Boeing earnings call: 787 accounting block boosted to 1,300

Boeing announced today that the accounting block for the 787 program has been increased by 200 to 1,300.

Introduction of the 787-10, boosting the production rate from 10 to 12 to 14 between now and the end of the decade, and production investment to increase efficiency are among the reasons. The accounting block is the break even in accounting terms, though the program on a cash basis will be positive much sooner.

Update, Oct. 24: We received this message from Boeing:

 

The program accounting quantity (or block) simply represents the number of airplanes for which we can reasonably estimate revenue and cost as we look ahead. It is not a breakeven number ( it wasn’t for 1,100 and isn’t for 1,300).

 

The profitability calculation is derived from the accounting quantity, not the other way around. As we line up more sales and have visibility of future costs for any airplane program, the block for that airplane will be extended and the margins adjust– it is not related to concepts of  ‘breakeven.’ And the program is profitable, so it follows that the accounting quantity can’t be ‘the breakeven number’ .

Continuing original post:

Here are the highlights from the third quarter/9 months Boeing earnings call:

Jim McNerney, CEO: JM

Greg Smith, CFO: GS

JM: Strong passenger demand means fewer deferrals, requests for acceleration of deliveries. Cargo market remains soft but the fuel efficient 747-8 remains well positioned when the market recovers.

  • On the strength for the growing 90-plane order for the 787-10 and growing order book for 787-8 and 787-9, we announced rate growth to 12/mo in 2016 and 14/mo before the end of the decade.
  • 777X continue to anticipate market launch this year. The 777-9 will be the only twin aisle, twin engine airplane available in the 400 seat market.
  • Demand forecast for 737 continues to place upward pressure on rates.
  • Defense unit still faces US budget issues and sequestration.
  • Delivered 98 787s to 16 customers YTD.
  • Improving dispatch reliability of 787 is at the top of priorities. We are making good progress at reducing reliability issues. We are not yet satisfied. At around 97% on fleet-wide basis.
  • Progress of development of the 787-9 is on track and progressing well.
  • 787 productivity gains proceeding.
  • 737 MAX started detailed design phase.
  • Third KC-46A entered production.
  • Delivered 223rd and final C17 to USAF, made tough but necessary decision to end production.

GS: Commercial airplane business increased 15% in third quarter.

  • We continue to have progress on productivity.
  • Accounting block increased by 200 units to 1,300 for 787 program on strength of 787-10 launch. Higher rates increases and production flow, along with deferred production balance will increase then begin to decline on a rapid basis.
  • Continue to cut costs at Defense unit.
  • Remainder for 2013: EPS forecast increased on unchanged revenue guidance. Still expect 787 deliveries to be greater than 60, BCA margin to be greater than 10% on improved performance, lower R&D ($3.2bn, $100m lower than previous guidance).

JM: With three strong quarters behind us, we remain committed to goals. Priorities: profitably ramp-up on commercial programs, execution, strengthen and reposition defense business with more international expansion, and providing value to shareholders and customers.

Q&A:

  • GS: The higher deferred balance is the increase in glow time as you bring in the 787-10. We are in the middle of reconfiguring the flow in Charleston. Same thing in Everett. After 134 airplanes, workforce is coming up with better ideas to increase flow and productivity that requires some increased investment but which will pay off when implemented. The addition of -10 and investments in building -10 adds to the accounting block.
  • JM: We are seeing improvement in 787 dispatch reliability but while we are, we’re not pleased yet. We want to go higher and we have some customers who are not at that level. It’s on us to help them improve. We’re putting people, we’re putting spares and engineering components on site. Software issues, false signals, are about a third of the issues.
  • JM: Re: Partnering for Success (supply chain cost-cutting). This program has potential to increase our margins. Leverage over the suppliers comes in a lot of ways. The biggest way is joint success. If our suppliers have faith in that, which is fundamental here, then the tactics of switching suppliers becomes less important. There are plenty of suppliers to re-compete. A lot of the increased business we can do together means success. We are trying to lead by example here. It is a major priority for us [to cut costs, improve productivity internally]. The majority of our suppliers are working with us and see this as a big opportunity.
  • GS: Partnership is improving margins on 737 and 777 programs, too. Improvements have been brought into these programs, and these costs cuts offset lower pricing on 737 MAX and end-of-line NGs.
  • JM: I’m less concerned about commercial growing too fast vs defense unit.
  • JM: JAL Airbus win, obviously that was a campaign we did not want to lose. We fought hard, Airbus fought hard, I can’t speak for JAL why they chose the other airplane. Knowing the JAL folks I’m sure the reasons were good ones. We take this as a sign to redouble our efforts. We made some progress in Europe with Lufthansa, which in the minds of some is an analogous situation. (Ed: LH bought the 777-9X.)

27 Comments on “Boeing earnings call: 787 accounting block boosted to 1,300

  1. Programme Cost and Unit Cost Accounting keep moving further apart.
    Quite the bow wave of deferred cost.
    (acknowledged by the accounting block extension further into the future )

    • That was because of the “10,” I call that a positive, I half expected them to use the excuse to go for 1500 so as to hide the problems with the 8 and 9. At least they end up “cleaning out” the old overruns in the foreseeable future.

    • What’s a rough guess for production, to get a return on investment for the 787-10 or the A358? 100 units? So maybe half of that 200 is for the -10. I wonder what the numbers are for the A350 program?

    • Yeah, I read that Boeing had upped its Max Deferred Production Cost estimate of the 787 Program to $25 Billion from the little over $20 Billion it had projected a few months ago (BTW, it’s already over $20 Billion now). I don’t believe it. I think the ultimate Deferred Production Costs of this program are going to make $25 Billion look like wishful thinking. I don’t think the Cash Burn rate is going to end anytime soon.

      • Increasing the production rate faster than the “fixing” rate will have that effect.
        Boeing seems to have limited capabilities to provide ICU services to the customers that don’t have the expertise, patient endurance and technical background that ANA, JAL and maybe BA seem to have. ( Pretty damning for the designer and producer of a product. )
        Does Boeing expect to be instantly out of the woods when they can EIS the -9 and produce _ and_ deliver it in numbers ?
        Or could there be a similar situation brewing as in 2008 ( GFC ) that would provide another pressure release cycle by way of another massive downturn.
        Could the cascading NSA ( and siblings ) snooping exposures have a global effect like that?

  2. 97% dispatch reliability on an aircraft which entered service over 2 years ago. Where was A380 after 2 years? Customers will expect the same EIS results with the A350. If customers expect to see the same early reliability issues with the B777-X as they are seeing with B787 it will hurt orders. Wind down of R+D is a worry to me, Boeing are profitable now, so I don’t think it is necessary, but I’m not sure of 2020 if Airbus keep coming with more new successful projects, like an A330 replacement.

  3. Let’s face it both companies are making money, but those profits are on the heads of tier 2 and 3 suppliers. Boeing has done much with the introduction of the 787 and the 737 MAX to impact the flow of profits on MRO activities for many of the tier 1 suppliers. Those suppliers have squeezed the 2 and 3 guys so after market is not the money making avenue it once was for some lower level suppliers. I expec that Airbus has done a similar approach so it makes responsbility for the food chain more important for the OEM and the tier 1 suppliers to provide to lower level players.

  4. Boeing admitted they are offering price reductions on the 737 MAX? Now we know that is not being done as an internal strategy for Boeing only. It has to be driven by the competition, and it probally is being done at levels not seen in the past. Also JM is admitting that they are driving price/cost into the chain with an exchange for volume!!! Oh my, we get volume for the parts we use to use as loss leaders so we could get the profit made up on aftermarket. Now Boeing wants to play in aftermarket so they have the potential of gaining the extended life benfits once owned by the lower tier guys. Tough world this aerospace game is becoming!!!

    • Remember the “let me wet by beak” demands Boeing announced towards suppliers some time ago?

      This may backfire as the demand on produce from suppliers is rising with increased production. If Boeing “oversqueezes” their suppliers there is a chance
      that they will turn towards Airbus. ( And Airbus already invested money and effort into curative efforts at suppliers )

    • The 98% value was “produced” while the two japanese airlines dominated
      the active fleet of dreamliner. both airlines kept their units in ICU care all the time.
      ( Must cost a fortune every day ). With deliveries increasingly going to other sometimes smaller airlines the ICU umbrella becomes leaky.

      Looks like the improvements Boeing is able to introduce do not compesate for expanded problems from diverse users ( who seem to thing that a new plane should work like new )

  5. The thing I don’t get about the 787’s DR is that isn’t it being skewed by that airline(ANA I think) that only counts any delay more than 2hrs when the norm is 15mins?

  6. Dispatch Reliability was and remains a PR officers best friend. Everybody keeps forgetting / ignoring it says little about aircraft reliability.

    The word “reliability” is in the same sentence as “787”. Thats good enough if you want good news.

    • Of course Airbus isn’t perfect either. Airbus is still delivering planes with the wing crack defect, and will continue to until sometime in the first quarter of 2014.

      And Airbus isn’t meeting the repair schedule:

      Wing modification work on Emirates’ Airbus A380 fleet has begun around two months later than planned due to late arrival of new aircraft. “The modifications were due to begin in mid-March, but the first aircraft only went into modification in early May,” says Tim Clark, president of the Dubai-based carrier. “We need to receive the new aircraft to backfill the fleet and maintain the route network when we release A380s for modification. There’s been quite a long delay driven by the lateness of delivery of the new aircraft.”

      • “Airbus is still delivering planes with the wing crack defect, and will continue to until sometime in the first quarter of 2014.”

        Not entirely true, almost all 2013 deliveries underwent wing modification during cabin outfitting in XFW, or during assembly in TLS. And all 2014 deliveries will have the new wing design straight out of the wing factory.

      • Rick, using DP reliability is for groupies and stockholders only. E.g. the QF A380 with the exploding engine had perfect DP reliability, because it left on time. Just like the 787 with burning battery and others making emergency landings. A reserve 787 doing the flight of a grounded one also leads to 100% DP reliability. As long as the flight leaves ~on time.

      • @karelke
        Not entirely true, almost all 2013 deliveries underwent wing modification during cabin outfitting in XFW, or during assembly in TLS.

        That conflicts with this article:
        From the first quarter of 2014, Airbus will deliver A380s incorporating modified wing designs, removing the need for retrofitting planes in service or on the production line.
        http://www.reuters.com/article/2013/04/15/us-airbus-a-idUSBRE93E0TU20130415

        @keesje
        E.g. the QF A380 with the exploding engine had perfect DP reliability, because it left on time.

        It didn’t leave on time for it’s next scheduled flight.

      • Rick, it doesn’t conflict. ( A question of reading comprehesion )

        2013 deliveries got/get their frames changed predelivery in XFW or Toulouse.
        2014 deliveries have wings manufactured with the new frames.

        Finally a previously canceled or rescheduled flight can’t start late either on the original schedule.
        ( though I don’t know offhand if Qantas canceled outright or moved in other metal.)

      • “It didn’t leave on time for it’s next scheduled flight.”

        If another aircraft took over the flight and it left on time DP reliability was 100%.

  7. Dispatch reliability is an indicator of airline operations, not an indicator of aircraft type operation. Therefore, numbers are influenced by an array of factors other than aircraft type specific issues. For instance, if a type is at times substituted by another one on a given airline route, the indicator does not show any difference for that route.

    Boeing initially used this indicator to show that 787-operated routes were on average faring as well as routes operated with other aircraft types. That was not fully convincing because unusual efforts had to be made (by Boeing and Japanese carriers) to achieve satisfactory results.

    Now the same indicator shows worse results, but the aircraft may, or may not, be the main factor, since not all airlines display the same quality of maintenance as ANA and JAL.

    To me, the bottom line is that publically available numbers shed no light on aircraft type-specific issues.

  8. The accounting quantity (or accounting block) is NOT the break even point. It is a number used for accounting purposes only.

    Companies that defer part of their costs must lay out and apply adequate bookkeeping methods for the handling of such assets, and the amortization (or depreciation) rule obviously is of particular importance.

    If I understand correctly, in Boeing’s methods, total costs are divided by the block number to determine the amount of deferred costs that is written down every time an aircraft is delivered.

    It might in practice be difficult for Boeing to turn a profit on 787s sales before these costs have been fully depreciated, but it has not to be so, it all depends on manufacturing costs and selling prices. That’s why it is not a break even point.

    As regards the block number increase (to 1300), it is a logical consequence of Boeing deciding to launch the 787-10, which adds more costs but allows more sales. Whether other reasons also exist is a subject we can only speculate about.

    • “The accounting quantity (or accounting block) is NOT the break even point. It is a number used for accounting purposes only.”

      While very true, over the last year or so, Boeing has stated several times that over the original accounting block of 1100, the 787 program would turn a small (I read minuscule) profit. In this case, Boeing chose the accounting block based on their estimates of when the program would break even. However, your original point is well taken.

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