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.
- 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.)