“A billion here, a billion there, and pretty soon you're talking about real money.” – Congressman Everett Dirksen

On October 6, 2009 Boeing Aircraft Company announced it was recording a $1 Billion charge in its third quarter related to “increased production costs” and “difficult market conditions” leading to lower than expected demand for its new 747-8 Freighter aircraft. Because the program is in a loss position, Boeing must record its entire forecasted loss upon identification.

This is not the first hint of trouble for Boeing Commercial Aircraft (BCA) and its aircraft programs. We previously posted that delays and overruns of BCA’s 787 and 747-8 programs may have led to the early departure of BCA’s President, Scott Carson. The program delays and other issues (e.g., the Machinists’ strike) also contributed to EADS overtaking Boeing as the No. 1 Aerospace/Defense company in the world, as we reported that “Boeing Commercial Aircraft (BCA) suffered a sales drop of 15.3% while Airbus' sales rose 18.9% (or 11.2% after currency adjustment).” We also noted that companies connected to the Boeing supply chain did not fare well either. For instance, Spirit Aerosystems, Kawasaki Heavy Industries, Curtiss-Wright, and Fuji Heavy Industries each underperformed against their peers. In contrast, some Airbus suppliers such as Zodiac Aerospace, Latécoère, and Moog outperformed their peers.

What led to the charge being recorded? Boeing doesn’t have much to say on that score, offering only the explanation that “it became clear that late maturity of engineering designs has caused greater than expected re-work and disruption in manufacturing. This is resulting in additional resources being applied on the program and higher supplier expenses, which are the primary cost drivers.” Other reports, such as this one from Bloomberg.com, note that “about $640 million of the pretax charge reflects higher expenses to produce the 747-8 … Higher allocation of fixed expenses and volume- based penalties to suppliers are the main drivers of the additional costs … the remaining $360 million of the charge relates to ‘challenging market conditions’ and the decision to keep production at a rate of 1.5 airplanes per month for almost two years longer than planned, instead of increasing output to two per month.”

According to the Wall Street Journal, Boeing’s announcement “did not quell speculation that the U.S. aerospace company may still cancel the loss-making program as it wrestles with delays and production issues with its 787 Dreamliner, which, like the 747-8, has yet to fly.” Moreover, “The 747-8 replaces the profitable 747 jumbo and was seen as a simpler design challenge than the 787 as it involved stretching and adding new wings and other parts to the existing aircraft. However, Boeing has already had to boost investment in the program, which was hampered by a machinists strike last year, the need to pull some engineers onto the 787 program and supply-chain problems. “

Although Boeing’s announcement was careful to let investors know that it discovered its 747-8 problems in the 3rd quarter, some have speculated that Boeing was aware of looming problems earlier, and that the problems led to Mr. Carson’s ouster as BCA President. Obviously that is speculation without evidence, and Boeing would be in trouble with the SEC and other regulators if that were the case. Nonetheless, Boeing is developing a history of “program surprises” such as this one, and one can only wonder if the world’s premier program management company has lost the formula to managing large programs to successful outcomes.