By Alwyn Scott and Harriet McLeod
SEATTLE/NORTH CHARLESTON, South Carolina (Reuters) - A 787 that rolled out of Boeing's factory in Everett, Washington, in January was hailed as an important milestone: the first Dreamliner built at a rate of 10 a month, the fastest for a twin-aisle jet.
But some employees who work on the aircraft are calling into question Boeing Co's (BA) ability to sustain that pace. They say the two factories that assemble the 787 are struggling to cope with a ramp-up in production that started late last year, and a huge backlog of unfinished work threatens to slow output.
Boeing's plant in North Charleston, South Carolina, cannot finish thousands of work orders and is sending pieces to the larger plant in Everett to be completed so that the company can maintain its 10-a-month rate, according to four employees who spoke on condition of anonymity. A work order can be as simple as attaching a part or as complex as installing a duct system.
A senior employee in Everett said the problem is particularly acute with the jet's complex wiring: fuselage sections were arriving from North Charleston with large bundles of wires that were not connected properly.
The South Carolina workers have the skills to produce the plane correctly "but there are not enough of them to match the rate increase," the senior employee said. "They can't keep up."
Boeing said it is aware of the bottlenecks and is working to fix the problems. The company has hired hundreds of contract workers in South Carolina, and created special teams in Everett to inspect the planes and tackle the extra tasks, known as "traveled work" because it was moved from South Carolina to Everett.
"While we try to minimize it, traveled work is something we deal with in all production programs," said Boeing spokesman Marc Birtel. "The 787 program remains on track to meet its delivery commitments in 2014 and we are producing 787s at a rate of 10 per month as planned."
The backlog, first reported in the Seattle Times, comes as the U.S. Federal Aviation Administration has launched an audit of Boeing's factories this month. The FAA said the audit was regularly scheduled and declined to comment further.
Boeing said the audit was routine, performed about every two years at multiple facilities, and required for Boeing to maintain its FAA certification to produce all of its airplanes. It was not focused on the South Carolina plant, Boeing said.
Boeing's ability to churn out the Dreamliner is crucial to its financial performance this year as the company is relying on commercial jetliners to offset a weak defense business. While Boeing still loses money on each 787 that it builds, it gets closer to breaking even as production increases.
Cash flow from the 787 is expected to improve next year, provided the factories stay on pace, Boeing said. The cash is needed to fund new plane development, as well as fulfill investors' desire for share buybacks and dividends.
Boeing's South Carolina facility makes all aft and midbody fuselage sections for the 787. Most of those sections are shipped to Everett for final assembly of the airplane, with the remainder assembled into finished planes in South Carolina.
Boeing said South Carolina aims to build three finished jets a month by mid-year, with Everett producing seven.
A Boeing employee in South Carolina said factory managers are telling workers to put down their tools and let pieces move along the assembly line even if they are not finished, so that the plant can maintain its output rate.
Boeing's spokesman confirmed it is sometimes more efficient if unfinished work is moved elsewhere so the line can keep operating at the planned pace.
The production problems with the wiring bundles have caught the attention of the FAA, whose inspectors issued Boeing at least one "letter of investigation" on the matter months ago, according to the senior Everett employee.
The letter was part of ongoing FAA oversight and has not been linked to the current audit or to any issues on the delivered planes, including the 787 battery fires that grounded the entire fleet for more than three months last year.
According to Boeing, it has addressed the wiring issues raised by the letters. The company has teams to inspect all wiring, both from suppliers and its own facilities, as is standard practice.
The Everett worker said wiring is now no longer being fully installed in South Carolina. Instead, wiring bundles are being "pre-routed," or put in loosely, and the actual connections are done in Everett.
The employees who discussed the 787 problems all asked not to be identified because they were not authorized to speak publicly and feared losing their jobs.
BOEING TAKING ACTION
One contractor recently hired in South Carolina said his job consists of working "shoulder to shoulder" with assembly workers to review engineering plans, inspect components before they are installed, oversee installation and review the final work to make sure it was done properly. Other contractors perform assembly or fabrication work.
He said 9,500 work orders were backlogged late last month. The Boeing staff worker in South Carolina said the backlog has since fallen to about 7,500
Boeing disputed those figures, but declined to give other numbers. It said about 7,000 contract and staff employees currently work at the South Carolina facility.
The contractors are being paid overtime on mandatory work Saturdays, the contract worker said. Sunday work is voluntary but there is pressure to volunteer, the worker said.
Boeing Chief Executive Jim McNerney told an industry conference last week that bottlenecks in the South Carolina factory appeared as Boeing added a stretched version of the 787-8, known as the 787-9, while increasing the production rate.
There was "not any sign that the 787 program is off the rails or we may not be able to hold 10 a month," McNerney told the conference organized by Cowen & Co.
"This is what happens on all of our programs," he said. "Sometimes when we break to a rate, it surfaces an issue that needs some extra attention. And that's really the story here."
(Editing by Christian Plumb, Tiffany Wu and Mohammad Zargham)