Bernstein Research issued a report today assessing the Boeing 787 program profitability.
- It appears unlikely to us that Boeing will deliver a positive program gross margin over an initial accounting block of 1000 airplanes, if production inventory results so far can serve as a guide.
- We have evaluated scenarios varying price, baseline cost (cost of 45th airplane), and learning curve rates. We apply parameters that we see as optimistic, including average pre-escalated pricing of $120 million (50/50 787-8 /787-9 mix) and an 82.5% learning curve.
- We assume a slower production ramp than Boeing’s plan (10/month rate reached in late 2014, rather than late 2013).
- If the initial accounting block were set higher than 1,000, we believe the challenge for profitability would be less, but still significant. Boeing management maintains that it is not in a forward loss position on the program. This means that Boeing is making more positive assumptions about the program, which could include some significant sources of cost savings in the future (e.g. redesign of structure or components, manufacturing process changes).
- On the positive side, by the 1,000th unit, Boeing should be delivering unit gross margins that are reasonably close to those on the 777 today (20%). From a unit margin or annual cash flow standpoint, we expect the program to turn positive around the 2015-16 timeframe
- There are also events later in the decade that could add to margins. Production rates could be taken up above 11.5/month (our model), which we see as eventually likely – but, dependent on economic conditions. Boeing may introduce the 787-10, which, depending on level of performance (particularly range) could add to pricing, but also require investment.
- We now assume zero gross margins for the 787 through 2015 on a program basis. This means that BCA margins are slightly more diluted due to the 787.
- Cash flows should benefit as pre-built 787 deliveries are delivered in 2012 and 2013, but we expect cash flows to decline in 2014 as a steeper production ramp takes place (consistent with our nine month assumed delay in going to 10/month).