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.