David Strauss: What have you assumed in 2009 on C-17and when do you get to the point that you do have to make a decision in terms of shelling down the line?
Jim McNerney: The assumption this year is that we will continue and we will also be continuing production next year. That is the assumption. The international order base continues to strengthen; the smoke signals out of Washington are strong right now in terms of 2008 supplemental and potential order in the 2009 base budget next year. We are always on tender hooks. We feel relatively strong about the prospects short and medium-term of C-17.
Ivy Wood: When you go through and analyze the range of possible additional costs on these customer penalties and supplier support, in totality what is the highest negative cost outcome that is realistic?
James Bell: We go through and struggle with that same thing ourselves and with the information we have to date, it is hard to set a number. That is why we have taken the position that we are going to start off booking the program at a zero margin to make sure we have adequate reserve in order to deal with that. I can not predict what the number will be. I know that our past history would suggest that we do a good job of mitigating that and not having and roll through to be a significant impact to your financial performance.
Ivy Wood: How will you make the determination for the accounting block size for earnings recognition?
James Bell: Typically when we got to a point of delivering the first airplane we sell it about a 100, this in raw numbers on our new airplane models. Typically the initial block turns out to be and about 400 airplane range. What that is beyond the long orders you look at what the market potential is for the airplane you look at a time period over which you can estimate your cost and estimate you revenue. And so you take those things in consideration and then you settle on what the accounting quantity is and then what is your booking margin ought to be on these airplane as you deliver them. In the case of the 787 we are going to have a 1000, so by the time we deliver it, we are going to be more constrained by which gives us great opportunity over a time period to product good earnings and value for both us and our customers and it also gives you great capacity to deal with unknowns that you do not understand you will experience as you look back to today. We will be more constrained about is what we will be able to estimate over a time period and what we will be able to produce in that time period. So you can get the significant opportunity we are going to have on the initial opening quantity here. What we see today and what we understand based on what our contracts have in them, based on N-SAR, our preliminary discussion with our customers, it is hard to estimate what the customer settlements will be but we do believe that whatever the opening quantity will be based on the price theory, there will be significant profitability in the program today to cover.
Ivy Wood: There is backing out the door to buy 787s and your costs are rising on the plane, but in this situation your costs are rising and we are not getting confirmation for higher customer demand. Can you walk us through your rationale there?
Jim McNerney:
We have about 110 orders for both the freighter and the passenger. I wish we had more intercontinental orders which is what you were talking about. We are in discussions with about 8 to 10 major carriers. It is impossible for me to predict how many of those will order but typically when we are at this stage, a large number of them would. We are still basing our spending on what we perceive to be the market and by the way we are up to a good start with a 110 orders worth over a year to go before we have to set accounting quantities and the like. I also wish we had another couple major intercontinental orders right now and the guys are working hard at it and I think there is a good chance we will have some soon.
Joseph Nadol: Your 2009 guidance shows flat production on non-787. You have said that you are studying the 37 a few months ago. Did you come to any conclusion there?
James Bell: We are pausing after a series of increases across our model line and we are taking a hard look at the 37. It is fair to say if the economic situation does not deteriorate into something that we do not currently anticipate, if that does not happen that the bias would be to the upside there, longer term after 2008. We have time to make that call. And so we will take that time to make that call as we are moving forward but on the 67, the death of that program has been predicted for many years and the demand over the last couple of years has been strong even without the tanker situation. We are also like 11 or 12 on that program right now and so that is another decision we now have to face into and believe it or not we are having honest regard discussions with people right now about that airplane.
Joseph Nadol: Are there any non-Japanese customers that will be interested?
James Bell: There are a couple people in discussions.
Joseph Nadol: Is there is a timeframe on the 37?
James Bell: Over the next 12 months we would make a decision on that rate, it could be a longer than that, but we will be asking the question seriously over that timeframe.
Howard Rubel: Your major competitor talked about price increases the other day. Have you seen that realized in the market in any fashion?
Jim McNerney: No.
Ron Epstein: If the tanker stays with EADS and Airbus ends up setting up a wide-body production in North America how those will change the strategic outlook for the industry?
Jim McNerney: It would not change the nature of their business and it would not introduce another competitor. It ultimately gets down to a dollar based production site. If they end up wining this thing e that site will be pre-occupied with modifying freighters made in France for a long time. I am not sure they would immediately convert hat into something else. It is more of a geographic deployment. They have announced similar things in China, US. They have got lots of dispersed production in Europe. It will not be an in complicated supply chain for them to manage by the way as you look at from managing manufacturing operations.
Ron Epstein: When you look at your suppliers everything from raw material down to your Tier-I''s, Tier-II''s, on the legacy programs, how is the supply chain doing?
James Bell: It is doing fine. Not that it does not labor from time to time. We have go through periods where certain raw materials are scarce, other periods where quality funds are found. I would categorize them as being well managed and less difficult than you probably imagine. Most of our supply chain issues have been centered over and found the 787 development and those are well chronicled. I am trying to paint a picture, when I managing at everyday we are but we have had no major disruptions in our production and with our fingers crossed we think we can keep that record going.
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