Alenia parent believed 787 costs would force program's cancellation

Alenia parent believed 787 costs would force program's cancellation:

Flight International's Italy Special Report is out this week and business editor Dan Thisdell, takes a close look at Finmeccanica, the troubled Italian aerospace company. The impact of rising development costs and workmanship issues from Alenia Aeronautica, the unit of Finmeccanica responsible for supplying the Boeing 787's Section 44 and 46 fuselage barrels and horizontal stabilizer, forced a billion dollar (€753 million) charge against the company's earnings in the third quarter, €161 million of which paid as a penalty to Boeing for the "non-compliance" of the stabilizers.

For the proper context, Alenia's initial August 2005 contract for 787 was valued at $1.1 billion over the first 150 aircraft, or about $7.3 million per shipset.

The Italian supplier has since been removed as the sole source for the 787-9's horizontal stabilizer, which will now be built to start at Boeing's Seattle Development Center.

The impact of skyrocketing 787 program-wide costs due to the "major technological, process and structural challenges" were so systemic and "substantial", reports Thisdell, that CEO Giuseppe Orsi believed that Boeing would cancel the aircraft's development.

The €592 million figure was based on a huge increase in Finmeccanica's assessment of the contract cost. Up until the end of the first half, Orsi explains, Finmeccanica valued the programme at only 300 shipsets, as there had been a "tangible risk" that a permanent increase in development and industrialisation costs would lead Boeing to cancel the 787 programme. In the event of cancellation, Finmeccanica would have kept a Boeing cash advance, but with certification and first delivery finally achieved, cancellation is "quite unlikely" and that, says Orsi, changes the calculations dramatically, as the contract is now valued at 1,022 shipsets.

Orsi believes the 787 will, now, prove profitable over the 1,022 aircraft plan, and should provide "low single-digit" profitability during the early programme period.

The 1,022 profitability figure for Alenia is in line with Boeing's initial accounting quantity of 1,100 deliveries which the airframer says was driven by both the rising costs of the program and the substantial demand for the aircraft, far in excess of the accounting block of 400 for the 747, 757, 767, 777 and 737NG programs.

Now with the billion dollar charge to its earnings due to 787, Finmeccanica believes it will now turn a profit over 1,022 deliveries when coupled with its cost reduction plan. Unclear if that profitability will take the company longer to achieve than Boeing as its new second source role on the 787-9, reduces its revenue by half per shipset, though Alenia is "assured" 100% production rates for the yet-to-be-launched 787-10X.

Though Orsi's acknowledges that the company's financial troubles go far beyond the 787, his take on the impact of the rising development price tag is the first public acknowledgement of by a supplier of the dire seriousness of the 787's cost increases that almost made the program not worth Boeing's undertaking.