Boeing Company (BA) — Q1 2015 Earnings Call Transcript

Thank you and good morning. Welcome to Boeing’s first quarter 2015 earnings call. I am Troy Lahr and with me today are Jim McNerney, Boeing’s Chairman and Chief Executive Officer and Greg Smith, Boeing’s Chief Financial Officer. After comments by Jim and Greg, we will take your questions. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in today’s press release and you can follow this broadcast and slide presentation through our website at boeing.com. Before we begin, I need to remind you that any projections and goals included in our discussion this morning are likely to involve risks, which is detailed in our news release and our various SEC filings, and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures, and reconciliation of non-GAAP measures that we use when discussing our results and outlook. Now, I'll turn the call over to Jim McNerney.

Thank you, Troy, and good morning, everybody. My comments today will focus on our positive first quarter performance and what we see as a continued healthy business environment. After that, Greg will walk you through the details of our financial results and outlook. Now let's move to Slide 2, please. Building on the strong performance trend we sustained through 2014, Boeing delivered solid first quarter 2015 financial results including higher revenue, healthy core operating margins, and double-digit growth in core earnings per share. We also continued to return cash to shareholders in the first quarter by repurchasing $2.5 billion of Boeing stock and increasing our dividend as promised by 25% for a payout of $639 million. Revenue at Boeing commercial airplanes increased 21% to $15.4 billion and operating margins were 10.5%. We delivered 184 commercial airplanes in the quarter and added 110 net new orders. Key milestones in the quarter included delivery of the first 787-9 built at Boeing South Carolina, the opening of our South Carolina propulsion systems facility, and the start-up of an automated wing panel assembly on the 737 program in Renton. Boeing defense, space and security reported revenue in the first quarter of $6.7 billion and generated strong operating margins of 11.1%. Key contract awards included orders for 43 AH-64E Apache helicopters, a multi-year combat logistics support contract and an order from SES for an all-electric 702SP satellite. In addition, the U.S. Air Force selected the 747-8 as the next Presidential Aircraft. Noteworthy program milestones in the quarter included launching the first two all-electric propulsion satellites double-stacked on a single rocket, and breaking ground on the crew access tower which will support the commercial crew program; replicating a best practice to bolster performance on development programs by establishing a single unified defense and space development programs organization. Our success with the similar structure put in place at commercial airplanes starting with the development of the 787-9 shows that we can leverage synergies and expertise across different development programs to reduce cost and risk and better ensure performance as promised to our customers. This new organization will oversee current and future development efforts including work on the KC-46 tanker, the 747-8 Presidential Aircraft, our commercial crew spacecraft and space launch system rocket, the 502 small satellite, and our St. Louis based 777X work package. In summary, we delivered another strong quarter of operating performance, achieved significant program milestones, cash at orders totaling $15 billion, and returned significant cash to shareholders all of which Greg will cover in more detail in a moment. With that, let's turn to the business environment on Slide 3. Strong airline profitability, healthy global air traffic trends and our backlog totaling more than 5,700 aircraft all combined to underpin our planned production rate increases over the remainder of the decade. Our long-term outlook also remains positive as we expect airline fleet growth and replacement demand to drive the need for nearly 37,000 commercial aircraft over the next 20 years. As evidenced by the healthy pace of orders during the first quarter, conversations with our airline customers continue to center on new purchases or accelerating delivery slots. Deferral requests are still running well below the historical average; these remain very good times for our industry. As I mentioned on last quarter’s call, historically airplane orders are highly correlated to airline profitability. And lower oil prices have not fundamentally changed our customers' view on fleet planning or their commitment to existing delivery schedules. The rapid return on investment from new, more efficient airplanes remains a compelling factor in purchase decisions, even if the fuel price environment remains well below the 15-year average. As a reminder, in addition to far better fuel efficiency and lower maintenance costs, our new technologically advanced airplanes also often deliver higher passenger and cargo revenue, increased residual values, a better overall passenger experience, and greater range that grows market opportunities by allowing for new city pairs and more optimal routes. All of these elements provide significant value to our customers over the life of the aircraft. Further to those points, demand for both the 777 and the 777X remains strong. The 777 production line is essentially sold out for 2016, approximately half sold out in 2017, and has a healthy number of slots already sold firm in 2018. As we've discussed before, the new 777X is scheduled to enter final assembly in the 2018 timeframe and will leverage new manufacturing processes and technologies being proven on the current 777 to optimize the overall 777X production system. We will continue to assess the most efficient way to phase in this new technology and adapt as necessary to ensure we meet our customers' commitments. On the 787 program, we have now delivered more than 250 airplanes including 20-9s. Notable among the strong new bookings during the quarter was ANA's order for three 787-10s. 787-10 development remains on track for first delivery in 2018. In the single aisle segment, demand for our new fuel-efficient 737 MAX also remains high with cumulative orders totaling more than 2,700 airplanes from 57 customers; development of the MAX remains on track for first delivery in 2017. Turning to defense, space and security, we continued to see solid support for our major programs. The President's fiscal 2016 budget request included increases for core Boeing production programs such as P-8A Poseidon, Apache, and Chinook helicopters; key development programs such as tanker, Long-Range Strike and commercial crew also saw budget increases. International demand for our offerings remains strong, particularly in the Middle East and the Asia Pacific region. During the first quarter, international customers for defense, space and security represented 23% of revenue and 37% of our current backlog. Our investments in technology and innovation for organic growth continue in areas such as commercial derivatives, space, unmanned systems, intelligence, surveillance and reconnaissance, and the few critical future franchise programs like Long-Range Strike and the T-X Trainer which are priorities for our customers. The relative strength of our defense, space and security business stems from a portfolio that is reliable, proven, and affordable, supported by our ongoing market-based affordability initiative which is focused on reducing operating costs by another $1 billion on top of the $5 billion already achieved which will ensure competitiveness through the ongoing downturn in domestic defense spending. Overall, our business strategies are aligned to the realities and the opportunities of our markets and our teams are executing them well to deliver increased top line and bottom line performance, support the needs of our customers, and capture new business to sustain our growth and profitability for the decades to come. Now, over to Greg for our financial results and our updated guidance. Greg?

Thanks, Jim and good morning. Let's turn to Slide 4 and we’ll discuss our first quarter results. First quarter revenue increased 8% to $22.1 billion driven by strong commercial airplane deliveries. Core earnings per share for the quarter increased 12% to $1.97 driven by higher commercial airplane volume and continued strong operating performance. Let's now discuss commercial airplanes on Slide 5. For the first quarter, our Commercial Airplanes business increased revenue 21% to $15.4 billion on 184 airplane deliveries and reported operating margins of 10.5%. Strong operating margins in the quarter were primarily driven by higher volume, continued focus on productivity, and program mix. Commercial Airplanes captured $9.8 billion of net orders during the first quarter and backlog remains very strong at $435 billion and over 5,700 aircrafts equating to approximately eight years of production. Specifically on the 787 program, we continued to expect the program to be cash positive during 2015 and we still anticipate deferred production to decline shortly after we’ve achieved the 12 per month production rate in 2016. No change to these fundamental milestones. We continue to see progress in key operational performance indicators for the 787 program as we further implement production efficiencies while meaningfully increasing the 787-9 production and managing through some near-term disruption in supply chain, largely around cabin interiors. Despite these challenges and with a lot of hard work from the team, we delivered 30 787s in the quarter and made further progress on reducing unit costs. On the 787-8, we’ve seen a decline in unit cost of approximately 30% over the last of 190 deliveries and furthermore, the 787-9 unit cost declined approximately 25% over the first 20 deliveries. In line with our expectations and as declining rate, 787 deferred production increased $793 million to $27 billion in the first quarter and as we previously discussed, we continued to anticipate 787 deferred production to grow at similar levels for the next couple of quarters before seeing a healthy decline in the growth later in this year. We remain focused on solid day-to-day execution, risk reduction, and improving long-term productivity and cash flow going forward. We continue to manage the smooth ramp of the 787-9 production compared to the 12 rate per month introduction of the 787-10 while also driving efficiencies across all aspects of the program. Let's turn now to Defense, Space, and Security results on Slide 6. First quarter revenue at our defense business was $6.7 billion and operating margins were strong at 11.1%, largely driven by solid performance and favorable mix. Boeing military aircraft first quarter revenue declined to $2.7 billion primarily driven by planned timing of C-17 and F-15 deliveries. Operating margins at 9.5% reflect delivery mix that offset improved operating performance. Network and Space Systems reported revenue of $1.7 billion and increased operating margins to 9.6% in the quarter resulting from higher ULA earnings. Global Services and Support revenue was $2.2 billion and operating margins increased to 14.1% on solid operating performance in favorable program mix. Defense, Space, and Security reported a solid backlog of $60 billion with 37% of our current backlog representing customers outside the United States. Next slide please. Operating cash flow; operating cash flow for the first quarter was approximately $100 billion driven by solid operating performance and as expected the timing of receipts and expenditures that largely benefited late in Q4 of 2014. We continued to expect 2015 operating cash flow to be more than $9 billion with the majority of that being generated in the second half of the year. With regards to capital deployment as Jim mentioned, we paid $639 million in dividends and repurchased 17 million shares for $2.5 billion in the first quarter as we continued to deliver our commitments to our shareholders and furthermore this reflects our ongoing confidence in the long-term outlook for our business. We continued to anticipate completing the remaining $9.5 billion repurchase authorization over the next two to three years. Returning cash to shareholders along with continued investment to support future growth remains a top priority for us. Moving to cash and debt balances on Slide 8. We ended the quarter with $9.6 billion of cash in marketable securities and our cash balance continues to provide solid liquidity and position us very well going forward. Let's now turn to Slide 9 and I’ll discuss our outlook for 2015. We are reaffirming our 2015 guidance for revenue, operating margins, core earnings, deliveries, and cash flow. Overall, we’re very pleased with the first quarter performance as the core operating engine continues to deliver strong results, and we expect that performance to continue as we remain focused on production, program profitability, rate ramp-up, and ongoing productivity improvement. With that, I’ll turn it back over to Jim for some closing comments.

Thank you, Greg. With a strong first quarter behind us, we remain focused on disciplined execution, quality and productivity improvements, and meeting customer commitments. Our priorities going forward are clear and consistent: the profitable ramp up in commercial airplane production, executing well on our development programs, driving efficiencies throughout the enterprise, continuing to strengthen our defense business, and importantly, providing increasing value to both our customers and our shareholders. Now we’d be happy to take your questions.

You mentioned there could be several questions to ask. However, you spoke about making significant progress with the 777 bridge. Can you provide more details on that? Jim, could you also discuss the quality and nature of the conversations you're having with customers?

Yes, I think the 777 you've heard my speech before Howard, it's a unique airplane in terms of its capability and where it's positioned in the market, so it's a real opportunity to manage this bridge well. So far so good, I think last year's performance was good. I think this year where we stand now we've got 25 orders and commitments in-hand today, that's roughly half or just short of half of what we're looking forward to for the entire year. I mentioned the production skyline in '16, '17 and '18 and it's beginning to firm up. So we're increasingly confident that we can implement this bridge and it's important not only commercially and to keep the rate going, but as I mentioned in my comments, we're sort of feathering in some new technology on the current airplane, the ER, so it's tested and de-risked by the time we get to the X. So this bridge has lots of value for us, lots of value for our customers. So steady she goes.

To clarify, you're referencing the integration of this technology and the press release about speeding up certain development milestones. Should we interpret this as the R&D programs for the MAX, 10, or X performing slightly better than your existing budgets?

No, what I would say is on budget slightly ahead on de-risking, in other words, we're spending about what we had planned, but the technical advances or the reliability that we're shooting for is coming in a little bit more robustly than we'd hoped. And as you recall, we've got a development organization that is 100% focused on development now and that gives us much greater visibility and much more objectivity around these kinds of milestones.

So your 787 deferreds per unit built looked like they went from 32 in the fourth to 26 million, maybe give us some color, this looks like better performance than we'd expected. Was this better than your performance expectations? How did the 787-9 and 787-8 do? And is the 787-8 now in a cash positive mode with regard to deferreds?

Yes, what I would say Cai, when you look over that timeframe we have seen improved performance, in particular I noted on the 787-9 as they're coming down the learning curve in a very aggressive manner. And I think that goes to the lessons learned off the 787-8 and getting those into the production system. So that introduction of that airplane is going very well and as you know that will be close to half of our deliveries this year, so that smooth introduction is important. When you look quarter-over-quarter as you know, Cai, mix comes into play so we did have some early 787-9s actually the first two coming out of Charleston, so that played into the shift quarter-over-quarter. But I'd say fundamentally, again the program continues to make good improvements on unit cost, still got a long way to go but making good progress.

And maybe a follow-up, you had mentioned the cabin interior disruptions, what impact did that have on the 87? And when do you think you'll have that behind you?

Well, I mean, Cai, we delivered the 30 airplanes which was the production rate, but it's disruptive, it added additional pressure obviously on deferred and you see by the growth in the deferred, we were able to offset some of that through our own productivity. But certainly, it's been disruptive, there is recovery plans in place, we're part of that recovery, we're actively engaged with them and we don't see that impacting our deliveries through the balance of the year.

I'd like to just continue on that with the 787. If you look at the increases that you're seeing in deferred, and as I look at the numbers for this quarter, it looks pretty much on the trajectory you described last quarter. But can you parse this out into buckets? And what I mean by that is things that would be one-time investments, I would say higher costs on early 787-9 deliveries, and potentially other factors related to operations of the supply chain. How would you divide this up? I mean how much falls into each category?

I'd say roughly, Doug, it's about a third, a third, a third through breaking each one of those pieces down. Certainly as we talked about maintaining some higher employment as we work through incorporating reliability and driving productivity initiatives, obviously getting ready to de-risk for the 787-10 to 12 a month and the early introduction of the 787-9. And as you know you’ve been covering this business a long time, this is about a smooth introduction you've seen on a wide body program and particularly one that is at record production rates. And that's attributed to really risk reduction effort and focus early on in the program. Some of the supplier negotiations that we talked about moving some of those to the right as we get more mature on the learning curve within those suppliers. And then some of the productivity initiatives as I've highlighted where we're really seeing opportunities to drive further value in the program over the long-term, but requires some upfront investment. Those are very good business cases. Those are absolutely the right thing to do to drive long-term profitability and cash for this program and those are obviously remain a top priority for us and at the same time we're looking for more opportunities to capture further productivity and cash that will require more investment. So, we're continuing to focus on that and again I think it's absolutely the right thing to do for the program and again, driving long-term profitability and that's the focus.

And if I can, on a follow-up on this, on the 787-9 in principle, I mean, this is an airplane that will have higher pricing. You've done design, a lot of design work to lower manufacturing costs for it. So in theory, this should be a very attractive airplane from a profitability standpoint. Can you give us a sense of when you expect the 787-9 to become cash positive?

I don't really look at it that way, Doug. I mean I look at the program as a whole. And the productivity focus is not just on the 787-9. It's across the entire value chain of 787-8 and 787-9, but again on the overall profile, when you combine the 787-8 to 787-9, we expect to be cash positive during 2015. So that hasn't changed, but the fundamentals, again are more across the entire either supply chain or internally, whether it's a 787-8, a 787-9 or a 787-10, where do we drive additional productivity.

Greg, could you clarify something about the 777 for me? I'm curious about how the introduction of some productivity investments into the ER production line affects the margins for that program. Will including these in the end of line ERs before the 777X lead to a significant negative impact on margins? Additionally, how should we assess the impact of separating the 777X into its own block regarding overhead and non-recurring investments? Will that significantly improve the situation? What are the implications we should consider?

First, to address your last question, the answer is no. Regarding the introduction of this, we expanded the block by 50 units this quarter, and the investment we discussed for the 777, and eventually the 777X, is included. These factors are reflected in our booking rates for this quarter. I would describe the introduction process as very smooth. By proving out this technology outside of the production system in an isolated environment—again, not in the mainstream production—we ensure it's rate-capable and can be smoothly implemented while we continue to build at a rate of 8.3 per month. Much of this proofing is about reducing risk upfront while ensuring long-term profitability for the program, and it is happening outside of the regular production system. Therefore, I do not see this as being high risk. The de-risking efforts have been very sensible, and if any issues arise, we have a backup plan to maintain the current production system. Thus, I believe the risks are well-managed. The opportunities here include reducing flow time, improving quality, and ultimately lowering unit costs. Overall, these are excellent long-term investments for us in relation to the 777 and the 777X.

And was there any impact on the program margin as a result of the block extension?

Slightly down. And keep in mind too, Carter, escalation comes into play here that some of the productivity that came through in the booking rate, some of that was offset by escalation that impacted the booking rates across all the programs. But again, strong productivity across all the programs.

I was wondering if you could talk a little bit more about the supply chain and the $2 billion increase in the gross inventory. We know about the seat issue, GE talked about not being able to deliver all the engines that they would have liked, and so I guess to what extent do those delays impact that inventory number and where do you see issues in the supply chain that concern you as you talk about going up to 12 a month?

Well, I mean, some of that Sam is just the fact that we're going up in rate. So there is some of that. The disruption we've talked about, again, the team has done a fantastic job managing through that disruption, reaching back into the supply chain and helping wherever we can help out. And there is recovery plans in place. So watch item, certainly been disruptive but certainly not something we see impacting the deliveries for the year. Later in '16.

Jim, I was wondering if you might spend a few minutes talking about the defense business. In particular, comment on the sales efforts on the C-17 and then maybe provide some updated thoughts on, say, the next five years in the defense business historically talked about this being flattish with some programs coming up, some coming down. Maybe just an update there would be helpful.

I think the summary would be the outlook remains challenging, but recently looking a little better as I read the political dynamics, just an overall comment about the marketplace, particularly the US Congress-driven marketplace. But to the specifics of your questions, C-17s, we've got orders and commitments that leave about five to go. We have a lot of action on those five, so I think the team made the right call on when to curtail the program. You always want to curtail these things where you end up having a little more demand than you've got airplanes at the end, so hold pricing and production and that is playing out well for us. I think in the face of sequestration, the reason for my optimism and it's not wild-eyed optimism, it's a matter of sort of Ryan-Murray 2.0, sort of maybe extending the kind of budget compromise that had been fashioned a couple of years ago, another couple of years, and that may turn into a broader consensus dealing with sequestration in a balanced way. So there's a little more optimism that that will sort out and based on newspaper reports I've seen, Murray and Ryan are working together again trying to come up with some kind of a budget compromise that would include the defense portion. We're well marked up in the President's budget request, more than our fair share of sort of the jump balls, I guess is the way to put it. And so our backlog remains strong, our profitability because our productivity plans assume the worst and what we would like to do is be surprised and so that's the reason you're seeing strong margins in the first quarter in our defense business, notwithstanding some timing on the deliveries which we'll sort out by year-end, did that give you the flavor you were looking for?

Yes, just maybe just to put a little bit finer tooth on this. You've got risk on F-18, F-15 towards the end of the decade, its long talked about tanker and PA offsetting those declines. Is that still the broad brush stroke view of the world?

Yes, I believe that the F-18 and F-15 have more potential than I previously indicated, so I feel more optimistic about them now. Long-term, that's my perspective. Additionally, there are several significant development programs currently underway, including Long-Range Strike, the tanker, and the U-class. If we capture our fair share of those programs, or perhaps even more, it would enhance the outlook you mentioned.

Just a quick question on customer advances, it seems like more recently that's been more volatile than it has been in the past and just kind of thinking about it, has there been a change in policy around how you collect the PDPs? Meaning with backlogs going out so far, is it to your advantage to try to collect some of those PDPs maybe sooner, monetizing it sooner than waiting eight years for those PDPs? Does that make sense?

No change, Ron. No change. I mean what you're really just seeing is just the timing of those. And as you've heard me talk about before, as you go up in rate, obviously and with the strong order book, we've seen more advances but the timing of those quarter-over-quarter is very difficult to see a trend there. And you really got to look at it over a year-over-year and frankly over a 24-month period because of the size of those, some of those, as well as milestone payments, so very difficult to look at on a quarter-over-quarter basis, but no change. I would say as far as cash flow goes, the outlook for operating cash from us remains unchanged, and we still see strong cash flow this year, again greater than $9 billion and continued growth as we come out of '15 into '16. Advances are certainly a part of that, but just the core operating performance and the fact that our delivery rates will continue to go up as we deliver on the 5,700 airplanes. So our view on cash flow, again, is very solid and remains unchanged.

And if I can, just follow on with just a more technical question. On the 777X, I think you guys have said that the center wing box is going to be aluminum as opposed to carbon fiber. What can we read into that, with that move on that aircraft compared to what was done on the 787?

I wouldn't read anything into it, Ron. Obviously when we go through the design of the airplane, I won't pretend to be a design engineer here, but everything's taken into consideration as far as efficiency of the operating economics of the airplane and the weights and that gets taken into consideration, maturity of technology and obviously development costs and recurring costs to build the airplane. So those are a few things that are obviously important key factors we take into account when we're making trade-offs between one type of, I'll say, application versus another.

And there was no change there. That was always the plan.

Greg, you did 10.5% of BCA margins in the quarter, it looks like mix and volume would actually be modest helps for the rest of the year. Doesn't look like R&D should be much of a headwind, and it sounds like the 777 kind of extension was a negative in this quarter. So other than conservatism, how do you put it to the 9% to 10% guidance for the year?

I kind of put it into three main areas, Myles. I mean R&D we do expect R&D to pick up a little bit in the back half, in particular 777X ramping up. We'll have more 787-9 deliveries, 787-9 deliveries and then with more 747s as well. So that's I'll say the dilutive impact for the margins going through the balance of the year. Having said that, obviously we got everybody extremely focused on continued good productivity and we will through the balance of the year. But it's really that mix that's driving it.

And just one clarification. You said the majority of cash in the second half, are you thinking two-thirds or are you talking 80%?

Well, I would say traditionally, as you know, we're backloaded, but third quarter and fourth quarter will be heavier than first quarter and second quarter and again, progress payments, milestones, and then just delivery profile.

Just wanted to get a clarification from Jim and then a question for Greg. Jim, on the 777, you mentioned 25 orders and commitments but I think you printed just the seven orders in the quarter. So are these still in process? Are they falling to Q2?

Well, we don't mention commitments unless things are largely done. So things are largely done. And there are timing considerations in some cases driven by customer requirements and things and so we let the customer decide when to finally approve and release. But I have a very high degree of confidence in the 25 number.

Regarding cash flow, following up on Ron's question, you likely have an after-tax benefit of $1 billion to $2 billion from the deferred 787. You're expecting relatively stable operating cash flow and net income, although timing does play a role. Given this, how should we view the advance and physical inventory levels at the end of the year? I suspect there might be some negative impact from advances and physical inventory that offsets the deferred benefit.

Like I said, Rob, timing around advances in milestones can swing significantly quarter-over-quarter and as you said year-over-year. So that comes into play, as well as, as I said, delivery mix and even the way the orders are profiled through the balance of the year. So again, the outlook on cash flow for this year unchanged. Greater than $9 billion, that's what everybody's focused on generating. Again, quarter-over-quarter, you're going to see variance in there. And those elements I described are really what the big shifts in quarter-over-quarter, I'll say fluctuation you're going to see. But nothing's changed on the cash flow, Rob, and we continue to remain extremely focused and I think you've seen a $2.5 billion share repurchase in the quarter alone I think should give you some idea of the confidence we have in executing to our business plan and just the overall business environment and executing on the total backlog. We don't anticipate any change from what we talk about when we gave guidance.

Jim, you mentioned that the deferral request is continuing at record low rates along with accelerated purchases. Do you still feel confident about the bookings environment? I assume this reflects the health of your backlog, but do you believe you can achieve a book-to-bill ratio of one this year?

Yes, I believe we will achieve a book-to-bill ratio of one. When I assess the pipeline and the progress made so far in the first quarter, I maintain that outlook. This indicates a positive trend after several years of exceeding that figure. It's important to note that much of the current demand is driven by the replacement of older technology with new advancements. We are currently in a technology cycle that is not directly linked to GDP growth, but rather to favorable replacement economics. Approximately half of our growth is derived from replacements, while the other half is associated with new routes, new airlines launching, and new deliveries, which are more connected to GDP. This underscores the advantages that innovation can bring.

Operator, we have time for one more question.

Sort of a follow-up for the previous question actually, it was about the sort of the comments you've made Jim over the last couple of calls about running below historical deferral cancellation rates. Can you give me some more color on that? How are you tracking that? Did you look back at that metric to sort of where we are in prior cycles at this point in time or did you sort of like a rolling historical look back? Is there any way you can sort of give us some color on how you look at that metric and help us sort of think about it and quantifying it?

It's essentially a continuous review of the specific back metric. I began incorporating this into our presentations when we were discussing last year's situation during the dip, as concerns about that metric were prevalent. In my experience over the past decade, we have consistently remained at the lower end of the cycle, and through that time, we've stayed below the historical average, which is positive. If you're interested, I can provide you with more detailed numbers, but the main point is still relevant throughout the cycles of the last ten years.

Greg, I wanted to follow up on your comment about advances remaining roughly flat. I recall you mentioning at last month's conference that they might be slightly down due to a lack of rate breaks. Are you referring to PDPs, or is there something else in the advances line that could explain this potential disconnect? Or maybe I just misheard you?

I mean I was talking on commercial, there's a little bit more on the BDS side that's driving that.

Thank you, we will continue this morning with media questions for Jim and Greg, if you have any questions following this part of the session, please call our media relations team at 312-544-2002. Operator, we’re ready for the first question and in the interest of time, we ask that you limit everyone to just one question please.

Question about Boeing South Carolina. I noticed they withdrew their request for an election late last week. Jim, what are your thoughts on the site today and its future relations with the union? Are there any lessons to learn from how Boeing is managing the workforce there that could apply to what's happening in Puget Sound? Additionally, do you think Boeing South Carolina could potentially sustain a union to remain competitive?

They chose not to proceed with the election, likely because they believed they lacked the necessary votes, but you would need to ask them directly about their reasons. We are very satisfied with our relationship with our team members in South Carolina; the site is performing well technically and in terms of manufacturing and certification, and I am pleased with its progress. I also place great importance on our relationship with our employees in Puget Sound. One group has a union while the other does not; we prefer to maintain a direct relationship with our employees, but when they opt for union representation, we want to collaborate with them. Our aim is to work effectively in both environments and foster their growth. Overall, I am very pleased with the developments in South Carolina; that location is thriving.

Airbus said today that they're looking at boosting A320 production past 60 months and I am just wondering if Boeing is studying a similar increase in narrow-body output. And if there are concerns at this point about the supply chain's ability to keep pace with some of the increases coming down?

I didn't catch Airbus' comments today, but I believe our supply chain has prepared for strong growth likely from both companies. They are aware of the orders and backlogs just as much as we are. We have been in frequent discussions with our supply chain regarding preparation issues. Regarding these preparation issues, we've announced 52, although they count slightly differently. 60 is essentially the same as 52 or 54; I can't recall the exact calculations. However, I am confident that the supply chain is prepared, and we have invested significant time in ensuring they are ready.

I wanted to ask for an update on the tanker, and specifically, we learned from the GAO report this month a couple of key points. First, the flight tests will begin production ahead of schedule. Can you address the risks associated with that? Additionally, the GAO report indicates that Boeing’s estimates for costs during the initial development phase are $380 million. Is this amount included in the $425 million pre-tax charge you took last July, or should we expect a new charge for that later?

I am not sure about the last number…

There is no anticipated charge, Dominic, our… I mean our estimates taken all that into consideration on first flight as well as completing the balance of the airplanes. Certainly there is work left to be done here and we’re going to get the airplane into the air sometime this summer and that will be fully militarized and we’ll see how that goes and continue to execute the balance of the program. There is no change to the financial position on program at this point.

I wondered if you could say a bit more about why you feel confident that the zodiac seat problems are resolved. They have said today they got to the root of the problem, but that they are still anticipating disruption. Can you tell me more about what gives you confidence that it won’t disrupt your deliveries this year?

I think that all of the problems are not resolved. We do have a high confidence in the plan to resolve them, we have and it's because our people are deeply involved with them in the resolution. We don’t anticipate a lot of it being worked through till the end of the second quarter. But we’ve all figured out a way to work together that it's not going to disrupt our production plans and we’re pleased to see their response now to getting this fixed.

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.