UBS: Boeing too aggressive in 787 ramp-up plans

UBS Securities issued a note today that says Boeing is too aggressive in its production ramp-up plans for the 787. A synopsis:

* 787 learning curve appears more aggressive than 777: BA’s assumed learning curve is a key component of its forecast for 787 profitability and cash generation. Our analysis indicates that BA is assuming much faster learning on 787 than it was able to achieve on 777 despite having less control of production this time. With 777 type learning, we estimate BA would likely be in a forward loss with flat to progressively worse 787 cash flow over the next several years.

* Average cost implied to drop from $250M+ to $113M by 2014: BA has disclosed that it expects its 787 unit production cost will approach its average cost over its block as it hits rate, implying 2014. For this to happen, we estimate BA will need to learn roughly 50% faster than it did on 777. Specifically, we estimate BA’s unit cost would need to drop from $250-300M currently to roughly $113M (our assumed average cost and price) with its cumulative average cost dropping at a 24% rate with each doubling in production (learning curve).

* 777 type learning implies forward loss and weak cash: By comparison, we estimate BA’s 777 learning curve at 16%, very similar to SPR’s learning thus far on its 787 production. If BA instead learns like on 777, we estimate that its unit cost will only drop to ~$150M by 2014 with an extremely large block required for it to not be in a forward loss. Under 777 type learning, we see 787 burning $4B in cash on average annually through 2015.

Company officials have previously reiterated their confidence that they will be able to meet their goal of producing 10 787s per month by the end of 2013.

45 Comments on “UBS: Boeing too aggressive in 787 ramp-up plans

  1. Maths are a hard science that don’t do public relation, just give figures.

    That is an interesting comment, thanks for sharing.

  2. learning curves are appropriate when the process is basically stable. without a stable process or design, learning curve estimates are4 next to worthless

  3. Scott,

    You are mistakenly equating production rate ramp-up to learning curve. While I agree the manufacturing learning curve can constrain production rate, they are not the same thing. So when you say “BA is assuming much faster learning on 787 than it was able to achieve on 777”, you are assuming the 777 production rate ramp was constrained by the same factors as it is the 787. It was not.

    Using your assumptions and “analysis”, you could also make the case that BA is assuming much slower learning on the 787 program than it did for the 737 or 747 in their first full year of production (105 737s were built in 1968 and 92 747s were built in 1970).

    In reality, it’s apples and oranges, whether we’re making the comparison to the 777, the 747 classic, or the 737 Jurassic. They are all different programs with different factors driving and constraining the ramp up of production. Placing too much stock in correlations between various programs ramp ups will not be helpful in assessing the health or likelihood of success for the 787 production system.

      • We have that Boeing titbit of “production sold out till 2019”.
        That is ~8.5 frames per month on
        average.
        Before MHI has a second line up
        for wing manufacture ( expensive investment, no sign of it being
        started as MHI currently balks)
        the (hard) limit is slightly more
        than 6 sets per month.

  4. UBS is a large international bank that was heaverily involved in the global economic collapse. Their involvement in that was also based on the future economic assumptions.

    Here, UBS is making an assumption that no other major bank or security firm made. First off assumptions are just that, assumptions, they are a guess. When you begin an analysis with a guess, the rest of the analysis becomes very questionable, at best.

    • You are grasping at straws here LC.
      Better to face the music and stop shooting the messenger.

  5. Seems like there’s a mixing of issues here. The analysts aren’t questioning Boeing’s ability to make production targets so much as pointing out that Boeing will not be making profits on the 787 for a while. Even producing the 787 at a loss in the early years, Boeing has to ramp up production quickly or face cancellations or penalties from customers. Boeing can have both a fast production ramp up and losses at the same time.

  6. Quite so. Another nail in the USD19bn deferred cash-flow report.

    This one seems more realistic to me, and it appears that whatever flaws UBS may have, they do actually understand accounting.

  7. Let’s also keep in mind Flightblogger’s report that a vast number of 787s were sold at prices as low as 76m a shot, and let’s keep in mind the original sales prices. This to me would indicate that even under the optimistic assumption of BAC, the 787 programe will be a drag on compaby cash-flow for a number of years to come. The problem is then exacerbated by Boeing further increasing negative cash-flow the more they accelerate production over the period. I.e. they can choose a thousand paper cuts over 6-7 years, or a few cutlass slashes over 2-3 years.

    It’s really not a great position to be in.

    • I hate being negative about the 787. I’m sure that in 6 or 7 years time, once they sort out the production issues and the 787 model achieves its intended standard with the -9 model, we’ll see it as a great plane. I used to think, despite its issues, that the 787 was at least a huge marketing success. But when Flightblogger told us that the high sales was mainly due to Boeing dumping the plane at below cost prices, my disillusion was complete.

    • cite :: ./2011/01/08/Flightblogger-787-sales.pdf:
      In the race to sign up customers between 2004 and 2006,
      airframe prices averaged just below $76 million, a
      :cite
      2004 .. 2006 accumulated sales : 446 Dreamliner orders.
      if we go by the Air India compensation penalties may well
      equate to a further $15m rebates per plane.

      I am rather sure that Boeing is completely unable to produce
      any Dreamliner for less than $60m. The question: does this
      hit Boeing alone or does it beggar the partners too ( or even
      exclusively ) ?

  8. I don’t have anything to add to UBS accounting analysis, but I think they make a valid point about the production process. After a well publicized nightmare on getting the 787 into service people refer to the 787 being on the “home stretch” and Boeing having got its “arms around the program”. But the issues so far have related the design, when it’s production that causes the biggest upsets on most airplane programs. Boeing and its partners have yet to demonstrate they can turn out 787 planes efficiently. So far it’s all been rework and firefighting.

  9. The biggest problem I can see for Boeing is a parts slow down due to another major earthquake (7.0 or bigger) that effects the MHI and KHI production facilities (the recent 9.0 had minimal effect on these facilities, but really hurt Toyota and Nissan). Italy could face the same problem.

    I still think that any analysis that is based on assumptions made (guesses) are pretty useless.

  10. It’s more a fact than an “assumption” or a “guess” to say that since the beginning of the 787 project, Boeing figures and production forecast are totally wrong. That’s why I think it’s wrong to assume that the UBS assumptions are wrong (or “useless”) 🙂

  11. This strikes me as a pointless argument. Whether UBS has done bad deals or not is neither here nor there, since they are not in the business of building airplanes. The expertise of the analyst matters however. I have no way to judge it, but at least the analysis passes the first trest (it’s plausible), unlike the USD19bn cash-turnaround another analyst predicted.

    The credibility of Boeing as a company on the 787 programme matters however, since it is their programme and their core activity. And it is in tatters.

  12. Uwe :do they show “Ricola” commercials in the US?
    “Wer hats erfunden!”
    UBS is a swiss bank.http://en.wikipedia.org/wiki/UBS

    Oops, you are right about the bank name being Union Bank of Switzerland. I have no idea why I wrote United Bank of Scotland, other than it is on TV commericals here in the US.

    We also see Ricola commericals (great sore throat drops).

    But my point is UBS has made some major errors themselves in the global economic crisis. They also have had tax evasion charges against them by the US Government, and paid a fine of about $800M USD, and had to revil the names of some 50,000 US citizens who held accounts with UBS. In the global economic crisis, UBS lost some E100B Euros, IIRC and had to be bailed out by the German, Swiss, UK, French, US, and Singapore governments. I believe the US ‘contrabution’ to the bail out was the smallest.

    Since these events, UBS has not been very happy with the US, IIRC, one CEO or CFO was convicted here in the US.

    So, is their ‘analysis’ just anti-American political mumbo-jumbo? I don’t know, but UBS does have a ‘dog in this fight’. That means they are biased.

    • I am sorry, but this is just tired old nonsense. For all we know the analyst could be American. UBS is in business to make money, not to pursue a political agenda.

      Could your post just be anti-European mumbo-jumbo? I don’t know, but you do have a ‘dog in this fight’. That means you are biased.

  13. I’m sure there will be challenges ahead for the 787 ramp up but it cannot be compared with the 777. I sincerely hope the learning being gained from outsourcing can be used for the replacement 737. What is key is that the 787 delivers the promised performance and is able to command a premium in the market place and becomes the passengers preferred choice of travel

    • Going by list prices the Dreamliner remains cheap ( ~$20m less than the competition ) but nobody has ordered it after Boeing has “adjusted the price
      to better meet the (Boeing)perceived value of the plane”.

      What real value has an unavailable plane that slightly bests the competition?

      Trotting out various derivatives that promise to be even more unavailable
      may appease the Boeinginista but s(o)urely doesn’t accelerate the heartbeat of
      anyone else.

  14. Uwe :Going by list prices the Dreamliner remains cheap ( ~$20m less than the competition ) but nobody has ordered it after Boeing has “adjusted the priceto better meet the (Boeing)perceived value of the plane”.
    What real value has an unavailable plane that slightly bests the competition?
    Trotting out various derivatives that promise to be even more unavailablemay appease the Boeinginista but s(o)urely doesn’t accelerate the heartbeat ofanyone else.

    “Unavailable” and “slightly bests”? Are you talking about the A-32X-NEO?

    Which Airbus model “accelerates the heatrbeat”? A-380? Nope. A-340? LOL. A-330? Boring. A-32X? A short ranged NB that truly is short ranged. A-32X-NEO? Nothing proven, yet. Could be the next reasonable successful DC-8, or the failure to meet performance specs. MD-11. A-350″XWB”? Not truely extra wide compared to the airplane it is designed to compete directly with, the B-777

    Meanwhile Boeing models provide much more excitement. B-747. The true “Queen of the Skies. B-737NG. A true workhorse NB with trans-continential range. B-757. Still talked about as a hot rod, and with trans-Atlantic range. B-767. The true trans-Atlantic champion. No other airplane type flies as many times across the Atlantic as the B-767. B-777. The range and capacity champion. The only airplane (other than another B-747) able to replace the B-747 on some routes, and an airline and passenger favorite. B-787. The new face of avaiation for the future. B-7X7. Perhaps the most talked about of the new airplane designs since the B-787. It has a very promising future and will be an A-32X-NEO killer.

  15. Every time the A380 is turning to line up for approach into LHR over Victoria Park London, normal people turn their faces up.

    People don’t do that for 747s, 737s, or indeed any other plane, be they Airbus, Boeing, Avro, or Embraer, unless they are airplane geeks.

    So I’d say you are wrong. But whatever floats your boat.

    • A380s ( and the Belugas) coming in to land on 23 @ XFW
      on a sunny day seem to hang over Hamburg city like
      slow moving silent blimps,
      very majestic ( especially if they are plain white ).

  16. The A380 may be the biggest spectacularest greatest awesomest efficientest quietest comfortablest wonderfulest etc etc airplane ever built

    If only it weren’t so d___ed ugly!

    • Form follows function.

      Anything that achieves very high efficiency
      can’t be ugly, can it? 😉

      There certainly is a bit of a trend to invert
      this and go from “looks good” to “efficient, works well”.

      Well, detracting influences of the movie industry 😉

    • On the ground it is somewhat ungainly. In the air I find it very beautiful. And I can guarantee you that nobody but geeks will turn a head for a 787 or an A350 on approach. Just more boring twins.

    • http://www.flightglobal.com/articles/2005/06/14/199071/creating-a-titan.html

      The distinctive double-deck fuselage presented its own unique aerodynamic challenges, not least because no-one had ever to attempted to develop such a wide, blunt-nosed and ovoid cross-section of this scale before. “One of the design objectives was to maximise the width of the cabin, but minimise any ‘bad’ flow over the fuselage. There was a lot of work done in terms of optimising the flow around the doors and windows, and we have done well,” says Ogilvie, who adds: “There is virtually no supersonic flow over speeds up to Mach 0.89, and no shockwaves, which is really important.

      “Some of our customers want to belt along at M0.89, so we’ve deliberately gone out to make sure we’re shock free. We ended up playing tricks with the ovoid cross-section to get the flow to ‘go bad’ at M0.93. You have more ‘fatness’ up and down than you do in width, and the acceleration of the air from the nose is dependent on the curvature of the front fuselage. So we had to tailor the distribution of the curvature of the fuselage to maintain this acceleration,” he says. “We tried to make sure the velocity near the doors is as low as possible because the door areas can be susceptible to leaking and noise.”

      The nose shape was critical to not only helping achieve the correct aerodynamic flow lines, but also to helping obtain increased nose-up pitching moment. “After the mid-deck [cockpit location] was finalised in January 1998, we ended up with a shape that was flattened in planform with a more rounded look and less sharp curvature on the profile,” Ogilvie says. The mid-position also gave greater flexibility for the widest first-class cabin.

  17. UBS (Union Bank of Switzerland) is #10 of the ten largest banks in the world, with $1.8 trillion in assets. If UBS Securities analyzes Boeing Commercial Aviation and the 787 program, they most probably do this not for the fun of it, but on behalf of some of their customers who very likely are large shareholders of Boeing Aviation. As UBS is renowned for reliable and efficient wealth management, in principle they are only doing their job if they reveal the weaknesses and difficulties of the Boeing 787 Dreamliner program to their customers. Unfortunately for Boeing, this analysis will considerably impair Boeing’s ability to borrow cheap money to finance production ramp-up of the 787. In future, they most probably will have to pay more interest on their loans, as lending money to BA will be considered to be more risky by the banks.

  18. Addendum: “… but on behalf of some of their customers who very likely are large shareholders of Boeing Aviation or large Airlines who purchase Boeing aircraft”.

  19. I have seen the 787 cash flows. UBS’s prediction of $16 billion negative cash flow is only off by $500m

  20. Thing is, it turned out even the most conservative / careful / pessimistic forecasts on the 787 proved overly optimistic so far. We can all find some polls on the 787 from the last 7 years. People that said 2010 for EIS were yelled at.

    So I would prefer a very conservative, down to earth, unpatriotic forecast over the flag waving, blinded and hope based non-sense fed to us over the last 7 years.

    30-40 being delivered next year, 60-70 in 2013 and over 90 in 2014 seems realistic. Hope I’m not proven overly optimistic again.

    On the cost / break even of the program, I would like to see total program costs so far + compensations in the 2006-2016 period before drawing any conclusions. I guess I’m not the only one who heard “1000+” for BE and wasn’t surprised, just shocked.

  21. The UBS report is very important. When the 787 program was launched, the business case predicted production rates, costs, and delivery dates. Cost improvements were projected based on previous airplane models.

    With over 40 units of experience, costs and cost trends are now fairly clear. Not only are costs higher than predicted, but the trend is worse than expected. Rate buildup will stress the supplier base, and _increase_ unit costs, diverging even farther from the original business case.

    Here’s the kicker. In past programs, Boeing controlled design and much of production. In this global supplier business model, _suppliers_ will find most of the productivity improvements. For the 787, the whole learning curve process will be very different from past programs.

    See page 6: http://tinyurl.com/3kuzwdq

    With production costs mounting on one side and penalties on the other, profitability will be a long way off.

  22. RE: Rpx, FF and KC135TopB,
    Having invested up to $20 billion in the 787 program already, it appears unlikely
    that Boeing will ever make any money on the 787 program.
    Boeing Company CEO Jim McNerney, even outlined during a June 2 presentation
    at the Sanford C. Bernstein strategic decisions conference, that:
    “The 787-9 and a potential 787-10 represent one way to increase the profit-
    ability of the 787 program over time.”
    He also stated that, “Boeing is getting “a lot of push” from customers for a 787-10,
    we want to confirm with them that this is as great an airplane as we think it is
    going to be.” without even mentioning the A350!.

    Based on what happened to the A340 and MD-11, after Boeing launched the
    777 and became a great success, I am not at all sure that the 787-10 will ever
    be build.

    Re.Uwe & se18th, The A380, disregarding it’s looks, having roughly 30% greater
    capacity compared to the 747-400, while the 747-100/200’s were about 300%
    bigger compared to the 707/DC8’s it was to replace, Boeing made a big mistake
    NOT recognizing that the A380, while too big for the first decade or so, like the
    747, the A380 and in particular the A380STR, will be the only VL passenger
    aircraft operating in large numbers in the world, during the next 50 years, as the
    747 did, unless Boeing still manages to launch the BWB soon, which appears
    unlikely!

  23. With all that back and forth about Boeings problems and the
    always imminent just around the corner fix by way of an even
    more promising/profitable/p* subtype deliverable in an
    even more distant future:
    My prediction is that Boeing may well replay the “Foundering of
    the Banks” that comprised the kickoff for the GFC.
    There were dear predictions before but all the deciders ignored
    that willfully.

  24. “Which Airbus model “accelerates the heatrbeat”? A-380? Nope. A-340? LOL. A-330? Boring. A-32X? A short ranged NB that truly is short ranged. A-32X-NEO? Nothing proven, yet. Could be the next reasonable successful DC-8, or the failure to meet performance specs. MD-11. A-350″XWB”? Not truely extra wide compared to the airplane it is designed to compete directly with, the B-777

    Meanwhile Boeing models provide much more excitement. B-747. The true “Queen of the Skies. B-737NG. A true workhorse NB with trans-continential range. B-757. Still talked about as a hot rod, and with trans-Atlantic range. B-767. The true trans-Atlantic champion. No other airplane type flies as many times across the Atlantic as the B-767. B-777. The range and capacity champion. The only airplane (other than another B-747) able to replace the B-747 on some routes, and an airline and passenger favorite. B-787. The new face of avaiation for the future. B-7X7. Perhaps the most talked about of the new airplane designs since the B-787. It has a very promising future and will be an A-32X-NEO killer.”

    From some of the comments here, it appears that some Boeing diehards must find it really galling that despite Boeing having such exceedingly superior products, execution and planning while Airbus has such obviously poorer products, with no real hope of ever really being competitive, that Airbus somehow still seems, in the end, to be doing quite all right.

  25. Aero Ninja :
    From some of the comments here, it appears that some Boeing diehards must find it really galling that despite Boeing having such exceedingly superior products, execution and planning while Airbus has such obviously poorer products, with no real hope of ever really being competitive, that Airbus somehow still seems, in the end, to be doing quite all right.

    Well, one has to commend KC for his comedic rants – many of which would leave even Boeing’s top brass in disbelief. But maybe they’ll send him a fridge-magnet for being their number one fan.

  26. keesje :
    “Which Airbus model “accelerates the heatrbeat”? A-380? Nope.
    Who are you fooling?

    Was watching a clip the other day from AF’s A380 inaugural arriving at IAD. If I recall, the first word I heard coming out of the camera guy’s mouth was “wow!”. A rather typical reaction, even in the US. No other commercial aircraft in production elicits this reaction. I was hanging out at PDX earlier today when the 748F dropped by just after lunch… I’ll stop short of calling them boring and am delighted the Queen lives on, but as much as I love the 748 (particularly the pax version), I hate to say they’re quite unspectacular. The general public won’t even be able to distinguish a 748 to a 744. Love the 787 as well, but despite some cool technologies it doesn’t exactly promote that “wow” factor either. Neither will the A350.

  27. Pingback: 787 delivery plan targets 3Q « Leeham News and Comment

  28. alex :

    Aero Ninja :
    From some of the comments here, it appears that some Boeing diehards must find it really galling that despite Boeing having such exceedingly superior products, execution and planning while Airbus has such obviously poorer products, with no real hope of ever really being competitive, that Airbus somehow still seems, in the end, to be doing quite all right.

    Well, one has to commend KC for his comedic rants – many of which would leave even Boeing’s top brass in disbelief. But maybe they’ll send him a fridge-magnet for being their number one fan.

    KC135TopBoom is always a sure bet for some laughs here and in other sites.
    It is sad though that he stop seeing his “thoughts” on a.net commercial aviation section on all matters concerning Boeing and the 787 in particular.

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