Boeing Downplays 777 Production Cut

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At a briefing last week in advance of the Paris Air Show, Boeing Co. (NYSE: BA) admitted — sort of — that the company will have to cut production of the current version of its 777 passenger plane in 2018 as it transitions to building the new 777X, which is due for delivery to customers in 2020. Previously the company had maintained that no changes were planned to the current build schedule of 8.3 planes per month (100 per year) until the 777X entered service.

This is a big deal because the 777 is one of the most profitable, if not the most, of Boeing’s commercial planes. A 777-300ER carries a list price of $330 million and probably sells for around $165 million.

The Boeing executive running the 777 program said at the briefing that the company “will feather in some blanks” as 777X production ramps up. What that means is that Boeing will leave holes (“blanks”) in its 777 production line to accommodate the transition to the new 777X. Those blanks give workers some extra time to adjust to building the new model.

Those blanks also mean that Boeing will not be selling current versions of the 777. That translates to less revenue, less profit and, perhaps most important, reduced cash flow.

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The company has persuaded analysts and investors to focus on cash flow, so any threat to cash flow is not a good sign. Full-year operating cash flow before pension contributions in 2014 totaled $9.64 billion, down slightly from $9.72 billion in 2013. Free cash flow rose from $6.08 billion in 2013 to $6.62 billion in 2014. The company projects operating cash flow for 2015 at more than $9 billion.

Adding blanks to the 777 assembly line will not happen for a while yet, but Boeing’s explanation has left experienced analysts wondering what the company is trying to say. The Seattle Times cites Richard Aboulafia, an aircraft industry analyst with the Teal Group:

The rate is staying the same, we’re just feathering in blanks. What? What? What? You aren’t delivering these planes. Your revenue drops. Tell me again, what’s that about feathering in blanks?

Boeing also has figured out a way to add 14 seats to the 386 typically available in the 777-300ER. The company has also reduced the weight by 1,200 pounds, according to a report at Bloomberg, and made other changes that are expected to boost the 777-300ER’s fuel economy by about 5%. The upgrades are expected to be available next year.

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