Boeing Co., set to get government approval of its new 787 Dreamliner this week and deliver the first jet next month, expects to spend most of 2012 unwinding the record inventory built during three years of delays to the world's first composite-plastic airliner.

Boeing amassed US$16.2 billion worth of inventory related to the 787 through June 30, with so many almost-finished jets the company ran out of room to park them. There are 35 scattered outside the Everett, Washington, plant, in leased space across an adjacent airfield and in a facility in Texas. Many lack seats and lavatories and have black plastic over the windows and concrete blocks hanging from the wings to keep them from tipping over before engines are installed.

"This is like dinner in the anaconda right now," said Bill Batcheller, chief investment officer for Tower Wealth Management, which has US$140 million under management and has been considering buying Boeing shares after selling them in early 2010. "It's a big bulge in the middle of the balance sheet, and it's got to work its way through."

Even with U.S. Federal Aviation Administration approval expected Aug. 26 and first delivery due next month, most of the planes will sit for weeks and months more -- boosting production costs because each needs different fixes and eating into returns on the capital invested. Boeing had to build a temporary factory inside a leased hangar in Everett to handle the extra load.

"Boat Anchor"

The mothballed jets represent almost US$6 a share in inventory growth since 2009. Counting four planes in the factory and six test jets, Boeing has more 787s on hand than Richard Branson's Virgin Atlantic Airways has planes in service.

Working capital as a percentage of revenue is approaching 50 percent, from less than 25 percent in 2009, showing that Boeing has more money tied up in its production flow.

"It's like they're dragging a boat anchor equivalent to 25 percent of their sales, which is at the expense of the profitability of their enterprise," said Wolfgang Demisch, a partner at Demisch Associates LLC, an aerospace financial consultant in New York. "It's bloated with inventory, and somebody has to pay for that, and it's the shareholder."

Boeing tumbled 42 percent from the first 787 delay in October 2007 through yesterday, worse than the 6.1 percent decline by Airbus SAS parent European Aeronautic Defence & Space Co. and the 31 percent drop on the Standard & Poor's 500 Aerospace & Defense Index.

Credit-Default Swaps

Credit-default swaps tied to Boeing bonds, which rise as investor confidence falls, closed yesterday at the highest since Dec. 7, 2009, gaining 1.3 basis points to 84.5 basis points, according to data compiled by CMA. A basis point is US$1,000 a year on a contract protecting US$10 million of debt.

"The production delays have created a huge glut of inventory, bloating the balance sheet," said Joel Levington, a managing director of corporate credit at Brookfield Investment Management Inc. in New York, which doesn't own Boeing bonds. "It has been a large concern to us."

Boeing is getting help in carrying the cost. It created a production system for the 787 using suppliers around the world to build most of the plane. They usually don't get paid until Boeing does. Airlines generally pay about 60 percent of the price of a plane in installments leading up to its delivery.

Eating Dirt

Boeing expects inventory growth to moderate as deliveries progress, said Chaz Bickers, a spokesman at the company's Chicago headquarters. The planemaker's "strong core operating performance and cash management" provide a foundation to support the 787 and 747-8 development programs, he said.

Boeing can "eat some of the dirt of the inventory cost" by spreading it out over the initial block of 787s, using so- called program accounting, said Demisch, the consultant. The company plans to reveal the size of that accounting block with its third-quarter earnings in October.

It's unlikely that the program will show a positive gross margin over an initial block that will probably be 1,000 planes, said Douglas Harned, an analyst with Sanford C. Bernstein & Co. in New York.

Profitability for the 787 is "the most important outstanding issue regarding the investment case for Boeing," Harned said in an Aug. 16 note. He rates the shares as "market perform."

The Dreamliner is Boeing's fastest-selling jet, racking up more than 800 orders before it even flew. The planes have an average catalog price of about US$202 million, and Boeing plans to assemble 10 a month by 2013 -- a record for wide-body jets.

First 1,000 Jets

The program has the potential to be the company's most lucrative ever, say Barclays Plc analysts Joe Campbell and Carter Copeland.

The problem is that Boeing has probably spent US$300 million to build each 787 and will realize revenue of as little as US$50 million apiece for the early models, the analysts estimate.

The 45th plane to be built -- in the factory now -- will probably cost Boeing at least US$184 million, Harned estimated after analyzing inventory figures. That would make the average cost over the first 1,000 jets, including a learning curve, at least US$116 million per plane, he projects. FAA approval this week after a flight-test program that began in December 2009 would set the stage for delivery of the first 787 to All Nippon Airways Co. next month.

About half the 787s in Boeing's inventory were already built last year, before the company had to push back targets again because of a fire during a test flight. Testing took 20 months instead of the eight originally planned.

Rain and Fire

Each plane is in a different state of readiness, since Boeing kept improving processes after the jets began rolling out of the factory in 2009.

They have undergone waves of repairs based on testing discoveries, and numerous jobs remain on "various and sundry components" before they're ready for delivery, said Scott Fancher, Boeing's 787 chief.

One of those jobs has been to install new condensation- collection systems to handle "rain in the plane" found in flight tests, a byproduct of the extra moisture in the air allowed by the composite fuselages. Workers also have had to replace electrical power distribution panels with redesigned parts after the fire grounded the test fleet at the end of 2010.

Delivery Plans

The modifications have forced Boeing to pare its delivery plans for this year by several planes, to fewer than 14.

Not only does Boeing have to hurry to fix the jets at the front end of the factory so they can be delivered, it also needs to cure its manufacturing woes at the back end so that shipments can get on track once the 787 is certified for use.

Production has been stalled at a rate of two a month for more than a year and Boeing has routinely frozen the final- assembly line in Everett for catch-up sessions, the most recent of which was a four-week pause last month.

"We want to see a little more clarity on when we can start anticipating a steady flow of deliveries and a sense that we've really got the factory floor straightened out" before buying the stock again, Batcheller said. "At that point it becomes attractive."

Most airlines' contracts have clauses providing penalties for delays, so Boeing needs to make up for the lost time. Some of the changes generated by tests are already in the production pipeline and won't have to be made retroactively.

"Anytime you're building an airplane out of sequence, the amount of work that's required probably goes up by a factor of 10, because they have to unbuild all the things you built on top of whatever you have to change, and then build it all back," said Demisch, the consultant. "It's better than starting the airplanes from scratch, but it's cost that will be added to production and make the likelihood of a profit on this program over the next half-dozen years very, very low."