波音 (BA) 2008 Q3 法說會逐字稿

Good day, everyone and welcome to The Boeing Company's third quarter 2008 earnings conference call.

Today's call is being recorded.

The management discussion and slide presentation plus the analyst and media question-and-answer sessions are being broadcast live over the internet.

At this time, for opening remarks and introductions, I am turning the call over to Ms.

Diana Sands, Vice President of Investor Relations for The Boeing Company.

Ms.

Sands, please go ahead.

Thank you and good morning.

Welcome to Boeing's third quarter earnings call.

I'm Diana Sands and with me today are Jim McNerney, Boeing's Chairman, President and Chief Executive Officer and James Bell, Boeing's Corporate President and Chief Financial Officer.

After brief comments by Jim and James, we will take your questions.

In the interest of time and in fairness to others on the call, we ask that you limit yourself to one question.

As always, we have provided detailed financial information in our press release issued earlier today.

And as a reminder you can follow today's broadcast and slide presentation through our website at Boeing.com.

Before we begin, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks which are detailed in our news release, in our various SEC filings and in the forward-looking statements at the end of this web presentation.

Now I'll turn the call over to Jim McNerney.

Thanks, Diana and good morning.

Let me begin with some comments about our third quarter and the environment we are currently facing and then James will walk you through our results.

After that, I'll say a few words about what's ahead and then we will take your questions.

Starting with slide 2, our third quarter financial results were clearly affected by the machinists union strike, as well as supplier challenges on customer furnished galleys for certain wide bodied commercial aircraft.

These items reduced our earnings per share for the quarter by an estimated $0.60.

Regarding the strike, I want to be very clear, we worked hard to avoid it and we want to resolve it as soon as possible.

Our offer was industry leading by any measure.

And when viewed in light of the recent dramatic developments in our economy, it looks even better.

Our goal in reaching a settlement remains the same.

We want an agreement that fairly rewards a highly valued group of employees and protects our ability to compete now and into the future.

It is both disappointing and frustrating to be in a position where we are not meeting our commitments to our customers.

After a second round of federally mediated talks, a number of issues remain unresolved, with the linchpin being management rights.

From the company's standpoint, the turmoil in the financial markets provides a timely reminder of why it would be unwise for us to agree to terms in any contract that would restrict our ability to manage our business and respond quickly to market dynamics and global customer needs.

As I have said before and many companies have learned the hard way, jobs in today's global economy are created and sustained only through productivity improvements and customer-focused innovation.

That has been our strategy and it has benefited everyone, not the least of whom are the more than 7000 employees represented by the IAM and nearly 3000 employees represented by SPEEA, who have been hired over the course of the last threeyear contract.

Simply put, again, we want this strike to end and we are committed to working with the union leaders and federal mediator to reach a settlement.

We will be resuming discussions in the coming days and are hopeful of finding a way forward sooner rather than later.

Let me now turn to the galley issue.

As many of you know, the commercial airplane industry has been dealing with delays from a supplier of customer furnished galleys.

Before the strike started, between five to 10 deliveries of Boeing wide body commercial aircraft were at risk of slipping out of third quarter because of this galley issue.

We have been working with the supplier to help in prioritize and improve its production processes.

We are making good progress and expect that once the strike is completed, our galley supplier will be able to support the revised aircraft production schedule.

Despite our challenges during the quarter, we continued to take new orders.

Our backlog grew to a new record of 349 billion, up 7% year to date.

Commercial airplanes backlog of 276 billion increased 8% year to date, and remains diverse by region, product type and customer.

Only about 10% of the commercial backlog in dollar terms is with US airlines.

So far in 2008 we have only had two cancellations and about 80 deferrals that we have accommodated.

We have had no issues in reassigning the deferred aircraft to other customers and we have customers who would like earlier positions if they do become available.

Even so, we are very mindful of the increasing risks we are seeing due to the financial and market turmoil.

I'll discuss that more in just a minute.

IDS orders in the third quarter included a US Army Chinook multiyear contract, Qatar's C17 order, and an International Space Station contract extension.

IDS continues to have one of the industry's leading backlogs with a breadth of capabilities to meet evolving customer requirements.

Now, I just want to say a brief word on the US Air Force tanker program.

As you know, on September 10th the Department of Defense withdrew the tanker competition.

Given the timing considerations of the current administration and the substantive findings of the GAO, we feel this was a prudent action that should lead to a full, fair and open competition.

We look forward to working with the Defense Department and the Air Force on their path forward to a new request for proposal.

And we intend to compete aggressively for this important program.

Moving onto the 787 program.

Despite the strike, we achieved some key milestones during the quarter including a successful hydraulic systems test and a landing gear test.

Both important because they require several systems within the airplane to work together.

We also completed a high pressurization test of the static airframe which was a key step to validating the structural integrity of the 787's all new composite fuselage.

The program also began testing the flight controls and began final assembly of the fourth flight test airplane.

We were pleased to see American Airlines announce last week its intent to order a substantial fleet of 787s and consider it a significant vote of confidence for this game changing airplane.

While the strike has stopped most production work on the early 787s in our factories, we have used the intervening period to better organize our factory for the ramp-up that will continue once we return to work.

Obviously, the work stoppage will have an impact on the schedule for all our commercial programs and once it's over, we will conduct a full assessment and update our delivery and financial outlook for you.

Right now we expect the strike to result in at least a day per day impact to our commercial program schedules including the 787 as there will be a ramp-up period from when we return -- we turn the production system back on to when we recover the momentum we were achieving prior to the walk-out.

Now, let me say a few words about the current business environment.

Clearly, economic conditions have become much tougher during the quarter with unprecedented events within the financial services industry and credit markets.

These conditions are putting additional pressures on the aircraft financing environment and our commercial customers.

Boeing Capital is working closely with our customers as it always has to help create financing solutions.

Virtually all lending sources have tightened up.

Having said that, there is still aircraft financing available on a selective basis and we have no current evidence that says our backlog won't be financed over the next five quarters or so.

Regional Banks like those in Asia and some European banks are operating and US Ex-Im bank is another viable source for many of our international customers.

I want to remind you that nearly 80% of our commercial backlog is eligible for EX-IM financing.

Through Boeing Capital we stand ready to help our customers if needed.

Over the past few years we have been preparing ourselves to step back into the financing business and will do so when appropriate.

James will elaborate but suffice it to say that BCC will work closely with BCA and will be very disciplined in its actions.

While we haven't seen a significant impact to our business results to date, there is no doubt there will be some impact from the rising recessionary pressures along with the aircraft financing issue I just mentioned, softening demand for air travel is something we are monitoring for potential impact on our customers and our delivery schedules.

Lower oil prices, on the other hand, are better allowing airlines to recapitalize their fleets.

On the defense side of our business, we believe, as do many others, that funding requirements to support the government's plan to resolve the current financial turmoil will put some pressure on defense budgets in the near to mid-term.

To preserve our flexibility, to respond to these dynamics, we are accelerating the drive for productivity gains throughout our business and our focus on maintaining our balance street strength which includes over $7 billion of cash and marketable securities and a conservative debt level.

We will be very selective in our future investments and are examining the efficiencies of our organizational structures in light of the volatile environment we are facing.

These are clearly dynamic and challenging times.

I believe, though, that we are relatively well positioned to weather them because of the diversity of our business, strength of our backlog, including significant international orders and the strength of our balance sheet.

Longer term, commercial aviation remains a growth industry with a fundamental role in the global economy.

And we believe defense markets will trend with the threat environment which will continue to drive high levels of defense spending.

Now let me turn it over to James for a review of the numbers.

James.

Thank you, Jim.

And good morning.

I'll begin with the third quarter results on slide 3.

Our revenue of $15.3 billion was down 7% from the prior year due to the strike and the galley shortages that Jim talked about.

Those issues reduce third quarter deliveries by about 35 airplanes and BCA revenue by an estimated $2.1 billion.

Earnings per share declined 33% to $0.96 per share with operating margins of 7.5%.

The strike and galley shortage reduced earnings by an estimated $0.60 per share, about $0.56 impacted our Boeing commercial businesses with the remainder affecting IDS.

We also had about a $60 million of unfavorable tax adjustments during the quarter which reduced EPS by $0.08.

Now let me discuss BCA in more detail on slide 4.

Commercial airplane third quarter revenue of $6.9 billion was 16% lower than the same period last year driven by 23% fewer deliveries.

Within the quarter BCA recorded close to $700 million of intercompany revenue, much of it related to P-8A.

For external financial reporting, this revenue was eliminated in the accounting differences and elimination segment.

Operating earnings decreased to $394 million with an operating margin of 5.7%.

Earnings were impacted primarily by the lower deliveries from the strike and galley shortages which together reduced BCA earnings by over $600 million and reduced its operating margin by an estimated 5.4%.

BCA made good progress on cost reductions versus the second quarter which helped offset the continued impact of infrastructure cost absorption from the 787 schedule update in April and now also from the strike.

However, the strike impacts clearly dominated third quarter results.

We will update our forecast after the strike concludes and provide that outlook at a later date.

747-8 continues to make progress as the first airplane began production and engineering on the freighter is 95% complete.

However, schedule and cost pressures are increasing on this program which resulted in higher 747-8 program costs during the quarter.

In light of this, BCA has increased its focus on improving productivity and accelerating cost reductions.

BCA R&D was $70 million higher than the same period last year due to the absence of R&D supplier cost sharing payments in the third quarter of 2008.

The R&D cost sharing payments that we have been expecting in the fourth quarter could slide into 2009.

Demand for our commercial airplanes remain high.

BCA captured 149 gross orders in the third quarter and 625 during the first nine months, which increased its backlog to another record of $276 billion.

Now, moving to slide 5 and our defense business.

IDS delivered margins of 10.1% on revenue of $8.5 billion in the third quarter.

Strong performance across our large, diversified portfolio of defense programs was somewhat offset by the strike which reduced earnings in some of our Boeing military aircraft programs by about $40 million.

Boeing military aircraft delivered 9.9% margins during the quarter, which were reduced by about 1% due to the strike.

Network and Space delivered a 10.1% margin driven by strong performance across its broad array of programs.

Global Services and Support generated a 10.4% margin with solid performance offset by the disposition of some contract matters.

IDS continued to win new business and pursued growth opportunities through targeted acquisitions.

During the quarter IDS completed the Insitu transaction and announced the Tapestry deal and just last week we announced an agreement to acquire Federated Software Group.

IDS backlog at the end of the quarter was $73 billion and that's up 2% year to date.

Now turning to slide 6.

As Jim mentioned the current economic environment is challenging for our airline customers and the recent credit crisis has put pressure on aircraft financing.

Boeing capital stands very close to both BCA and our commercial customers.

Our process includes monitoring every delivery in our production skyline to assess customer health and financing status.

While there are still third-party sources of aircraft financing available, it is very likely that BCC will do some new financing in 2009.

We will be disciplined in this process and work with BCA to determine the deals that make the most sense.

We will also be mindful of preserving our current credit ratings.

As of the third quarter, BCC had backstop financing commitments of $9.5 billion that represents about 3% of BCA's backlog associated with delivery positions through the end of the next decade.

Our financing commitments have always included certain terms and conditions to mitigate risk to Boeing.

We have recently included additional terms and conditions for new commitments which further limit Boeing's risk in light of current market volatility.

I should point out again that we have been preparing our balance sheet and lowering BCC's risk profile over the last several years in preparation for the time when we will need to resume financing new aircraft.

We are in a very strong position to help support our customers and we will be prudent in that process.

In our unallocated segment, expenses were down due to stock price impacts on deferred compensation and lower allocation pension expense.

We are monitoring the recent market performance and its impact on our pension plans.

With the change to our pension asset allocation strategy implemented last year, our asset returns have not been affected as much as the overall equity markets.

We were still fully funded as of the end of the third quarter.

Asset return since then, however, have further deteriorated.

As of mid-October our pension assets were down by about 20% year to date.

At the same time discount rates are running substantially higher than we planned.

Based on where we are today, we are estimating increase to our 2009 pension expense versus prior forecasts of about $100 million.

In addition, when we remeasure our pension plans at year end, we expect to have a reduction in our equity which would be several billion dollars.

Both 2009 pension expense and the year-end equity adjustments are heavily dependent on where market returns and discount rates end up on December 31, which is our new measurement date.

Now let's move on to slide 7 and discuss cash flow.

During the third quarter we used $442 million of operating cash flow reflecting the strike and planned working capital increases primarily for the 787 program.

The strike and galley shortage reduced operating cash flow in the quarter by an estimated $1.3 billion.

Balance cash deployment remains a focus area for us.

We continue to invest in growth programs, used approximately $500 million to repurchase 7.9 million shares and paid $295 million in dividends.

Now moving to cash and debt balances on slide 8.

Our balance sheet and liquidity remains strong.

We ended the third quarter with $7.2 billion in cash and liquid investments and that's after absorbing the strike impact, planned debt repayments, cash used for acquisitions and cash returned to shareholders.

That balance has decreased from the end of the second quarter as BCC paid down maturing debt of approximately $600 million.

Since 2003, Boeing Capital has paid down $5.5 billion of maturing debt.

Now let us turn to slide 9.

Now, due to the uncertain length of the labor strike, we are suspending financial guidance until the strike concludes and a complete assessment is made on further results.

All of our commercial airplane programs and a few of our defense programs have been impacted by the strike.

It is also important to know that when we -- when the strike concludes, there will be a ramp-up period before our programs are producing at the rate they were achieving before the work stoppage.

We will take the time necessary to assess both production and development programs and provide you an update on our outlook at a later date.

Now I'll turn it back over to Jim, who will give you some final thoughts.

Jim?

Thanks, James.

Some quick summary thoughts.

Third quarter was challenging with the credit market turmoil, worsening economic situation and our machinists union strike.

Looking forward, I want to reiterate that we are focused on improving our competitiveness longer term.

We will not sacrifice our ability to compete for a short-term agreement with our unions.

But I'm hopeful we can find a way forward here and as I said, sooner rather than later.

This is especially important in light of the current economic situation.

While mindful of the risks at hand, we do feel we are relatively well-positioned to weather the current volatility.

Our financial strength coupled with the size and strength of our backlog provide the foundation.

And we have heightened our focus on improving productivity throughout all of our businesses.

In summary, I believe our long-term outlook remains strong as we continue to focus on our customers, drive growth and productivity and aim towards being the strongest, best and best integrated aerospace company in the world for today and tomorrow.

With that said, we would now be happy to take your questions.

(OPERATOR INSTRUCTIONS).

Joe Campbell of Barclays Capital, you may ask your question.

Good Morning.

Can you hear me all right?

Good morning.

Yes.

Good morning.

I'm going to stick to the rules.

My one part question is for James and it's about the Boeing commercial margins in the quarter.

In the last quarter we saw some issues related to overhead absorption related to the 787 and I suppose there is some extra block pressures from the strike that will be recorded in the margins going forward, and I wondered what was going on with the margin before R&D at the program level, not the unit level where we will see the strike, and whether these margins reflect your estimate of the impact of the strike, the ongoing strike, the recovery, the extra costs as well as the whatever is left over from that absorption issue.

Yeah, Joe, it is.

We were making really good progress and we were really encouraged by what we saw in BCA relative to overcoming the infrastructure cost impact relative to the 787 slide and move to the Z14 schedule we announced in April.

And obviously it has been overcome by the addition of infrastructure costs associated with the strike but if you look at the margin, we do have the strike impact in there as well as the improvement we saw over the second quarter and the efforts that have been performed by BCA to offset that which was related only to the move of the 787 schedule.

So we'll continue to work that hard, but, yes, both are in and also the improvement is in.

But, in other words, we had the -- well, whatever we had, the better priced airplanes because we had talked about having the program margins, which are not reflective of the current period and -- or of the strike, but of your estimate of the -- the full block for the production airplanes.

Yes.

So I'm struck by how much the margins went down.

So apparently, I mean, I know you're not giving '09 guidance but unless something changes, your current estimate to complete the blocks is significantly lower than it used to be?

Well, no, I think the variable margin -- the margins that are on the airplanes, particularly those that slid out both due to the strike and the galley issues are pretty high, and so the impact on earnings this quarter is more significant as a result of that in terms of the difference between what we expected versus what we recorded, because as you know on the galleys, it's mostly the wide bodies that moved out, Joe.

But I'm still confused, James, about -- we can do it off-line if you want, but, I mean, if the program -- I mean you would reflect the difference between unit and program, it would cause that thing to be really big and --

It is.

I'm talking --

Unit and programs are large.

Yeah, no, that's what I say.

But I don't understand why that would affect the program margins unless you had made some big adjustments about what the future costs would be.

Well, you know, we did not make -- we actually put the strike impact in there as well, but if you excluded the strike impact and if you excluded the slideout, the program margins would have been 11%, about 11.1 in operating.

So -- and the pre R&D margins would have been in the range we have always talked about, around 30.

Okay.

Great.

Thank you very much.

Yeah.

Robert Spingarn of Credit Suisse, you may ask your question.

Good morning.

Jim, you referenced two cancellations and 80 deferrals this year and talked about offsetting demand for those slots.

But a little more color please.

Are these generally front-ended in the backlog and has the pace of these types of discussions changed recently, and how should we think about strike deferred airplanes supporting rates next year and into 2010?

Well, first of all, the cancellations and deferrals are pretty much in line with what we have experienced over the last three or four years and we still have a -- I would say a significant overhang of demand, people who would like to move the positions forward if others want to move them out.

Now, I would say the discussion is slightly more, but I would not say step function more discussion along those lines.

So we are monitoring it very closely, but I think it does speak to the fact that a lot of our backlog is in economically strong parts of the world.

I think that speaks -- and that our airplanes are relatively productive compared to their fleets, that things are hanging in.

But we are monitoring it very closely.

In terms of the impact on production rates, again, the -- we have steadily increased production rates in a measured way over the last few years, as you know.

We have tried hard to meet demand without getting beyond our headlights, so to speak, and I think that's serving us well now because I -- we will provide guidance going forward once we understand exactly where we are post strike, but we are feeling good about our production rates over the next couple of years, but we -- we want to make sure we understand the impact of -- any impact of the strike before we give you a definitive answer to that question.

But is it fair to say that, this pool of aircraft, these deferred aircraft provide some support at least against the macro pressure for next year?

Are you suggesting that things --

I'm saying you have 60 or 70 aircraft so far this year that haven't been delivered that customers want.

No.

But they were quickly -- they were -- they were quickly replaced by people who did want delivery.

So there was no change in our production.

I'm referring to what -- did the strike delivered airplanes.

In other words, if you have white tails next year, you've got strike planes you could deliver instead whereas three years ago it took a long time to deliver the strike airplanes.

The quick way into the end zone is we don't anticipate any white tails at all next year.

Okay.

Okay.

Thank you very much.

Yeah.

Joe Nadol of JPMorgan, you may ask your question.

Yes, good morning.

Thanks.

My question is on the 787 and it's either for Jim or James.

Wondering if you could provide a little bit more color on the day for day impact on the program, because of the strike, why is it day for day?

My understanding is that you're, you know, waiting, I guess for long lead parts from suppliers and so I wouldn't think the impact would be day for day.

And then if the strike ended tomorrow hypothetically, could you still fly the plane in 2008?

The reason it's day for day is that the gating item is production and assembly in our factories.

All right?

The supply chain has largely healed up in terms of having caught up with the whole schedule and was largely caught up before the impact of the strike, which doesn't -- doesn't suggest we didn't continue to have challenges, that we had to wrestle with the ground every day, but the gating item has become now the assembly of the early airplanes in our factory and senses the gating item with our strike, that's where you get for the day for day or slightly more because of the ramp back up when the strike ends.

And as for the second -- the first flight, if the strike hypothetically ended tomorrow, could you still fly the first -- make it the first flight by the end of December?

We had -- like I say, we estimate day per day for a little bit more we were targeting.

As you know in the fourth quarter, and we'd have to go back and add that all up when it's done and we'll let you know.

But we were on that schedule prestrike and so now we have got to see where it ends, add it up and we'll let you know.

Okay.

Thank you.

You're welcome.

Heidi Wood of Morgan Stanley, you may ask your question.

Good morning.

I want to --

Good morning, Heidi.

-- on the financing status.

Can you talk a little bit, give us some granularity of the financing status of both the strike impacted planes as well as the 2009 planes?

If I break that up a bit, do those strike impacted planes need to renegotiate their financing deals since the deliveries didn't occur?

And for the 2009 planes, can you give a sense about kind of the landscape between US and European and leasing company deliveries?

Because presumably those would be the niches that would be most affected by financing needs.

I'll take a swing here, Heidi and then James will clean up.

The -- as I alluded to in my remarks, we have pretty good visibility on the next five quarters, you know, through the -- now, obviously, the impact of the strike is not fully understood yet.

Okay?

Because we are not exactly sure where we are.

But when you -- when you look at that financable backlog that we have got out there, as you would imagine, about roughly 40% of it is -- overseas banks, Europe, regional banks in other parts of the world, lessors are about 20% of it.

Capital markets, as you would imagine, are not in business right now.

Ex-Im is another 20%.

And then BCC, as James said, stands ready to provide a cushion if there are any pushouts that cause renegotiation that isn't successful.

But by and large, we have gone through all of these positions with all the financing sources and we are feeling -- we are feeling pretty good about the ability and the willingness of these financing sources to finance our airplanes against this schedule.

Yeah.

I would add we are not overly dependent on any one funding source and we have gone through as early as last week and talked to our customers and talked to the banks that we think are financing those customers and have been -- we have pretty -- been assured that, you know, the commitments they have today they would keep and would honor and that they are going to standing ready to fund those airplanes that are delivered in the second half of next year if commitments aren't already in place that they will be in business to do that.

Now, the cost of the financing may vary a bit, but it doesn't seem to be too out of line.

And can you give us a sense, James, as to how much -- kind of the bandwidth of how much Ex-Im financing you are anticipating in 2009 and the bandwidth of BCC financing?

I mean, give us a sense of the ceiling as to how high you would be willing to go.

Well, I think that from a standpoint of Ex-Im, we would be looking at Ex-Im doing 20% maybe of the total financing as Jim mentioned if you look at what we are trying to deliver over that period , the next six months period you can kind of tell of the airplanes we have in the fourth quarter and what we have guided you to in '09 and I'm using that as the base.

We already -- we have provision for BCC to participate in that at -- I don't know.

We are probably looking at about $1 billion.

We may do more or less, depending on what the needs are and depending on the customers that would come to

All right.

Great.

Thanks very much.

In the interest of time, we are asking that you limit yourself to one single part question.

Robert Stallard of Macquarie Research, you may ask your question.

Good morning.

Good morning.

James, following up on BCC, I was wondering if you could give us an update of the assets that BCC might have in your balance sheet in terms of airline debt and any aircraft and whether there's any risk of any write-downs there.

Well, clearly, we do have a -- the issue of we are heavily concentrated in 717s and will continue to monitor that, we will continue to look at what we can do to reduce that concentration, but clearly that's where the exposure is, and we have been writing down and reserving against that exposure over a number of years, and so we think where we are today, we are pretty well balanced between our reserves and what we think that exposure on those aircraft are.

And by the way, those aircraft are still very, very good aircraft for their mission and although -- and we are constantly monitoring the people that hold those airplanes to make sure that we can support them in their business operations.

What is the unreserved amount as of the end of the third quarter?

The unreserved amount, I think the exposure is about a little over a billion.

Okay.

Thank you very much.

Cai von Rumohr of Cowen and Company, you may ask your question.

Yes.

Thank you very much.

You haven't kind of commented on deliveries for next year and, obviously, it's probably too early to kind of reset things, but, I mean, given that it looks like airline traffic may grow 1% or so next year, obviously you have to be thinking about potential changes to your output, kind of as you look at your business, which of the programs where there might be more likely downward pressure on rates and how kind of do you plan to kind of implement that if you have to and which are the programs where demand looks -- and financing looks more solid so we should feel better that the risks of kind of having to pull those rates down are lower?

Yeah.

Let me start with the finance question.

The finances followed across the product lines.

I mean, the 777s are financable and 37s are financable and the 87s, you know, are financable.

So we don't think are product line is pretty equally across the board there.

You know, and in terms of what we look like in deliveries, right now as we have just said, we have talked to the customers, we have talked to the financing sources and the -- and the commitments we have in our backlog, we really feel good for the next five quarters relative to what we are going to deliver on and, obviously, we are going to -- that is going to be somewhat impacted by the strike because, as you know, we are at -- we were at peak rates before so to be able to make up that in any short time frame is nearly impossible.

So we are pretty solid but we are monitoring it every day, Cai.

Thank you.

Doug Harned of Sanford Bernstein, you may ask your question.

Good morning.

Good morning, Doug.

On the strike, could you talk about how you're working with suppliers to ensure they stay healthy through this period, in particular are you -- in what cases are you actually taking delivery or taking title of components, how are you making those decisions?

Well, this is Jim.

We are working flexibly with them as we already had been in the case of the 87 with the reschedule, but as you've noticed, many of the suppliers have trimmed their production schedule, trimmed their manning levels and are absorbing a lot of it and why are they doing that?

They are doing that because they are participating on winning programs, and so we are having to do relatively less there than we were on the reschedule.

So I think everybody is -- everybody is trimming their sales and everybody is getting through it.

Does this change at all if the strike goes, say, longer than 60 days?

Do you get to a point where you look at this differently?

Well, there will be some point, obviously, where different questions have to be asked.

I mean, and every supplier has a different financial situation.

Although part of our selection criteria for suppliers is their financial strength and wherewithal.

Obviously, the longer the strike goes, the more risk you've got.

But as I said before, we are hopeful of resolving this issue sooner rather than later.

Okay.

Thank you.

You're welcome.

Ron Epstein of Merrill Lynch, you may ask your question.

Yeah.

Good morning, guys.

Good morning.

Good morning, Ron.

Jim, I was wondering if you could follow up on your comment about how you think potentially the government intervention in the financial markets could impact defense spending.

You know, lately we have seen things like the TSAT program get pushed to the program, ARH was cancelled, things that you wouldn't expect to see this late in an administration.

Is that any indicator of, you know, what could potential be going on in defense spending?

Well, I think the -- there's two countervailing forces here, obviously.

One is -- one is the short and medium term crowding out phenomenon.

It's hard for us to assess exactly what pressure would be put on near-term spending.

Having said that, there are reports TSAT, CSAR, no official notifications but there are reports.

Our base production programs, of which we have many, are not impacted, and -- but that does have to be monitored.

I mean, because the countervailing force is the threat environment.

The threat environment is not going away and I think our nation is committed to responding to it.

So I think how that sorts out is something that is not as easy as to say one side of that argument will win and the other side won't, but it has to be sorted out.

Great.

Thanks.

Okay.

Howard Rubel of Jefferies, you may ask your question.

Thank you very much.

Good morning Jim and James.

Good morning Howard.

Good morning.

Thank you.

I want to go back to an operational question and sort of use the 787 -- excuse me -- the 747-8 as sort of the paradigm.

I mean, you have, again, you know, a that looks like a charge or additional costs associated with that program and if we kind of look, there's been -- whether it's been the AWACS or the -- or, you know, the Airborne Early Warning Control or even the 787, you've had sort of just a series of what I call development misses relative to what normally Boeing is able to do.

So what are you doing, to sort of go back and look at program management or operational management to sort of not have these misses?

Well, I think on the defense side fixed price development contracts are a contract form that James and I are looking very, very carefully at before we commit to any new fixed price development contracts.

So -- and the -- we inherited a number of them, as you know and we are working through them.

On the BCA side, I think the 87, we are trying to learn from that.

I think the -- in retrospect, we bit off more than we could chew, new composites, new design tools, new production process, global responsibility for design as well as production, I think -- I think there is a lot to learn from how we did that.

There's a lot of good and there's some bad, obviously, that we are committed to learn from and hopefully you'll see that reflected in some of our newer programs.

On the -8 -- on the -8, the -- we are not particularly proud of how that is sorting out, but we'll get that program done and it's one that, it suffered from a few -- few misassumptions that we have caught up on now and we are going to get fixed.

And so when we kind of look at some of this, there's -- I mean, I don't think it's systemic, I mean it just -- I mean what you've done to sort of solve the problem, I mean, it's just not costing -- I mean it's process as well and could you elaborate for one more moment on what sort of process changes you've done to sort of help me feel more comfortable going forward?

Sure.

On the defense side, okay, you will not see big fixed price development programs.

Okay?

So that's one thing that if you add up the challenges we have had over the last three or four years, that would explain more than half of them.

Okay?

So that's one process fix.

I think the other one is learning how to manage this global supply chain that is at the center of the 87 and it has to do with IT.

It has to do with design responsibility.

It has to do with visibility on supply and production through these IT environments as well as visibility in design which we did do well.

And so it is like many in other industries before us, we did not have the kind of controls that we now know we have to have, both management and IT to manage globally remote activity and it's -- we are fixing it.

Thank you very much.

You're welcome.

Troy Lahr of Stifel Nicolaus, you may ask your question.

Thanks, just wondering if you guys can talk about the pull back in oil and how that is impacted your business.

Have you seen a greater interest from airlines looking to place future orders now that they can afford it, or is this there a bit of a trade-off here that the fuel burn is a little more manageable for some of these 15-year-old aircraft.

Kind of how is this impacting your outlook.

Well, I think the exhaling that otherwise would sound like a hurricane is the collective exhaling of airline executives globally, particularly in the US as the oil prices have trued back up to more reasonable levels.

So, I mean, the guys who run airlines are good customers have had one hell of a time.

They have all put together business plans that, in my judgment, as I just talked to them, would succeed at higher prices than they are experiencing today, but you need to have that business plan because of the volatility.

Volatility is the issue, not the absolute level today.

But there is no doubt that their financial strength is enhanced by the current oil prices and back to the -- James's discussion of a few minutes ago, they are more willing to finance and purchase and implement the backlog more attractive to financing sources and so that is all, I think, good.

Having said that, the price is still high enough that you need new technology.

Okay.

Do you think you had some customers sitting around with oil at 140, 150 that weren't placing orders and now you think, you know order activity is going to pick up a little bit down at this level?

There was a few in United States in particular where -- but, it was this cross current you always have which is the higher the price, the more you need the new technology.

I mean, the amount of money that can be saved by replacing a big fleet of 25-year-old airlines with new technology, whether they are 737s or 777s or 87s with a gas price over $100, the pay back is incredibly quick, and so the desire is there and it's a matter of getting the financing done and as we have said, while monitoring it every day and with only the paranoid survive kind of headset, we feel -- we feel pretty good about the next few quarters, the next five quarters in particular of financability.

Great.

Thanks, guys.

You're welcome.

David Strauss of UBS, you may ask your question.

Good morning.

Good morning.

Good morning.

Could you just give us an update on negotiations with your 787 customers?

It looks like you've now settled up with some of your early Japanese customers.

And in light of what you're seeing there along with what looks like an additional delay on the 787, are you still comfortable with a zero margin assumption, program of margin assumption for -- for 787?

Let me talk about how they are going with the customer settlements on the initial delay.

We are off to a good start.

We have settled some and we did better than we anticipated in those settlements and so not to say that we have a trend yet.

We still have an awful lot of other ones to get through yet, but we do think we have a very disciplined robust process that appears to be working that's both satisfying our customer needs and also protecting our corporation and so we are really pleased with the start we are off to.

The second -- the second part of your question, again, was what -- what was it?

Based on what you're seeing there on -- with your customer negotiations along with what looks like an additional delay on the 87, does the zero program margin still hold?

Yeah.

So, again, the zero margin was solving -- we were solving for whether or not today we felt we had a forward reach, and so we -- and the leading to zero margin is just that's where we are in terms of firming up the costs that are incurred that we are looking at relative to our cost accounting base and for the program of margin assumptions.

That will mature over time and by the time we deliver the first airplane, we will have a lot more definition around those cost categories and will be much better able to tell you what the right margin will be on the delivery of this airplane.

Yeah, I guess what I was getting at was, are you approaching a position where you think you might have to take a forward loss?

No, that's why we are saying that there is none.

Okay.

Thanks.

Gary Liebowitz of Wachovia, you may ask your question.

Good morning.

Good morning.

Given that some of the American Airlines 787 deliveries are as early as 2012, are you looking to increase production rates there so that you will take -- won't take as long to catch up on those late deliveries the further you go out into the decade?

No.

You know, the discussion with our good customer, American Airlines, had been ongoing for an extended period of time, and as a result, we had sort of informally slotted those positions for American so this does not represent incremental short-term demand, rather anticipated short-term demand.

And then just a quick one for James.

The sequential decline in the backlog at network and space systems, was there a significant de-booking of something in the backlog there?

We did have a contract adjustment for that where it was an Australian contract that we terminated and I don't think it was significant, however.

I just think that's the runoff.

Okay.

Myles Walton of Oppenheimer, you may ask your question.

Good morning.

James, you mentioned the R&D risk sharing that was remaining for the rest of the year in your guidance, about $80 million, potentially flipping it to '09 and as I guess a follow-on to Doug Harned's question but is that a sign of easing up or giving some consideration to suppliers on liquidity and also if that's the case, are you having conversations with suppliers beyond the --

No.

It's not that at all.

I think it's more a schedule.

I mean, we have the strike and then we have the schedule delay on 87 itself and it's more that's the discussion we are having around that, it's just timing.

It's not a liquidity issue.

On -- then on the topic of liquidity, have you had the discussion with suppliers in terms of any consideration that's being sought?

We absolutely have and we have -- we have in the case where we thought it was appropriate particularly for those suppliers that were producing and doing a good job to the original schedule and we have already talked about that.

We have provided some liquidity to them.

And then those that are in trouble, obviously, different discussions around how we do that and how we go through that process to make that determination, but those are ongoing.

There's no increase to that as of the strike impact yet.

Okay.

Thanks.

That was the -- I was looking for the delta for the strike.

Thank you.

Yeah.

Ben Fidler of Deutsche Bank, you may ask your question.

Yes thank you.

The further follow-on on the aircraft financing you gave the scale of 2009 potential level of financing that you see BCC doing.

Where you see that may be looking for 2010 or put it another way, what's the maximum annual level of funds that you think you would be willing to put in to vendor financing and how could that potentially impact any ongoing share buy back plans.

I think it's too early to tell but I can say this to you, you know in 2003 the portfolio in BCC was at $12 billion.

Today it's down to under 6.

So we have capacity.

I'm not saying to you that I'm willing to take it back up to 12, but I am saying we have capacity and we will have to look and see what happens.

But I think the liquidity issue that we are seeing today in the financial crisis we are seeing today, a lot will clear up by 2010 and for when you start looking at funding sources for those airplanes that will be delivered in that time frame I think we will be looking at a much different picture.

Okay.

Thank you.

JB Groh of D.A.

Davidson, you may ask your question.

James, I think you mentioned that obviously when you restart production at BCA it's not like a light switch.

We are not going to get back up to 30 37s a month.

How long does that take and it sounds like you were maxed out before so I guess those deferred aircraft are going to fill the slots that were vacated, but how long does it take to get back up to that high run rate?

It depends on how long the strike goes and the actions we have to take relative to that in order to be responsible in managing costs.

I mean, we have to -- the strike continues and we have to send people home and we have to start shutting down suppliers, obviously it will take longer.

If it stops now, it will be less.

But, we don't know that until the strike is over and then we go through and do the assessment and the orderly ramp back up to what were peak production rates.

But -- well, let us say theoretically if it's -- if we end after 60 days, can you get up to that rate in two months time or --

I don't know.

I really don't know.

I really don't know and I don't want to speculate but I think two months is a long time but I suspect that we could get close to if not in a two month period.

Hopefully we can do it in a lot less time.

It all swings on all long they stay out?

How long they stay out and the actions that we take as a result of that.

As Jim said, we will be answering different questions and taking different actions the longer the strike goes and that will impact our ability to ramp back up depending on what those actions are.

Okay.

Thanks for your time.

Operator, we have time for one more analyst question, please.

Thank you.

Peter Arment of American Technology Research, you may ask your question.

That was easy.

J.D.

just asked my question so I'm all set.

Thank you.

Want to do one more or?

We'll move to media now.

That completes the analyst question-and-answer session.

(OPERATOR INSTRUCTIONS).

I will now return you to The Boeing Company for introductory remarks by Mr.

Tom Downey, Senior Vice President of Corporate Communications.

Mr.

Downey, please go ahead.

Thank you.

We will continue with the questions for Jim and James.

If you have any questions after the session ends, please call our media relations team at (312)544-2002.

Operator, we are ready for the first question and in the interest of time, we ask that you limit everyone to just one question, please.

[Lynn Lunsford] of Wall Street Journal, you may ask your question.

Thanks.

I wanted to ask a question regarding the strike and kind of the situation where both sides of this -- of this dispute seem to be pretty well dug in on the issue of -- or for the union it's job security and I think you, Jim, have said it was management, management rights, but, I guess the thing that I'm trying to get a sense of is that do you think there is a compromise in that area that would be possible without one side or the other completely capitulating .

Yes, I think there's a way forward, Lynn, to be honest with you.

I think the management rights issue is one that leaves us with the ability to manage our business.

I think having said that, I think there's a way to work with the union to meet some of their goals and in fact, I think the -- I think the discussions that are starting up again tomorrow, the federally mediated discussions that are starting up again tomorrow, while it's impossible to predict success or lack of success, I think both sides are approaching it with a constructive headset, so maybe we can find a way forward here.

Do you plan to get involved in these at some point?

I'm involved in the strike on a day for day basis and so I think the -- Scott will be the lead, Scott and Doug Kight will be the lead negotiators as they always have been but I will be involved 24x7.

Thanks.

You're welcome.

Tim Claus of Associated Press, you may ask your question.

The last three Boeing strikes both with the machinists and with the engineers union have been settled only with the Boeing CEO and the President of each parent union getting together to reach a final agreement.

Do you plan to be at the table or are you ready to be at the table directly in these talks that are resuming tomorrow?

Well, like I say, the -- your first statement wasn't true.

I mean, we have resolved strikes with a variety of people at the tables, usually led by the commercial airplanes business leader who runs a $37 billion business and for whom the striking employees work.

So the -- like I say, I'm involved deeply.

I've had a number of conversations with the union leadership and I am open to be a constructive force in this thing any way I can be while also leading the company in a way that I think is best.

Can you elaborate on the conversations you've had with union leadership?

Not particularly.

I mean, I think, you know, the nature of these things are private, private constructive discussions and I think both of us would just as soon they stay that way.

Thank you.

You're welcome.

Susanna Ray of Bloomberg News, you may ask your question.

Good morning.

Good morning.

You mentioned the possibility of having to send some workers home.

Would that be engineers or who are you talking about?

You didn't come through clearly there.

Could you repeat it one more time?

I'm sorry.

You mentioned the possibility of having to send some workers home and I'm wondering if you're referring to the engineers or to whom.

Yeah, go ahead.

Listen, what I was talking about, that as the strike goes on, if it goes longer, we will be looking at more significant action to manage the ongoing costs that would, if in fact it went long enough could include sending people home.

Right now there are no plans to do that.

Okay.

And then just one more question.

You have a figure of $0.60 for the impact of the strike and the galley problem.

Can you give any sort of breakdown between the two?

Yeah, would I tell you that the strike is about $0.35 and the galley issue is about $0.25.

Great.

Thank you.

James Wallace of the Seattle PI Newspaper.

In a couple of your messages to employees since the strike began, you have commented about how disruptive these continual labor problems are.

When it comes time to find a site for your next all new airplane after the 787, how much consideration or how much of a factor will these strikes and labor unrest be in deciding where to build that new airplane?

Well, it's far too early to figure out where we are going to build a plane that is -- that we haven't designed yet, but, listen, the workers -- notwithstanding the strike and notwithstanding the frustration on behalf of our customers that I have about interrupting their lives on a pretty regular basis, I think we are -- I'm a human being, I think we are all human beings, we are frustrated by that.

Notwithstanding all that, the workers out in Puget Sound, represented by the IAM, are very fine workers.

They do a good job and I'm anxious to get them back to doing a good job and they can compete for any work that we have got.

If I could follow up, Jim.

When Alan Mullaly and Mike Bair came to Chicago to make the presentation for the 787 to be built in Everett, you were on the board.

Were you concerned at the time that a possible labor strike like this one was going to disrupt production of the 787 just as you got started?

I don't think that that was a front and center consideration, to be honest with you, back then.

I mean, I think we were trying to find the best production structure or Alan at the time was trying to find the best production structure and the best place to build the airplane and I think that issue sort of gets front and center during a time like this when you're making an investment decision.

It probably wasn't a huge factor.

Okay.

Thank you.

You're welcome.

Dominic Gates of the Seattle Times, you may ask your question.

Hello, Jim.

Following up on Lynn Lunsford's question and your answer to it, I seem to detect some -- a level of optimism there that you can solve this quickly.

I'm wondering, has there been any movement -- you talked about talking to strike leaders.

Have you talked to Tom Buffenbarger, have you detected any movement since the talks broke down just over a week ago between then and now deciding to go back to the table, is there some reason for that optimism beyond the mediator saying let's get back together?

Listen, I'm an optimistic person by nature, number 1.

I do want to resolve this.

There have been some informal discussions that have, I think, indicated a constructive headset on both sides, which is why I think we both readily agreed to get back together.

Could I just follow up with a different union question?

Looking ahead now toward the negotiations with SPEEA and the SPEEA leadership has been talking tough, any thoughts on how that's going to go?

Well, we look forward to a successful discussion and negotiation.

I mean, I think the -- I think recent discussions -- I mean, I think we head to the table here not too far into the future and I think some recent discussions suggest that, again, there's a constructive headset, so I anticipate getting through that one and coming to terms with a very important element in our workforce.

Thank you.

You're welcome.

Peter Pae of the Los Angeles Times, you may ask your question.

Thanks.

Good morning, Jim.

Good morning.

I'd like to switch tracks a little bit from the strike and ask you about the satellite business.

There were a couple of setbacks recently, a jury verdict yesterday and TSAT being sidetracked, commercial orders are down.

Wondering what you see as sort of prospects in light of all these things happening.

Well, I think the -- I think our customer, referencing TSAT in particular, is trying to sort through the best way forward as they think about all the things they need to think about and there are many considerations, as you know.

And so I think there's a -- we are going through a time now of sorting out by our customer, and we are ready to respond.

Whether it be some form of TSAT or some form of extending what we are doing currently, I think either way, it's a good way forward for us.

The business has been, from the times of four or five years ago when the -- when the business was upside down financially, as -- the leadership of that business has done a tremendous job not only satisfying customer requirements but getting their financial ship in order.

So I'm feeling like we have a good base to follow where our customer wants us to go.

So you think it's still a viable business for you guys?

Yes, yes, I do.

Okay.

Operator, we have time for one last question, please.

Our last media question comes from Andrea Rothman of Bloomberg News.

You may ask your question.

Yes, hello, a question for Mr.

McNerney.

Do you have a threshold for order numbers under 747-8 before actually committing to build that plane?

I know you have those kinds of firm.

I'm not sure if Arik has signed for the four they announced in Farnborough.

We have committed to build the plane.

So even if you only had 30 or so orders you will still move forward with it?

Yes.

I mean, we have -- we have -- I think the combined orders are somewhere in the neighborhood of about 100 and 110 or so, which is -- which is, I would say, about average in terms of this stage in a program development, so we -- while we are frustrated by the incremental costs we are seeing, that doesn't change our mind about getting this done for our customers.

There's good demand for this plane.

Okay.

Can I just follow up to get a clarification from Mr.

Bell.

There was a question about who you would send home, you know, if you had to send workers home, you said we might have to send people home.

Who would those people be?

I mean, is it engineers or overhead --

Don't know.

We'd have to get to there and see.

Oh, so you don't -- okay.

No, we are not planning on sending anyone home.

We have no plan yet.

I'm saying it was a hypothetical discussion around if the strike continued longer, would you have to make different decisions and the answer to that is, yes, including what we would do to manage our -- and conserve our resources both here and with our supply team and collectively we would figure out what's the right things to do in order to do that.

Cost reduction.

That would drive costs down until we got back to work.

Okay.

Thank you.

Thank you.

Operator and everyone that concludes our earnings call.

Again for members of the media, if you have further questions, please call our media relations team at (312)544-2002.

Thank you very much.