Boeing is entering 2015 better and stronger than at any time in recent history, said CEO Jim McNerney at the start of the Boeing earnings call today on 2014 financial results.
“We’ve completed a comprehensive refresh” of the product line with the 737 MAX, 777X, 787-10 and 737 MAX 200, he said. McNerney said that from lessons learned, the company has de-risked product strategy going forward. Boeing has also obtained long-term labor contract stability.
“We are equally committed to breaking the cost curve” on new airplane development programs, McNerney said.
McNerney said the outlook for the commercial aviation business environment remains positive. Boeing now has an eight year backlog as present rates.
Despite today’s fuel price environment, McNerney sees a continued positive outlook for deliveries and new orders. A combination of growth and replacement will continue to drive orders. He continues to see 40-60 777 Classic orders per year to successfully fill the production gap to EIS of the 777X.
Greg Smith, the chief financial officer, said production costs on the 787 are going doing and should be cash positive this year, despite deferred production increases to more than $26bn. Production costs will continue to increase, Smith said, with investments and preparing for the rate increase to 12/mo for the 787-10.
(Boeing at one time predicted a top of $25bn in deferred production costs and, during the 3Q earnings call, Smith said he didn’t see a path whereby deferred costs would increase another $2bn to $27bn. Editor)
Q&A: (Quotes are paraphrased.)
JM: Jim McNerney
GS: Greg Smith
GS: Expects deferred production costs to start coming down in 2016 after hitting 787 rate 12.
JM: On 777, gut issue to bridge to the 777X. The 63 orders for 2014 bodes well for the 40-60 orders needed for the 777 Classic. Swapping 787-8 to 787-9 bodes well because the 787-9 has a higher price. Hampered by the orders to 2021, but see options being picked up as get closer to the end of the decade. The 787-9 performance is better than expected. This airplane grows the market with more city-pairs than were available with older airplanes.
GS: There was 30% more 787-9 mix in fourth quarter than third quarter in the production. Deferred going up $2.5bn over next three quarters. Some of this are investments in production lines. Labor levels remain higher than expected, which add to costs. On supply chain side, some cost cutting has moved to the right with some slower agreements [on Partnering for Success] and as learning curves engage.
GS: We have seven C-17s that are unsold. 737 accounting block increased by 200, all of which are MAX airplanes.
JM: It is a sign that the 777 Classic is an enduring capability and there isn’t capability from the competition. We see some more blended orders in future for 777 Classic and 777X.
It is early in the year but I think we will see a book:bill of at least 1:1 this year. [On all equipment types.]
GS: No change in 737 and 777 margins in 2014.
GS: The fundamental milestones around the 787 program being cash positive by 2015 and going to rate 12 haven’t changed.
GS: Terrible Teens (787). We continue to see a viable market and continue to have active discussions for these. We expect to deliver three or four this year.
When the say $25bn in deferred production costs for the 787, does that include new plants like the entire Charleston facility?
A far as I can see the 787 line is getting up to speed with the better-9 making inroads which is very good. I understand Boeing is giving away $ 20-30 mil with each ship leaving the line. No accounting approach makes that go away and neither can the $2x bil deferred costs debt be left out of scope for the occassion.
The 767 and 747 lines are what they are.
The 737 line continuation until 2030 seems build on past reference and hope rather then market developments / competitive pressure.
A 2025 737 replacement seems a more robust scenario.
The 777 is bringing is generating cash based on old orders. Stating there is no competition ignores the 1000 A350 orders and options from (mainly) 777 operators.
The 737MAX is good for 15 years easy, that’s 2033. A 15 year run for an engine seems reasonable before it becomes obsolete. That gives Airbus five more years to bring out the A380neo. As for Boeing’s next project, middle of market aircraft 2025.
Are you seriously comparing the 777 to all the “1000 A350” sales. Frankly the only A350 comparable against the 777 should be the A50-1000 which has been totally outsold by the 777X.
I notice you’re such an airbus fanatic but please, no need to use wrong facts. First of all the A350 combined orders don’t exceed 800 as of today. And i’m sure you’re aware that over 85% of the A350 orders take on the dreamliner family which has still outsold them.
I love Airbus planes, but give credit where it is due. The 787 and 777X are doing better than their respective A350 competitors.
As for the A320, that really is the king. No doubts.
so busy pointing at the “fanatic” that you could not be bothered with reading carefully ;-?
Keesje wrote of “orders and options”.
The “nonexisitng” competitive pressure is high enough to force Boeing to spend quite a bit on the 777X and go for “very attractive” pricing for the classic 777-300ER.
Except for the freighter all other classic 777 models are out of demand. ( One could discuss the reasons for that but I’d guess upscoping of the A330 and the new A350 do play a role there. )
Ewe: attractive pricing due to the need to close the production gap as the newer model replaces it.
We hear how the A330 can undercut Boeing 787 prices as the tooling has been paid for.
So when the 777 does the same thing its desperation?
Both mfgs doing the best they can to maximize the return.
Boeing also gave great 767 pricing to FedEx so that the line did not go dead while the tankers are coming on line.
So it goes.
You have a strong tendency to attribute allegations to other posters that those posters never wrote.
In future I expect much more care on your side!
How do you get from
“The “nonexisting” competitive pressure is high enough ..”
to
“So when the 777 does the same thing its desperation?”
Really, take more care when attributing.
One could discuss the reasons for that but I’d guess upscoping of the A330 and the new A350 do play a role there.
Of course the A330neo has to be sold at a discount to compete with the 787.
estimated discounts for 2014 : ~47%:
http://theblogbyjavier.com/2015/01/15/my-forecast-of-boeing-commercial-airplanes-2014-revenues/
One quote that I found quite remarkable, twice from Greg Smith, is that unit costs of the 787-8 have come down by 30% over the last 175 frames delivered. That takes us back to November 2012 when the production rate was 3.5 per month. I would’ve been led to believe that two years of production maturation and a tripling of the production rate would have yielded a greater unit cost reduction than 30%. It also begs the question how production costs can possibly decrease by 30% this year, with no production rate increase and limited time for further maturation of production processes.
Remember, they were working hard to deliver the 787-9 which earlier samples supposed to cost more than what Boeing most likely sold them for. Doing the average cost will probably comes to the 30% number for the entire program to date. I believe another spike in cost per unit (as a whole) will happen once they start working on the 787-10.
~= 15% learning curve. Quite good. ( As long as one doesn’t look at the fact that initial production cost was massively “through the roof”).
The -9 should cost equal to the base -8 to produce. Added material for a simple stretch offset by improved produceability.
Revenue from delivering -9s should be significantly better.
I still think the -8 will lapse as a Mk1 version
During 2013 they were spot on the 85% learning curve.
See post with the calculation: http://theblogbyjavier.com/2014/03/05/learning-curves-boeing-787-case-in-2013/
I’ll re-calculate it with latest comment from Greg, but probably you’re correct Uwe, and they’re still in that curve (15% from you POV)
Learning curve:
In contrast to previous projects the developement should be dominated by fixing all those “dumb” mistakes made early on.
( Which makes a fast learning curve “rather easy” , a relative value good for PR but in absolute terms still a disaster.)
What I miss as informational tidbit is how much further north from “as initially planned” the actual progression lies. ( and maybe how the gains were distributed over those two years.)
787-9:
lower gains might indicate that easy improvements are now done and _both_ -8 and -9 will in the future progress much slower ?
The last 175 deliveries on the 787-8 span from Dec 2012 to Dec 2014 (excluding January 2015).
If we take the 30%, the calculated learning curve for the period is 87% (for a 85% curve, Greg would have announced a cost decline of approx 35% (34% as per the numbers)).
For the 787-9, for the first 10 units, the curve is somewhat worse so far: 93.5%.
http://theblogbyjavier.com/2015/02/12/learning-curves-boeing-787-case-from-dec-2012-to-dec-2014/
Nothing about the impact of the Dollar climb ?
Probably not…Boeing should be well positioned when it comes to currency fluctuation . They price their planes in dollars.
Uhm. No. The other way around. B is at a disadvantage with a rising dollar.
Older WSJ article says that Airbus airplanes are priced in dollars. Strong dollars improves Airbus’ margin while not affecting Boeing. http://www.wsj.com/articles/SB10001424052748704317704574503291415066898
worth reading
http://www.flightglobal.com/news/articles/boeing-reports-new-cost-increases-on-787-programme-408409/
What went wrong in a superficially “unremarkable” year of 787 production that created further unexpected deferred cost?
apropos: what was the body join issue Stephen Trimble writes about? Bad tolerances overcome by brute force like on the 777?
However, even as the unit costs drop, the deferred costs’ total will continue to climb for a while as Boeing spends extra money to increase the production rate to 12 per month and also to introduce the next model, the 787-10.
http://seattletimes.com/html/businesstechnology/2025568223_boeingearnsxml.html
While were on the subject, how is that A380 breakeven coming?
Isn’t tooling and developement a different basket than “deferred cost” ?
In a fit of gross stupidity, hubris and trying to impress the uppers with their management concepts patterned after how the Chicago Mafia runs things, BCA decided to lay off all the temporary workers in Charleston during the 3 months gap of the 787-9 fuselage lull (the Charleston boss is now retiring)
Those temporary workers were the glue that was holding the fuselage production and integration operation together. This resulted in travel work not only to Charleston but also Everett. More diverted workers and OT to try to get the sections ready to assemble.
No one has done an analysis on the workers costs, but those so called temporary workers are paid outside the normal salaries (I..e negotiation not imposed). They get paid whatever they can negotiate rather than a take it or leave it deal. i.e. they are not cheap.
As there is no fuselage production in Everett to compare we will never know what the true cost of the union free Charleston operation is.
What we do know is the cost of the program keeps going up, well done, first time in history of Boeing that has occurred and the management bonuses keep on flowing. You have to love pure capitalism where it has nothing to do with your performance but who you schmoose with.
In the conference call, CFO Greg Smith explained that they have made a decision to maintain the temporary workforce throughout this year and beyond, so to stabilize the 787 production system. I believe it can be interpreted as a tacit recognition of its importance to the program. He also explained that they will focus on “improving long-term productivity”, implying a contrast to a focus on short-term productivity that perhaps has yielded lessons learned.
There are reports that Boeing will also increase seat count in 777 with a small fuselage increase and interior arrangements changed.