the airlines to make timely purchases of the airplane. China Eastern’s expansion plans probably had a window of opportunity that is either closing or is about to close. Had Boeing been able to get its 787 out the door on time, those 24 aircraft might have remained on the company’s order books.

Boeing is currently producing the 787 at the rate of about 2 per month, with a total of 10 per month expected to come off the line by the end of 2013. Manufacturing was to have been done in a new, non-union plant in North Carolina, but that plan has been challenged by the union and is currently under review by the National Labor Relations Board.

Another problem Boeing could face is the lack of capital available to the airlines. A weak global economy is not good for the airlines. Seats don’t get filled, routes get cut, and coupled with high fuel prices, this makes it tough for the airlines to get credit at a reasonable price.

Bloomberg has a report on the difficulty of Airbus’s smaller suppliers getting credit. The same problem could affect Boeing as well, creating further delivery delays.

Boeing’s share price fell more than -2% yesterday. Shares are down less than -1% in the pre-market this morning, at $61.60, in a a52-week range of $56.01-$80.65.

Paul Ausick

The plant is part of Boeing’s Defense, Space, Security division and builds the H-47 Chinook helicopter and the V-22 Osprey, a tilt-rotor plane. According to the Philadelphia Inquirer, 14 people were also charged with attempted possession of the drugs being sold by their co-workers.  The investigation that led to the raid included users “because of the critical role that these employees play in manufacturing military aircraft,” the US District Attorney said.

That makes this more than just another bruise to Boeing’s ego. The Defense Department could delay production at the plant while it inspects, or forces Boeing to inspect, the aircraft that have come from the plant for the past year or two. That will certainly cost Boeing some money, even though it is unlikely to shut down the plant for good.

The drugs involved including pain killers fentanyl and oxycodone, and the anti-depressant Xanax. All typically cause drowsiness and other side effects that could hamper work performance.

Boeing ought to take this incident seriously. US military pilots and crews deserve better than this from the makers of their equipment. This incident is, or should be, about more than just a few bad (low-level) apples who want to get high at work. Boeing management should also be on the line here.

Paul Ausick

For starters, Boeing intends to soon put out about ten such super-jumbos each month when it reaches full capacity.  With all of the electronics and avionics, massive engine installations, and the myriad of other chores, this is a timeline that frankly sounds too good to be true to a lay person.  What the company has spent on R&D alone depends upon whom you speak with and we have no official tally from the company on what the entire 787 costs associated with he project are.  Some actually say north of $20 billion all said and done.

In a CNBC interview by Phil LeBeau, CEO Jim McNerney said that the plane will actually be profitable from the first day.  In short, the input costs per plane are not generating a loss on each plane.  What McNerney also said is that it would be “a few years” before Boeing has recouped its billions spent on getting this plane to the sales and delivery point.

With over 800 planes in the order cue counted as Backlog, Boeing now has a nearly certain stream of revenues.

BusinessWeek called the breakeven point as the year 2021.

The Daily Mail in the U.K. has a figure noting that the delays put the total cost closer to $32 billion for Boeing.

A figure from March noted that Boeing needs to sell a whopping 1,500 Dreamliner units before reaching breakeven, although we would note that this is an independent figure and seems more like a guess than hard fact.  

The long and short of it is that no official number exists on when the 787 Dreamliner’s breakeven date is.  We could say 2018, $19.7 billion later, as a theoretical number.  That is straight line “guestimating” and a lot depends upon the economy.  How many airlines will have merged by the ear 2016 or the years 2020?  Will the United States and the rest of the globe have entered into one recession by 2020 or will it be two recessions?  How many carriers will have delayed plane orders by then, or added to their orders?

Our base-case guess is admittedly a guess: 2019 is the year we see breakeven based upon the information available today.  That may be more than “a few years” but it slides within a consensus and does not assume any massie economic crash nor an geopolitical game-changing incidents.

This has nothing to do with breakeven or anything with the economics of the 1940′s versus the economics of 2011, but it is impossible to not consider in aviation comparisons.  How does the 787 compare to Howard Hughes’ Hercules or Spruce Goose?  All figures have been rounded down to the closest whole number (Boeing data on 787-8 Dreamliner):

• Spruce Goose: Length 218 ft; Wingspan 319 ft; Height 79 ft
• Dreamliner:  Length 186 ft; Wingspan 197 ft; Height 56 ft

JON C. OGG

The Wall Street Journal reported that the new report assumed that a projected market share increase, which led to the new orders, was “unduly optimistic” and “not adequately validated.”  The report could force Air India Ltd. to cancel orders for planes that have not yet been delivered, especially because the airlines has been running a deficit ever since the merger.

Boeing has delivered 38 planes to Air India since the orders were placed and has on its books 30 more planes yet to be delivered. Of those, 27 are 787 Dreamliners and 3 are 737-900ERs. The total list price value of the remaining deliveries is $5.8 billion.

Boeing might be able to make up a bit of the sting if the Air India orders are cancelled with an order from Fedex Corp. (NYSE: FDX), which is reported to be considering a combined new order for 50 Boeing 767s and Airbus A330s. Boeing’s 767 is the platform on which the company will build the new US Air Force tanker.

Boeing’s shares are down more than -2% in the first half-hour of trading this morning, at $63.41, in a 52-week range of $59.48-$80.65. Shares of EADS NV are also down about -2%, at $30.11, in a 52-week range of $22.20-$36.17. The Guggenheim Airline ETF (NYSE: FAA) is unchanged on no trades yet, at $27.71.

Paul Ausick