There is a sense of relief that Boeing finally delivered the first 787 this week, after a 3 1/2 year delay and the most painful gestation period in Boeing Commercial Airplane history.
In addition to the actual rain storm on Monday that could not dampen the spirits of the moment, there were many others who nonetheless tried to rain on Boeing’s parade. They pointed out, correctly, that challenges remain for the ramp up in production and Boeing spent billions of dollars on the troubled program.
These and other points are legitimate issues. We chose to let Boeing have its moment in the sun (figuratively speaking, anyway, considering the lousy weather Monday).
Here are our thoughts:
- Boeing had a backlog of 821 aircraft prior to the ANA handover. What people forget is that there are more orders that have been announced for which contracts have not yet been signed. Then there are options, which usually get converted over time.
- When guessing what the “accounting block” (break even) on the 787 will be, most analysts are guessing between 1,000 and 1,500. With the lower end of this range, Boeing is almost there already. If at the higher end, Boeing and Airbus project a mid-size twin aisle market at something like 5,000. If Boeing and Airbus evenly split, that’s 2,500 and Boeing will easily pass its upper end accounting block–although it will be a long time getting there.
- Boeing is sticking to its guns on its previously announced production ramp up schedule but there’s not one aerospace analyst we follow on Wall Street who believes the company will hit its target of 10/mo by the end of 2013.
- Our information continues to be that Boeing may only deliver four or five 787s this year instead of the 10-12 previously suggested. Perhaps there will be better guidance on the third quarter earnings call at the end of next month.
Separately, we understand an agreement has been reached on the Cargolux 747-8F compensation but the contract hasn’t been signed. We expect delivery to slip into next month.
Relief rather than jubilation, I think. Everyone seems exhausted by this drawn out project.
Whether or not Boeing will produce 10 planes a month by 2013, it doesn’t look like they are producing 2 planes a month now, as Boeing says they do. So the ramp up is already behind before they have started.
Getting the 787 delivered / in service is a welcome event in the industry. getting out 5 more would be good.
We have to wonder about Boeings communication though. Why do they keep promising milestones long after everyone knows they are inaccurate. For yrs now.
I love the american optimism and have respect for the persistance shown in getting the aircraft ready. However Boeings 787 communication will become a text book example how extreme optimism can damage credibility.
Boeing Corp Com has to follow Chicago. Keesje should be asking his question there, not of Corp Com.
Every information presented in heavy rotation becomes “truth” for the majority of
(naive?) listeners. Still lots of people around “knowing” that Saddam
Hussein and AlQuaida were close buddies and lots of other less than true facts.
This has worked quite well in politics and software and is for some time now moving
into the more tangible areas ( like Airliners and stuff 😉
This is the (dystopic) future and us OldEuropeans and forex Airbus are just country hicks
that haven’t reached this level of sophistication yet.
As we recently noted to KCTB, political commentary of this nature is not what this forum is about. We think you were trying to be light-hearted here, but request you refrain from this type of comment.
As we recently noted to KCTB, political commentary of this nature is not what this forum is about. We think you were trying to be light-hearted here, but request you refrain from this type of comment.
If Boeing can deliver 4-5 (or more, but even I dubt more than about 6) B-787 for the remainder of 2011, they will have at least accomplished not only delivering them, but getting them into airline and charter service (I understand NH has the B-787 scheduled for an international charter flight in October). Three and a half years ago, today seemed like it would never get here. Well, the day has arrived.
Yes, Boeing does have to ramp up to 10 per month, and they only have 2 years to do it. If the supply chain can get to the level needed, I know Boeing can do it. But they are held to the capabilities of the weakest of the suppliers.
It is good news there is also movement from CV and Boeing on the B-747-8F front, too.
keesje, I agree with you, because:
On 07/08/07, the chosen roll-out date for the 787 before James McNerney
was appointed CEO of the Boeing Co., he addressed the large audience of
politicians, customer airline officials, the worldwide aviation Press and many
Boeing employees, with words to the following effect:
“This beautiful first example of many 787’s to follow, will fly in September
and go into service next Spring,” while only very few insiders including CEO
McNerney knew, that the airplane was nothing more than an empty shell,
riveted together with over 5,000 temporary rivets, barely standing on a
borrowed 757 landing gear, flaps made of plywood and all of it painted over
with a beautiful polished coat of the now familiar blue and white markings,
applied during the 3.5 year long subsequent flight-test program!
There is one thing I learned many years ago and especially in the aviation
business, i.e. Don’t ever get caught with a deliberately falls statement and
qualify your statement if you are nor sure, because once you have lost your
credibility with a falls statement, which could have fatal consequences in the
aviation industry, it is hard if not impossible to earn it back!
I rest my case, with the following repeat question:
“Why, in the face of the above and many similar followup statements like it,
is he and his militarily oriented team, still running the Boeing Commercial
So now cometh the more interesting period of the product’s cycle… the operational part. Development took a bit longer than anticipated, will it’s operation do as well. Like the B52, will it be flown by the grand children of the initial pilots?
1,500 – 5,000 who cares. It’s just a matter of how long will they (BigB) keep pumping them out? anyone see any competitor besides Ab pump out high quality medium to large commercial airliners in the next 30 years.
how will it be – an operators (wet) dream, a hanger queen.
Thank heavens, after celebrating 1st delivery with a few more Malts than usual, reading Uwe’s mystical contribution had me pondering if somebody had slipped me a mickey finn. thanks to Lee-H I’m returned to earth now.
At this stage even the most optimistic business analyst will admit that Boeing will be in the red on the 787 program for at least the next decade.
What this means is that whatever profits they make on the 737 and 777 will be used to absorb the 787 deficit. Same thing for the 747-8, although to a lesser extent.
Same thing also applies to the 737MAX development costs. They too will be absorbed by the 737NG profits. Again, the same thing applies to the 777X development costs. They will be absorbed by what’s left of the profits made with the existing models.
What about the other programs? The 767 line will soon be producing only the KC-46 military version. How profitable is that endeavour going to be? We don’t really know. But what we hear is that they had to bid much lower than what they had anticipated, or hoped for. It’s still early, so we will leave it there for now.
What about the other military projects? I am sure they still make tones of money on those ones. But for how long? We are now entering a down cycle in military expenses. And we are also entering a down cycle in space activities. The NASA of 2011 has nothing to do with the NASA of 1961. The Space Shuttle has been retired at the same time the Space Station was completed. And we don’t know what they will do with the astronaut corps.
So for Boeing the prospects for making a lot of money in the coming years are actually quite remote. In the context of the existing duopoly, it is survivable. If it was to remain like this they would probably go through the next decade relatively unscathed. But that “cosy” relationship is now threatened by mounting competition outside of Europe and the USA.
A lot of things could happen in the next ten years and unfortunately Boeing might not be in a position to respond adequately as it always has in the past.
[Edited/Deleted as a violation of our Reader Comment rules.]
If I missed something, please feel free to use real figures/numbers to back up your claims. As a suggestion, you start with the public company financial statements. Just a thought…
as you can read above, the break-even point for the 787 is widely thought to be 1,00 to 1,500 shipsets. Even at 10/month (which is doubtful for a few years to come), that’s 8 to 12.5 years – let’s call that “a decade”
737max development will cost money, however you slice or dice it.
There are 6 products mentioned on the BCA page (http://www.boeing.com/commercial/products.html)
737, 747, 767, 777, 787, BBJ
the 787 and 747 just (about) came out of development and will have to amortize their costs, 737 is starting development and will be spending money on that and the 767 is just about end-of-line on the commercial side, certainly with the 787 coming on-line. That doesn’t leave a whole lot of earning potential.
the BDS page has a long list of current and in-production aircraft. (http://www.boeing.com/bds/a_to_z.html) – but the KC767 will be their largest program for a long while – and it will likely lose money during development:
Just about all BDS programs are government only, and if you can show me a government that’s planing on increasing their defense spending significantly in the next few years, I’ll buy you a bear.
Oh, the BRIC don’t count – try to sell F-15’s to china, Delta rockets to Brazil or Chinooks to Russia. That leaves India, which is unlikely to go with US on the mmrca.
Now, having used real figures/numbers, and even a few links, I would challenge you to the same exercise to support your claim – But I can’t. You didn’t actually make a claim, but used an ad hominem. Trying to bring someone down just because he says something you don’t agree with. Rather than try and educate the ignorant masses and share the bounty of you extensive knowledge – educate us all, you chose a personal attack and bring the whole world down a notch.
I will leave you with this proverb: “De beste stuurlui staan aan wal” (the best steersmen stand ashore)
“As a suggestion, you start with the public company financial statements.”
Those are probably rather useless. US bookeeping rules allow to push expenditure into assets at their most optimistic value ( forex: Boeing: “$19b in inventory” ) and thus push a definitive loss statement out into the far future. Under that kind of regime “shareholder value management” the company, will
like Enron, completely unexpectedly go “poof” in the future
when it can’t be hidden anymore that all those inventory assets
have in hard reality near zero worth.
Except this is not how program accounting works. Most of the 787 development costs are already accounted in prior years. Much of the cost overruns have already been written off the books, and this was done without posting losses in the year accounted. Take a look at the annual reports from the past 7 years and add it up. In this accounting model, there is no looking back. It is simply revenues and expenses from this point forward. While you could make an argument the 787 is costing Boeing more to produce today than the money they will take in on a given frame from this point onward (and that would be impacting net profit in future years) it does not appear that is the point you were trying to make.
BCA has a backlog worth hundreds of billions, all income to the company over the next decade. Cash-flow from that backlog will easily pay for the development programs in the pipeline. Writing off 787 expenses and overruns in prior years means that future income will be unencumbered with the prior year costs you are thinking of. Boeing can do this because they had a large amount of cash on hand when the the 787 program began, and they were able to largely navigate 787 development costs without borrowing the money needed to develop the airplane. It’s no different than you and I with our personal finances… as long as we don’t go into debt, huge expenses in the past do not impact our future, other than cash on hand. As for the revenue from the defense side, you need to go take a look at the outlooks from the analysts who include Boeing in their forecasting. Somehow NONE have come to the same conclusion as you have.
Thank you for your comments CM. What you say is worth pondering. I hope you are right, for I would much prefer to see Boeing thriving rather than falling further behind Airbus.
What brought me to this rather pessimistic scenario is the well known fact, which you have already referred to, that it’s costing Boeing considerably more to produce the 787 than the revenues they can expect from the initial batch. Nobody knows exactly where the turning point will be. But we all agree that it’s far into the future. In other words the program will be a drain on the finances of the company for a long time to come. That was my main point.
But how much of the development costs are already accounted for, I don’t really know. I would like to give you the benefit of the doubt on this one, but because of all the horror stories coming out of Wall Street in recent years I have come to take with a grain of salt any financial statements coming out of large US corporations these days. The integrity of the two Williams (Boeing and Allen) is legendary. But we live in a very different world today.
What has been less discussed are the compensations that Boeing will have to give to the frustrated customers that have been waiting 3 1/2 years for their airplanes. Those compensations could come in a cash form or be reflected in the price paid for any aircraft that an airline would wish to buy in the future. It’s hard to put a figure on that but we can take as a reference the 1997 production bottleneck and the ensuing delays that are estimated to have cost $2.6 billion in late deliveries penalties that year. (Reference: “Deep Stall” by P.K. Lawrence and D.W. Thornton, 2005).
In the case of the 787 we can estimate that figure to be considerably higher because of the the time span and the very large number of aircraft involved. I will leave it to others who are more cognizant on this particular issue to come up with a realistic figure that would help us to gauge the depth of the financial disaster we are talking about.
Does the break-even “accounting block” apply to expenditure to date? I ask because Boeing will incur significant additional expenditure developing the -9 model. Over time I expect the 9 model to be the definitive one and the one that ultimately delivers profits to Boeing. The -8 model probably won’t achieve this on its own.
hehe, never buy a Mk1 😉
This has been my assumption for some time :
the -9 will avoid most shortfalls and the -8 will later gain a lot from backported improved detail solutions.
The 787 is an iconic piece of industrial art. The detailing of the nose section, the wings, and engine pylons looks very cutting edge, certainly more so than the 767 or 777 when they first flew. It’s right up there with the Bell 47 helicopter and the 747-100.
As for the finances and the scheduling, like they say, it’s one thing to try to get other people to believe your spin, but once you start to believe your own spin, your sunk.
Some of what you say about US accounting laws is technically true, but not without skirting on the very edge of the law, or even crossing it. This was certainly the case with Enron. Do you believe all US companies are run in this manner? Are you really suggesting Boeing has built a financial house of cards, and will go “poof” in the future? Do you honestly think Boeing is gaming the system in some way similar to Enron and not one of the institutional investors or analysts has caught on or brought it up? Your delusions, or possibly your desire to brand Boeing as some evil empire have hijacked your common sense, but thanks for the post… we all love a good conspiracy theory!
lets take a historic example were we know about the runup and outcome:
This is the year 2006:
What would have been your reaction to my prediction on the housing
market going with a nuclear poof and Lehmann Brothers going belly up
in the very near future ;-?
( an outcome that was predicted but derided from ~2000 onwards )
First they ignore you, then they laugh at you,
then they fight you, then you win. (M Ghandi)
As for Gandhi’s First they ignore you, then they laugh at you, then they fight you, then you win, one aerospace company’s CEO certainly seems to believe that’s the case with his competitors. 😉
They will not force us
They will stop degrading us
They will not control us
We will be victorious, so come on
(Matthew Bellamy, Muse)
CM said ” It is simply revenues and expenses from this point forward.”
Mostly true but all production related costs, mostly tooling, are part of the project accounting and will be expensed over the accounting block.
I am not an MBA or an economics major but I think that the financial stability of Boeing is not an issue. Boeing is roughly 65/35 commercial/military. On the military side they have the tanker and the P-8 with prospects for the Hornet still in play. That is stable altho not huge volumes.
Sales of new commercial aircraft are an important but not necessarily only part of Boeing and it could be argued that parts/service/upgrades/maintenance are where the profits in the long run for any program. On the sales side the 777, 737 are both stable cash flow programs with large backlogs. Presuming the 787 and 747 now start to (albeit slowly) dig out of the hole they are in that should free up funding for other projects (737 MAX, 777-x, NSA?). Its also not as tho Boeing can’t get loans at great rates right now considering rates are low and it is one of the blue chip manufacturing companies in the US (compare Boeing versus say GM…) From a financial point of view I would think it should only get better as money finally starts coming in to start paying off the investment. If the plane delivers as promised of course.
If Boeing financed with little to no debt a $32B 787 development program over 7 years why is anyone concerned about a $6B 737MAX development over the next 4 years? The development cost was funded by cash flow from continuing sales. With the 777 having a ~300 ship backlog and the 737 with a 7 year backlog I think there is adequate cash flow for the 737MAX. As for the military side of the house, the P-8 program is rather log term as well as the Tanker. The F/A-18E-F-G is currently on a multi-year contract with another multi- year being discussed. The training and logistics part of BDS is also doing well.
I don’t see the problems that some bloggers are saying.
As for U.S. Accounting Standards, Uwe, they are much more stringent than those used in the EU. The Enron problem was fraud in reporting their books not the standards they should have been following. As CM pointed out, if some had read the Boeing annual reports they would have seen the costs of the 787 development being written off against earnings for the past number of years. Good accounting practice.
What ever the stringency, the interesting thing is the overly optimistic leeway
US GAP allows for valuation of assets and some other shenanigans.
So from my vantage point the asserted “stringency” doesn’t look all that usefull
for signaling economic conditions.
Yes, that is so right. No company in Europe would ever lie to its shareholders, they don’t ever have tricky accounting methods,they don’t go broke, and best of all, they are out there to make a profit, nothing else and nothing less. They’re perfect!
I think you haven’t quite understood what I wrote
(or was your reply a roundabout way of ceeding my argument 😉
The european ( in general nonUS?) setup makes it more difficult
to be overly optimistic ( and thus misleading ) in your bookkeeping.
And that because everyone knows that business is esentially amoral.
Some time ago Jerry Pournelle stated that without controlling markets
and their mechanisms “everything” including children and human meat
would be available in no time.
dopydem, do you take your $32B figure from the annual reports of the last seven years? I think not, for that figure is the result of speculations from journalists and business analysts who are trying to understand the situation. The fact of the matter is that nobody really knows what the final price tag will be. And that includes Boeing itself.
It is obvious that some of the 787 development costs of the last seven years must have been accounted for somewhere. But there is a lot more to it than R&D. This “only” represents about half of the $32B figure, and I am not sure it’s all there in the open light yet. When they launched the project in 2004 it was supposed to cost $5.6 billion. I am not aware that they have officially revised that figure yet. It is an extremely complex operation and that’s why business analysts are routinely fooled by it.
That it has taken almost twice as long as initially forecasted means we can easily double the initial figure of $5.6 billion. But what was not part of the initial business plan is the buyback of Global Aeronautica, the construction of of second line in South Carolina, etc… What that means is that the manufacturing costs are considerably higher than expected and will remain high for a much longer period of time than anticipated.
You can add to that the compensations that I have discussed above. It is the least obvious hidden cost and the most confidential. That is why most people only mention it without providing any numbers.
As to the military side of the business I said that Boeing is probably still making tons of money on those projects. My question was, for how long? The timeframe of my intervention was for the next ten years or so. I have always recognized that the present financial situation is sound. I am not worried for the present, I am worried for the future. And I hope I am wrong.
What I miss in all these estimations is how much additional capital is bound at the (risksharing) partners. I guess some
are in a financial high tide environment and blowing bubbles.
The inventory portmanteau is interesting too.
planes, complete, semicomplete, parts ( ok, can see that )
tools and dies ( some but not much imho most tooling is linked to partners and their expenditure )
extra work to make those frames flyable ( debatable, imho just sunk money it brings invetoried products up to their original value : from “junk” to “sellable” )
I don’t think Boeing is in any economic position that will hurt the value of the company. However, that said, they are lossing on the PR front, and that is the fault of management, not the employees, not the engineers, not even the unions.
Yeap, and they don’t need loans or government launch aid to launch new products, either.
Oh I get it now Uwe. You mean like the A-400M……
Norman, With all due respect your understanding of accounting leaves something to be desired. You are correct the $32B figure is an estimate. But the point is, whatever the R&D number is, it has or is being written off against current earnings, therefore will not add to the cost of 787 production from this point forward. As for Global Aeronautica plant and the So. Carolina plant, those are capital expenditures, already paid for, and again not added to the cost of 787 production. You may also be forgetting that the production “partners” are equity partners, which means they share in the added R&D costs as well as the future profits. Yes it will take a considerable number of years to break even on production but much of the total program cost is already paid for. IMHO you are overly concerned. Attached is also what the analysts think.
My understanding is that Boeing accounts at least $19b and counting as “inventory” towards the Dreamliner project. i.e. recoupable value. The 40 frames in various states of completion
can only fill a small percentage ( first 400 go @$76m on average : 40 * $76m ~= $3b).
Afair only the 3 first prototypes are written of as having no commerical value.
I certainly hope that I am indeed overly concerned. And I would love to be proven wrong. But I am afraid we will have to wait another ten years to find out. I must reiterate that I am talking about the long term here.
You are correct to point out that my understanding of accounting practices is not exactly of the expert level. That being said, where, and especially when, are we going to find out, outside the real of speculation, what the total expenditures of the program really are? We are not there yet. Although you seem to think we are.
Sorry for my poor understanding of accounting, but I refuse to not take into consideration the buyback of Global Aeronautica or the new SC line within the 787 program total expenditures package. But that’s a technicality for its all Boeing’s money anyway, except where work sharing and risks sharing are involved. And speaking of that, it is my understanding that Boeing will also have to compensate some of its partners and/or suppliers for the disastrous 3 1/2 years delay.
Your R&D point is also my point. Above I wrote “It is obvious that some of the 787 development costs of the last seven years must have been accounted for somewhere. But there is a lot more to it than R&D. This “only” represents about half of the $32B figure.”
So, what’s the difference between this and what you said: “But the point is, whatever the R&D is, it has or is being written off against current earnings, therefore will not add to the cost of 787 production from this point forward.” As you can see you and I are in total agreement on this.
Where we disagree is when you say “Much of the total program costs are already paid for”. That’s not the way I understand this business. Never mind accounting this or accounting that. At the end of the day the question to ask is what are the total expenditures on this program? And how many airplanes have we delivered so far, and at what price? It is simple arithmetics. But I am afraid it will take a long while before the two sides of that equation cancel each other out.
You don’t need to be a chartered accountant to figure that out.
Uwe, I must fall into the class of those who don’t understand what you are saying. What are you referring to in your comment about the inventory portmanteau? The cost of inventory is quite easy to account for. WIP (work in process) is also easy to account for by percentage of completion compared to previous cost or earned value management. I am also confused about your comment “the overly optimistic leeway US GAP allows for valuation of assets and some other shenanigans.” I don’t recognize the term US GAP so I can’t comment on what you believe it says. The frightening thing is that if the US Accounting Standards are the most stringent then you must have no confidence in any business enterprise in the EU.
US GAAP, i lost an A
Have more talk with foreigners.
You are misattributing properties to “stringent”.
What you completely ignore is : are those stringent requirements conducive to
exposing errors and fraud ? i.e. are the right questions asked?
The effect today is that an already photoshopped accounting image
is stringently interrogated for exposure to the public.
This is worthless.
away from accounting/costs et al ,something I liked on the day of the handover of the first 787;Jim McNerney mentioning among other leaders the name of Mike Bair-who has taken most of the heat/blame for the ‘supply chain failure”/execution missteps up to 2007-I personally think, it was good to recognize the contributions of people like Mike Bair-not withstanding the poor execution which goes right up the management ladder.
In some ways, Mike Bair would have learnt much more than others in Boeing-the challenge is-how to get the collective learnings fed back into their future program management ,that could determine Boeing’s success in this risky business.
People who rip on Mike Bair fail to realize he architected a program within the constraints dictated by Stonecipher and the BoD. Only the people at the top were wound around the axle about RONA… nobody on the program would have chosen to risk-share, outsource and divest the Boeing stake in the 787 in the way it ultimately happened. The alternative for airplane people like Bair was to perpetually develop derivative models and never truly innovate… or succeed (e.g. MD-95, MD-11). They chose the lesser of two evils, but it’s not as if they had all options available.
CM, If my memory recalls Phil Condit was the CEO of Boeing and Stopeciper the COO when the 787 began. Phil was a lifelong Boeing engineer. The BoD was predominately Boeing appointed directors at that time. So yes, Mike Bair was under the direction of senior management and the BoD but Boeing people were in charge
Instead of learning from their leaders on the battleground, the generals stationed at the headquarters in Chicago have a tendency to find a scapegoat for the stupid decisions they themselves have taken and imposed on their staff. So they move him somewhere else. And the less fortunate one ends up in front of the firing squad. His last words could be: I only followed the orders!”
Speaking of execution, I have noticed that many people blame the 787 problems on execution. Yes some of the difficulties are created by the day to day project management. But in reality the majority of the problems are the result of poor planning, rather than poor execution.
In the planning phase the problems are prevented before they occur. The planning period is not a time of action, but a time of reflection. You don’t put a “doer” in charge of planning. You put a “thinker”. Planning is a good place for strategists and the battlefield is best left to the tacticians.
To stay in the metaphor, I will add that in the military doctrine you never blame a soldier for his actions. The responsibility always rests with the officer in charge. If the soldier does not perform to the expected level it is either due to a lack of training, a lack of support or a lack of supervision.
“Planning requires Thinkers not Doers”
But that dissonates with the preference for “fighter jock” style characters in certain management levels.
You’re mixing apples and oranges. $3b may be what that inventory sells for, but it is nowhere near what it cost to produce those frames. Some of those frames spent a year in FAL, and have perhaps hundreds of thousands of more man-hours invested than the aircraft being produced today. The IRS has already accepted that the first 3 aircraft reasonably represent ~$2.5b in realized costs for Boeing; they have accepted that as the write-off value for those frames. Nobody is claiming the cost of that inventory will be “recoupable”, as you suggest. That’s not why that number is reported. Boeing has a fiduciary responsibility to the shareholders to account for where the money goes. Well, a TON of it is tied up in the early production aircraft..
comparing bananas? Actually not.
You are exposing the difference in bookkeeping rules.
The frames on Boeings lawn have probably accumulated $2..400m each.
But as merchandise they can never have value beyond their value
Just do the steps:
Boeing bookkeeping accumulates ~$300m over the assembly of a single
Dreamliner. the moment this frame is handed over to a customer $75m
cash comes (actually less, but lets ignore the deposits ) in
and an item worth $300m leave the books 😉 difference -$225m.
Again, then by your thinking, Boeing will post huge losses as soon as that overvalued inventory begins delivering. Not something any analyst is predicting… except you. Truly remarkable insight you must have! 🙂
Uwe, are you speculating on the Boeing accounting methods? Do you know for a fact each of those 40 B-787s cost $300M to build? I wouyld think that might be true for the first several of them, and production costs would go downafter airframe number around 8-10. By airframe #40 it could be down to as low as half to about two thirds that costs ($150M-$200M).
That brings the difference down to some $75M to $125M.
In any case, airframe #40 would cost a lot less to produce when compared to airframe #1.
So that would be a change in quantity but not in the basic observation that
inventory can’t have more book-worth than its market value..
At least that is the framework I have to work under.:
I have to value assets and liabilities at the most pessimistic levels.
assets goe at minimum value
liabilities goe at maximum value.
This helps explains why you are “discovering” glaring problems with Boeing accounting. Problems which seem to have been missed by every analyst reviewing Boeing’s business as a profession.
The 2010 annual report projects 2011 BCA revenues in the range of $36b-$38b, including 787 & 747-8 deliveries of between 25-40 aircraft (50%-90% of current inventory). If Boeing was placing a market value on all 787 and 747-8 aircraft in inventory of $19b. By your “market valuation” of that inventory, the variation in revenues from 25-40 787 & 747-8 deliveries would need to show a range of at least $7.6b in projected 2011 revenues, not the $2b Boeing is reporting. Don’t you think that would be pretty easy for an analyst to spot?
I’d say to you “don’t quit your day job”, but you’ve just told us you play a role in accounting for some business somewhere in the world… I guess that’s why it’s a good thing commenting on these blogs is anonymous!
you are sitting in the wrong tree to pick cherries.
What _you_ overlook in your characterisation is
that I have shown you the difference in accounting
practices and not an oversight by analysts.
Net result is, to come back on topic, that your books
always look that “little” bit plusher than under a more
conservative model of accounting.
There is actually quite a bit of information around
on the web about this topic if you bother to search.
Inventory is carried at cost. When the aircraft is sold the difference between the cost to build and the sale price of the aircraft is resolved in the profit and loss statement. If it cost more to build than the income derived in its selling, the resulting loss is displayed in the P & L statement. Will Boeing’s several years of 787 sales be a loss? Yes, and the analysts have been saying that. Will that mean that Boeing will be showing a loss? No, because the 787 isn’t the only income they have.
My understanding exactly.
Only I wouldn’t be allowed to do that under my local (german in this case ) accounting rules.
The timing of the loss statement ( early versus late ) makes quite the difference in “stringently” reported public statements.
Net result is I can have later/delayed profits beyond expectations while
forex Boeing can have later/delayed losses beyond expectation and it adds more leeway in managing profits
to match quarterly expectations i.e. “shareholder value”.
Oh, yes, you can always believe everything you see on the internet, or even on TV……….NOT.
Actually, quite a few analysts are predicting that Boeing is going to burn up to 4bn a year through 2014 when liquidating their 787 inventory.
That said, mind you that the inventory also includes supplier advancements that suppliers are expected to pay back. So you can’t just divide the inventory by the number of planes, ain’t that easy.
Sounds like a regularly reurgitated ball of hair, doesn’t it?
will this have longtime repercussions for suppliers / “partners”?
I think only a minority of those expected the spanish inquisition,
er Boeing running a project into the FUBAR corner.
next item: how will dire straits at suppliers effect the situation for
Airbus ( who frequent the same suppliers )?
I notice a lot of confusion about program accounting. I humbly suggest reading Boeing’s explanation that can be found at http://www.boeing.com/companyoffices/financial/finreports/annual/03annualreport/f_mda06.html#94
The most important paragraph:
We recognize sales for commercial airplane deliveries as each unit is completed and accepted by the customer. The sales recognized represent the price negotiated with the customer, adjusted by an escalation formula. The amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer during the quarter. Because of the higher unit production costs experienced at the beginning of a new airplane program (known as the “learning curve effect”), the actual costs incurred for production of the early units in the program will exceed the amount reported as cost of sales for those units. The excess or actual costs over the amount reported as cost of sales is presented as “deferred production costs,” which are included in inventory along with unamortized tooling costs.
That is about as expected ( for the US).
Only the Glen Beck scripting team was too busy to try to pounce 😉
would you mind being a bit more specific. I want to be clear that I have not miss-understood you before I respond.
My initial thesis was that US accounting rules allow to paint an overly optimistic
financial picture leading to possible unexpected losses while the more conservative
rules elsewhere are more held back resulting in possibly unexpected profits but
less so in unexpected losses.
This imho is a historically ongoing process.
The lack of traction of keneyessian spending seems to have created a drive towards
“more positive” bookkeeping “views” resulting in a setup that is so overly optimistic that
it will invariably fail with a spectacular and cascading failure.
This is a framework failure. ( Look at the banking/mortgage crisis for the mechanism)
Other posters were pretty busy insinuating that i alleged Boeing of fraud inside the framework
where my position essentially was that the framework is (fraudulently) defective.
Thanks for posting this Falcon, but you’re words have been wasted. Open minded people have already figured this out. The people who don’t want to believe Boeing is honestly accounting 787 program costs won’t bother trying to understand it so they can keep crying foul on Boeing; it truly is the height of intellectual dishonesty.
Only way to cure ignorance and bigotry is with education. Some are more stubborn than others but it gets better.
I do not think the issue is so much about if Boeing is following the rules in place as it is if those rules fairly display the state of the company.
I’m not a big fan of project accounting as it is today. The way it allows you to have direct outlays on an item produced that is several times what you receive when selling it but can still report it as a profit is, IMHO, not good. There are reasons you have to expense R&D immediately and I do think the same reasons apply to direct costs. At a very minimum I think the deferred production costs reporting must become much more transparent. Have a look at http://www.boeing.com/companyoffices/financial/balsheet.html and try to explain the changes quarter by quarter. Some quarters the change represent 5 M per delivered plane. Sometimes less than 1 M and there is even a negative value.
Not that this is unique to project accounting. Every system has its pros and cons.
We all listen to the analysts that confirm what we want to hear, to some extend..
I’m glad I asked because reading your posts I had a very different impression. As you can see in my other post I do agree there are “deficiencies” in how program accounting is implemented. But I also think a lot of the comments are made without knowledge of how it, or any other system, works.
I have not worked much in Europe the last 5 -10 years but my experience from when I worked there and the work I have done in other parts of the world is that every system have their good and bad sides and in the end it is six in one and half a dozen in the other.
Right, there certainly are a couple of “things” i chaff at in my local setup too.
( thought it is the behaviour of our political caste that gives me the heebees
Germany has a fine hand at artfully entangling business with bureaucratic
My reservation is that the US setup is synergetic to economic “bubbling” which
is rather dangerous. Another item is that though the overlayed formal ruleset
for publishing financial data is the same the presented pictures are not comparable
beyond national borders. i.e standing Airbus and BCA side by side is worthless
for an objective comparison of performance.
I think it is clear that the system is deficient. There were even analyst reports that Boeing was sitting on a multi-billion cash bonanza (JP Morgan no less – well at least it showed that it isn’t always the best and brightest who survive):
If Boeing accounted correctly for the inventory, the US$19bn number would not be there, since the inventory is not worth that much (anyone want to have a guess at the actual value? Say 50 planes in various states of finish @US$75m each would be less than 25% of the number. Any higher bids?). Pointing this out is not equivalent to implying that Boeing is fudging the numbers, but rather that an accounting system allowing this nonsense is, well, nonsense. There is no intellectual dishonesty in making this point.
Thank you Andreas for the link to this older post. I had never seen it before, but it’s quite relevant to the present discussion. I will take this opportunity to clarify my position on this whole issue of profits.
There are two break-even points to take into consideration:
1- Total program cost.
2- Actual manufacturing cost.
Total program cost must include all the expenses that have been engaged for a particular project. If one divides total program revenues by total program costs, the quotient should be at least one to reach the break-even point.
Actual manufacturing cost has to do with the learning curve associated with the manufacturing of an airplane. As the manufacturer progresses on the learning curve the manufacturing cost per unit will go down until it equals the selling price per unit, on average. That is the other break-even point and it normally arrives first.
I look at this from a business perspective rather than strict accounting practices. In other words at any given time one can ask the simple question: are we making money on this project? The answer could be no even though the the actual manufacturing cost has reached the break-even point. It is only when total revenues exceed total program costs that we can answer yes, we are making money on this project.
This view might be over-simplistic for some, but it helps me to gain an overall perspective on a particular program.
For the 787 program some people think that it might never make a profit. I don’t share this view, but I recognize the possibility. What we all agree on is that at some point in the program the manufacturing cost of the aircraft will be lower than the price the aircraft were sold at. When they reach that point they will make money on each airplane they deliver. But they will still loose money over the entire program.
Well, Boeing’s accounting system seems to get by US Government audits from the DOD, IRS, and SEC to name a few. I am sure whatever system of accounting Airbus uses also passes the government smell tests in France and, more importantly, Germany.
The point is not whether it passes any test, smelly or otherwise. The point is that what is normally a reasonable system is not functioning in an extreme situation such as the 787 debacle. The quote from Falcon shows that Boeing is refusing to treat the 787 as the clusterscrew it is:
“Because of the higher unit production costs experienced at the beginning of a new airplane program (known as the “learning curve effect”), the actual costs incurred for production of the early units in the program will exceed the amount reported as cost of sales for those units. The excess or actual costs over the amount reported as cost of sales is presented as “deferred production costs,” which are included in inventory along with unamortized tooling costs.”
Unless the 787 is the ‘new normal’, it is clear that it ought not to be covered by the learning curve effect. It should be treated as an extraordinary management disaster (because that’s what it is), and the associated cost should be written off transparently, rather than being carried forward on the books as an asset. They are a liability.
One question. If we assume that about US$15bn of the US$19bn are unrecoverable, does this include the charges already taken on the programme (when the first 3 or 6, I can’t remember) airplanes were written off as R&D, and unsellable? I honestly don’t know, so please don’t crucify me for asking.