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Reuters - Boeing Co reported a bigger-than-expected 19 percent drop in quarterly profit on Wednesday as it took a charge on a delayed military plane contract and suffered effects of its troubled 787 Dreamliner program.

By Bill Rigby

Boeing Co (BA.N) reported a bigger-than-expected 19 percent drop in quarterly profit on Wednesday as it took a charge on a delayed military plane contract and suffered effects of its troubled 787 Dreamliner program.

The world's biggest-selling plane maker and the Pentagon's No. 2 contractor had lower sales at both its commercial and military operations, but held to its financial forecasts for this year and next, citing strong global demand for its products.

The Chicago-based company, along with Airbus, a unit of EADS (EAD.PA), is hoping high oil prices will spur demand for its new fuel-efficient planes, but shares of both companies have suffered over the past few months as investors worry that prolonged increases in oil prices will prompt a global recession.

The shares dropped 3.4 percent to $66.93 on the New York Stock Exchange on Wednesday. The stock is down 36 percent from their all-time high a year ago, hurt by repeated delays on the 787 and rising oil prices.

"The real surprise of this quarter is the unusually soft performance at commercial aircraft," Robert Stallard of Macquarie Securities said in a note to clients. "However, there is nothing in this quarter which we view as a fundamental, long-term problem."

PROFIT DROP

Boeing, which beat archrival Airbus in the race for orders last year, reported second-quarter net profit fell to $852 million, or $1.16 per share, from $1.05 billion, or $1.35 per share, a year earlier.

It recorded a charge of $248 million for delays on a surveillance plane the company is building for Australia, known as Wedgetail. Boeing warned about the charge, which cut 22 cents from earnings per share, earlier this month.

Including the charge, Wall Street's average earnings target was $1.23 per share, according to Reuters Estimates.

Overall revenue fell to $16.96 billion, below the $17.28 billion expected by analysts.

Boeing's commercial plane unit, which set an industry record for orders last year, reported a 2 percent drop in revenue to $8.6 billion. It delivered more planes to customers in the quarter than a year earlier, but mostly the less expensive, single-aisle 737s rather than the more profitable 777 minijumbos.

The unit said it was also hurt by costs "absorbed by other production programs" due to the latest delay on its 787 Dreamliner, which is now at least 14 months late after a succession of production problems.

Boeing said it was still having problems putting together the first batch of Dreamliners for testing, but stuck with its timetable for the first flight in the fourth quarter and first delivery in the third quarter of 2009.

DEFENSE DOWN

The defense unit also reported a slight drop in revenue to $7.93 billion due to fewer military aircraft deliveries and lower sales of its network and space systems. The Wedgetail charge lopped $248 million off the unit's profits.

Overall profit was further reduced by an $82 million increase in aircraft financing reserves, a sign that Boeing is expecting losses from some struggling airline customers.

For the full year, Boeing stood by its earnings forecast of $5.70 to $5.85 per share. Analysts expect $5.85, on average. The company also held to its 2009 forecast of $6.80 to $7.00 per share. Analysts expect $6.95, on average.

General Dynamics Corp (GD.N), another U.S. company that spans the defense and civil aircraft markets, reported better-than-expected results, helped by strong sales of its combat vehicles and Gulfstream business jets.

The U.S. No. 4 defense contractor reported a 25 percent rise in quarterly profit to $641 million, or $1.60 per share, compared with $513 million, or $1.26 per share, a year earlier. That easily beat analysts' average expectation of $1.44.

The company also raised its full-year earnings forecast to a range of $6 to $6.05 per share, up from $5.55 to $5.65. Analysts expected $5.90 per share.

(Editing by John Wallace/Jeffrey Benkoe)