Bjorn’s Corner: Boeing’s 787 and Airbus’ 350 programs, a snapshot

 

By Bjorn Fehrm

By Bjorn Fehrm

Introduction

23 April 2015, C. Leeham Co: It has been an eventful week for Boeing with Q1 results reported and with that an update on the 787 program. At the same time we ran into Qatar Airways CEO Akbar al Baker, while visiting Airbus the other day and could exchange a few words with him and his team re the A350. I therefore decided that this week’s Corner should provide a snapshot on where these two new aircraft projects stand right now.

787 program

The Dreamliner is now into its fourth delivery year and passing 260 delivered aircraft with a production rate of around 10 per month. The 787-8 is just getting cash positive, that is each aircraft cost less to produce than what the customers pay in net price while the 787-9 is cash negative, i.e. it cost more to produce than what the customers pay right now. The average loss per aircraft during 1Q2015 was $26m.

Program deferred cost

The total program, 787-8 and -9, should pass to cash positive during 2015, according to Boeing’s CFO, Greg Smith, i.e., Boeing should be able to start amortizing the large deferred production cost debt they have in their balance sheet of $27bn. Smith said that once 787 production hits rate 12 in the second half of next year, the deferred production costs will begin coming down. Only through program accounting is Boeing able to report profits on the program. Under US accounting rules, if GAAP accounting were taken rather than program accounting, Boeing would be reporting losses on the 787 for many years to come.

Reliability

The 787-8 started out with operational reliability being around the 96 percent mark and it has gradually increased to the mid 98% today but the reliability has not climbed as fast as Boeing would have liked in the last year. Boeing has the target to get this figure north of 99% during 2015.

A350 program

The Airbus A350 program has had a very different birth than Boeing’s 787. In the wake of Airbus’ troubled project, the A380, the company focused on realistic program execution with an improved program management setup and it seems to have paid off. There are now two aircraft delivered, both to Qatar Airways, but there are around 15 more in the final production process being readied for delivery this year.

We ran into Qatar Airways’ aircraft acceptance team complete with CEO Akbar al Baker and their Airbus account manager while at an Airbus visitor’s hotel and picked up information that completed our A350 picture.

Production

Production seems to run smoothly with aircraft number three for Qatar delivery, MSN009, being at the customer delivery center since this week. Al Baker told us there might be an issue with the delivery as one engine is close to the allowed vibration level and Qatar might take an issue with that but apart from Qatar’s normal insistence on a perfect product to be presented at acceptance, there seems to be no real issues with the aircraft at present. Batch one has rework scheduled as part of the Final assembly process but it is a matter of weeks as compared to years for the initial 787. Airbus has installed temporary rework hangars made out of tents to cater for this rework. They should achieve a total delivery of around 17 A350 this year.

Production costs

There is no official information re the production costs for A350 but the initially produced aircraft will be delivered at a substantial loss, as it usual for this kind of project. Differently to Boeing these losses will be counted directly in this year’s Airbus and Airbus Group profit and loss. While there was a $434m loss provision charged to the bottom line for 2013 results, there were no charges for 2014 and none announced coming up for this year’s results.

Reliability

With the caveat that we are only looking at two aircraft flying two daily rotations between Doha-Frankfurt, it seems that dispatch reliability for the initial period is around where 787 is, 98%. This is of course measured on a tiny base so one does not have the statistical relevance of the 787 data but it is still significant that we know of only two issues that has plagued the operational A350 so far: a hydraulic hose that broke some time ago and a high lift issue that needed a spare part to be flown in about a week ago.

It seems that the A350 is not beset by the myriad of system software issues that plagued the initial operation of A380 and 787. It is our understanding this is what makes the increase of dispatch reliability difficult on these aircraft as new systems architectures takes time to stabilize and get reliable and further to get the field experience to a level where mechanics and operations departments know how to handle issues in an effective way. The A350 was effectively a further refinement of the A380 systems and Airbus has therefore been able to focus on system maturity before delivery instead of the exhaustive debugging of functionality that plagued Boeing for 787 and Airbus for A380.

Summary

It is far too early to draw any general conclusions in the comparison of the Boeing 787 and Airbus A350 programs. What one can see is that Boeing is still struggling to get the costs per produced aircraft and the reliability to the levels they planned. The way the project was launched still casts its shadows four years after first delivery.

The Dreamliner program was launched on wrong industrial and economical premises and with a too risky project setup. It is still work in progress to master the effects of this bad start to the project. While the airlines might not suffer so much anymore (the 787 is a fine aircraft which delivers the promised economics), Boeing is still wrestling with getting things under total control and this cost money.

In contrast, the A350 program, which was given more realistic project targets/time frames and a beefed up program management, working with a known supply chain concept and aircraft system approach, has created the conditions for a predictable economical situation with a product that is mature at delivery and starting to deliver on its promises.

83 Comments on “Bjorn’s Corner: Boeing’s 787 and Airbus’ 350 programs, a snapshot

  1. Thanks, Bjorn – nice summary. Will be interesting to see where Airbus are at regarding the A350 once the in-service base is a bit larger than the current two examples; i.e. say a year from now.

  2. Hello Bjorn

    You should give us the name of the Hotel 😀

    No word of the impact of the 787-10 (FF 2017 ?) on the program cost ?
    Is the 787-9 planned for break even in 2015 also ? or the break even at production level is only due to the break even of the 787-8 ?

    A350 : quite amazing the level of detail the airline acceptance teams go into!
    No word on A350-1000 ? or A350-900 WV001 ?
    What do you deduce from airbus latest A350 ACAPS ?

    best regards

    • It was the Radisson Blue at TLS airport 🙂 .

      I do not have the influence on the cost from the 787-10, of course it costs money to develop it but the deferred cost is for production and should not be to much influenced by -10 just yet.

      The 787-9 will not break even after only one year of production, it is the positive gains of 787-8 that gives the total a shift of sign in 2015.

      Re Qatars acceptance criteria, many see Al Baker’s actions as stunts, I think it is part of a very clear policy; only perfect is good enough for Qatar Airways and Al Baker puts his reputation on line to achieve this goal. He is running a 5 star airline and is determined to keep it that way.

      The latest A350 ACAP showed that the Max TOW of A350-900 is 275t now, I hope to get to verify the range data with that TOW in due time.

      • To bad, I guess i just missed you guys as i’m staying there right now
        I’ll vouch for software issues being a pain, but there is more to the A350 than just copy/pasting of designs 😉
        Thanks for the updates and analysis

  3. May I remind you that the A350 is flying with provisional conventional very heavy batteries??

    That the mishaps of the B787 were mainly causes by a mistaken intent of im[;ement ainternational project management and tells nothing regarding its quality, especially that 98.5% reliability is quite good for an aircraft where so much is new and innovative, much more as in the A350, which had years to learn from Boeings experience?!

    That not only as yourself state that the not commercial experiece of only 2 units means nothing between other as AIRBUS isobviously doing much more as usual at maintenance and controls to avoid any visible snatch

    That the experince of Airbus with large aircraft, both technical and fiancial, is anything as stellar see A380, A340, not mentioning the S400!

    That the experience with the B789, which is now increasing, shows practically no problems

    Finally, I would like your explanation why now for a long time only a trickle of BA359 were order, aside the Emirate cancellation! It is understandable why the A351 where so, not o much the A359

    Dear BJOERN:

    I would be grateful if you can re-omment this post in one of your interesting public articles. Thanks in advance

    Tom Wittmann

    • May I remind you that the A350 is flying with provisional conventional very heavy batteries??

      Everybody is aware of that, I believe. Although “very heavy” is a debatable term.
      They are 30-40% heavier than Li-Ion batteries – but for the 787, using conventional batteries would still only amount to an additional 17-23kg extra per plane.
      So the impact of the conventional batteries on the performance of the A350s delivered by 2016 (Airbus’ current switchover date for using Li-Ion) will be minimal.

      I won’t comment on the rest of your post as it – in my view – just rehashes a few common misconceptions and biases.

      • Is that with or without full metal containment box, structure & piping

        😉

    • Hi Tom,

      the extra weight of the Ni-Cd batteries is negligible in the whole and Airbus is re-introducing Li-Ion soon, not only for weight reasons but it has many other nice characteristics.

      Of course Airbus benefited from A380 and 787 mistakes, they also allude to that officially. The fact that they did take all those learnings into account is to their credit, the fact that Boeing wrestled control in an uncompromising fashion on a project as de-railed as 787 is to their credit, it shows what a strong company Boeing is.

      Re extra support for new aircraft introduction, it was there for A380, 787 as well, nothing new there. What was different was that flight testing could focus on verification of design and maturity rather then fixing development bugs, Airbus even ran the flight testing as Airline number zero.

      I am no special fan of Airbus aircraft, 787 is a very elegant design, in many ways more advanced than A350. What I have issue with is top managements way of setting the scene for a project making such advancements on all fronts, it was very naive and unrealistic to ask it in addition to complete in record time and on a record low budget, they never gave the BCA people a chance.

      For A350 it is different, a very realistic approach to the project from top management, it gave the project and design people a chance to do a good job from day one and they got an environment where they could perform to expectation.

      • The thing which really hurts about the 787 project is that a new design this size costs 15-20 billion. The other 20 billion was in rebuilding Boeing’s ability to do projects like the 787. It appears that current Boeing management is going to throw that 20 billion spent on learning into the bin in order to de-risk future programs by sticking to derivatives only. Boeing’s smart accountants need to find a way to separate the “extra” 20 billion on rebuilding Boeing’s technical abilities from the 787 costs in order to get a realistic view of development costs and stop scarring investors off the thought that every new project will be like the 787. To me 777-X has so much new that it is a waste of money not going with a clean sheet wider fuselage. A realistic view of deferred costs would also allow Boeing to compete with A330NEO prices.

    • much is new and innovative,much more as in the A350, which had years to learn from Boeings experience?

      Do you really think Boeing did not pick up any idea from the A380??? They even choose to copy the delay and the extra cost of this so mismanaged A380 program ….so bad from a great company
      keep trolling

  4. Wow -losing $25m per jet in last quarter is horrific. I suppose it is a combination of the additional work and the reported “low” 787 list price that was in place in the initial sales period where Boeing put a lot of emphasis on being able to say that it had the largest number of orders for a new jet.
    The US fiscal laws that allows a company to declare a profit while it ring-fences a $27Bn charge is bizarre.

    • What you have in those $26m is the initial learning curve effect for 787-9, given the experience from 787-8 it will come down fast.

      Re program accounting, yes it is something one has to understand when looking at Boeing’s present company results.

        • Not so surprising considering the extend of the externalization of the 787. Boeing purchase back Global Aeronautica (first Vought’s half and the Alenia’s half) but Charlestown’s workforce is still less experienced than the Everett’s workforce.

        • Javiers work is very interesting. The lower learning curve rate (87 as opposed to a more typical 83/84 percent) is probably reflective of change in working techniques. Airbus in particular but also Boeing have invested heavily in reducing the labour content of each plane and as such the potential for the learning effect is likely to be compromised given that machinery does not ‘learn’ after commissioning issues of course.
          The real problem for the b787 is that the initial hours were too high due to poor transition from development to production (museum pieces, terrible teens, rework) and the pricing was too low. The combination means that much of the curve is being wasted on getting to breakeven point. Note as a curve it flattens out quite quickly ( javier illustrates this well) and eventually ceases (becomes steady state or even the organisation starts to forget) to improve. Scope for the b787 to make money is based on the ability for Boeing to charge a reasonable amount for each plane more than the learning curve. This is what makes the spoiler a330 so important. The saving grace of the programme is the numbers ordered which means that consistent ramping up has been possible, a critical feature in allowing the effect of learning to best work

      • Personally, I think you need also to consider the unamortized tooling (about $4 Bn). So, right now Boeing need to recover $31Bn without considering penalties and R&D.

    • It is “normal” for aircraft to lose money until the program matures. The manufacturers (including their suppliers) go through a steep learning curve such that the cash cost to produce aircraft are much higher than their selling cost. As the program matures less time and labour is required, production rates increase on the same fixed cost base and the cost of components declines. Only then does the program starts to make money.

      • But a deferred production cost of $27Bn is not normal. Boeing clearly lost control on production cost. Excessive externalization, excessive discount in order to win market share and various management mistakes gave this near-catastrophic result.

    • The United States accounting methods show a key acceptance for short to long-term debt as a trade for innovation. This is a critical feature of US strength in innovation that sets it apart from its chief competitors, particularly the European Union. (It appears that the Chinese have caught on to this.)

      When discussing competition between the two companies, it should be noted that they operate in vastly different fiscal environments. This advantage to Boeing could almost be called state support, except that it is not, and the accounting practices can be used by any US corporation. Further, Boeing operates in a very powerful capitalistic market – its financial results are under heavy scrutiny from Wall Street investors.

      Those capital markets are a feature of the USA’s single-market, one which has yet to be replicated by the EU on the scale achieved by the US. Those capital markets are important for R&D / innovation while at the same time being extremely detrimental to the necessarily long-term development cycles that occur in aviation – Wall Street is much shorter term focused. So, there’s a trade off which Boeing failed to manage as evidenced by the 787 development plans.

      ###

      Operationally, it’s great to see the 787 maturing. The airplane features significantly different structure and systems architecture to any previous Boeing jet. Boeing early demonstrated the value of the composite structure, repairs and so. I think, the all-electric systems architecture is quite the accomplishment. With the amount of totally new electric systems on the airplane where they previously had vast experience with hydraulic and pneumatic systems, the reliability at 98% seems a fare achievement. This is an understated achievement. (An appropriate benchmark here would have been a comparison with the 777.)

      The A350’s 98% dispatch reliability also seems fair. Technically, Airbus has been extremely conservative with systems – a reflection of which is the aircraft structure itself; the bolt composite body panels. (Again, an appropriate comparison would have been the A330, the second member of the A330/A340 family.)

      • I’m not sure what you mean about “Technically, Airbus has been extremely conservative with systems – a reflection of which is the aircraft structure itself; the bolt composite body panels“.

        For example, many of the developments that were undertaken for the A380, were re-used and improved for the A350 : IMA, AFDX, -double-hydraulic/double-electric (2H/2E) flight-control architecture and the variable frequency electrical generation system philosophy, 5000 psi hydraulic system , and this to name just a few of the innovations brought forward by the A380. Only with the 787 did Boeing introduce similar systems — and I’ve not even mentioned the A320 which revolutionized commercial aviation back in the late 1980s by introducing digital fly-by-wire technology in civil airliners. Featuring a glass cockpit with a unique side-stick controller to fly the aircraft, the A320 set a new standard for safety and efficiency. Every new airliner designed since it entered into service in 1988 has incorporated glass cockpit and fly-by-wire technology.

        As for the composite structures in the A350, I can’t see how they’re supposedly inferior to the “full barrel” concept on the 787. Please do elaborate on why you believe that the large panel assemblies on the A350 are more “conservative” than the assembly technique for the 787.

        As for quarterly capitalism vs. long-term capitalism, here’s an interesting analysis:

        Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

        There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

        https://hbr.org/2011/03/capitalism-for-the-long-term

        Things look very different in the emerging world. When we compared Western multinationals’ rate of investment to that of their developing-market peers, we found the latter had double the investment rate of their Western counterparts. In general, the attitudes toward investment timeframes differ strikingly between the developed and developing world. I will never forget the first meeting I had with Korean President Lee Myung-bak shortly after he took office about five years ago. We were helping him to develop a long-term vision for the country, and I asked him what timeframe he wanted to consider. He answered, “Sixty years.” “There must be a translation issue,” I said. “You mean six years, right?” He answered, “No, 60. I am a little short-term in my thinking.” He went on to say, “We like to think about economic development in terms of generations, and as a leader, I should be judged a hundred years from now on what I was able to do in my time.”

        http://www.cimaglobal.com/Thought-leadership/Tomorrows-Value-lecture-series/2013/The-city-and-capitalism-for-the-long-term/

        • I’m not sure what you mean about “Technically, Airbus has been extremely conservative with systems – a reflection of which is the aircraft structure itself; the bolt composite body panels“.

          What I mean with that conservative comment is that the latest aircraft in the stable more or less sets the standard for the fleet – the A380 introduced many new systems not previously available on Airbus aircraft – which you’ve mentioned. The A350 made few such leaps, choosing rather to improve on A380 systems. This is not to say that Airbus chose to make an inferior product, but rather chose to have “technology earn its way onto the program” as Boeing has done when looking at improving some of their products. That’s conservative. Airbus did so from the A380 level of technology – not the A330/A340 or A320 level. There little such commonality between the 777 and 787 in systems, other than in the FBW.

          Airbus already flew many of the systems relevant to the A350 on the A380 for 10 years, so they have a decade of experience.

          Then regarding the bolt-on panel construction of the A350 versus the 787 the one-piece barrel, note, I again said this was a conservative approach – not inferior – many years of service with both types will answer that question. The Airbus thinking is one of easier maintenance – airplanes seem to be a magnet for airport service vehicles. This is a valid proposition. The Boeing idea should be somewhat lighter – but by how much is the question – and is it worth it? Over time, the 787 structure will get slightly heavier with repair work, but this probably will turn out negligible. Over time traditional aluminium structure will need patch work too. I am interested in how the two approaches pan out.

          Then on the A320 – there’s really three points in your comment: fly-by-wire, [full] glass cockpit, and spring-loaded side-sticks. The first two are relevant to the discussion, the last – side-sticks – is a fundamental design philosophy and ergonomics difference between the two – especially the traditional Airbus execution and implementation. The MC-21 will have active side-sticks – the active implying closer design philosophy to the Boeing 777/787.

          The A320 was the first with [digital] FBW – [Airbus heritage] Concorde led with analog FBW – and, the A320 was the first with full glass cockpit. In terms of the competition, the A320 led the 777 by 7 years, and the 747-400 by about a year, respectively.

          Airbus has thus had experience with digital FBW on the A320, A330/A340, A380 and now the A350, whereas Boeing has had commercial digital FBW experience only on the 777 prior to developing the 787.

          ###

          Thanks so much for your reply, and for those finance bits, those will help with my evolving thinking on that matter.

          • “The MC-21 will have active side-sticks – the active implying closer design philosophy to the Boeing 777/787.”

            I don’t know about the MC-21, but the CSeries has adopted a system philosophy that incorporates the respective advantages of both Airbus and Boeing.

            First the side-stick has built-in soft stops which can be overcome in accordance with the Boeing philosophy. In other words the CSeries is flown like an Airbus inside the soft-stop limits. But it can also be flown like a Boeing if the pilot elects to overcome the soft-stop.

            Also the throttles physically move when the auto-throttle is activated. They don’t move at all on Airbus but they do on Boeing. Bombardier thought that the Boeing philosophy was safer in this particular case. So the CSeries pilots will be able to enjoy all the advantages of flying an Airbus or a Boeing, all in the same airplane.

          • “What I mean with that conservative comment is that the latest aircraft in the stable more or less sets the standard for the fleet – the A380 introduced many new systems not previously available on Airbus aircraft.”

            Ok, I get what you mean. As a further point related to the system commonality between the A380 and the A350 is, of course, that the A350 programme has incurred significant cost savings in systems development over. that of the 787 programme in not having to “start from scratch”.

            As for fuselage panels vs. “full barrels”, we’re still talking about “black metal” adaptations for composites. Hence, neither the 787 and A350 are really fully optimised for carbon. Taking full advantage of carbon means much less use of fasteners (i.e. by at least an order of magnitude) and co-curing not only stringers and skin, but stringers, skin and frames. The problem is that doing all this on a 787-type “full barrel” does not seem to be very practical at all, that is if you want to fully optimise carbon for aircraft manufacturing. According to Airbus, large fuselage panels have an added advantage that their properties can be fully optimised (i.e. lighter) to whether they are side, crown or belly panels. Also, manufacturing large panels generally include easier handling, smaller and less expensive autoclaves (etc.) than what’s the case for a “full barrel”. So, the 787 “full barrel” fuselage sections may look like a dead-end, technologically speaking.

            As for the side-stick, please do note that it was only included in order to exemplify innovations originating with Airbus. In this case, side sticks seems to be “winning” over yokes on all major new platforms, except for those that are developed by Boeing. However, I’ve no desire to discuss the differences in A vs. B, FBW philosophies. 😉

          • When I switch on cruise control in my car the accelerator (“Throttle”) does not move up or down. I don’t have any problem with that!

          • After your last notes on given information would you be willing to reconsider your pronouncement on where _sustainable_ innovation actually happens?
            Good PR is not innovation. Finally good financial PR is the devils work. 😉

            PS: looking into current snooping affairs I’d like to put forward that an unknown amount of presented advances probably is due to involuntary information flow/transfer 😉

      • The United States accounting methods show a key acceptance for short to long-term debt as a trade for innovation. This is a critical feature of US strength in innovation that sets it apart from its chief competitors, particularly the European Union.

        Look how well deferring such costs worked for MDD.

        My point being – I don’t think it’s quite as clearly cut as you try to make out.
        Personally, I think that such deferral is mainly a nice way of making your current quarterly results better than they actually were if you took everything into account. By the time the deferred costs hit, the CEO that caused them may have long gone, and the costs might then impact programmes that need to be financed at that point.
        Although I would stop short of saying that doing it this way or that is a significant advantage for innovation. It’s mainly a different way of doing it and the one common in your own culture is probably going to be the one you feel most comfortable with.

        @OV-099
        Thanks for the links, must check them out – from the quotes, they seem like interesting reading.

  5. “We ran into Qatar Airways’ aircraft acceptance team complete with CEO Akbar”

    Good management involvement 😀

    Al Baker is accepting compromises, but he puts the bar very high.

  6. Bjorn:

    thank you for the well written even toned article. I had not known the software was developed off the A380 and explains a lot (many reports (not all) I had seen on the 787 reliably were alarm setting that were to high or tight tolerance when there was no problem)

    one item that as a technician/mechanic that I continue to be interesting in is the massive changes in the A350 coming up

    http://aviationweek.com/commercial-aviation/airbus-reports-large-charge-a350-program

    Trench 1 of 4 aircraft,
    Trench 2 of 16 aircraft
    Trench 3 that has massive structural changes and component in the whole aircraft structure and wings have been re-designed.

    Both technical execution and production issues as well as (I had a quote of 70% of the structure changes between Trench 2 and 3) but cannot find it would seem to negate the test articles and development aircraft as passed tests for aircraft that have little in common are not relevant.
    It also appears to me they did the first two trench on the fly and scrambling to catch up with what they had created.

    I think the A350 fully endorses Boeings move to Li batteries even though how Boeing approaches it would bring any engineer to tears on approach (or one of the worlds best examples of how not to do something, let alone new tech)

    Of course that reflects how they approached the whole project.

    Long term does the more and all electrical system look to be better than bleed air?

    I work with both in building controls and I far prefer pneumatics for the operating end as they are reliable, low cost and easy to trouble shoot (electronic activation and control was a great step, actuation no).

    Electronics have always have been an awful lot harder (and time consuming) to pin down where the faults are let alone fix , though once they have been they tend to be certain faults and you can often focus in (or just change a particular item) based on the symptom.

    • Re the changes from batch 2 to 3 at MSN021, I think you will find they are less severe then you anticipate. It seems A350 was a bit overstrong out the chute, no structural problems really and Airbus could increase the MTOW by 7t AND at the same time raise the ZFW by 2.7t in WV001 versus the original WV000.

      Raising MTOW is about tanking more fuel which is not a structural issue but more take-off performance ie you have margin since your Vmu and/or rejected take-off tests. Raising ZFW means you have a stronger structure than needed for WV000 as this raises the wingbending loads.

      In addition to these higher weight=loads it seems Airbus can shave off a layer of CFRP here and there ie adjust the structure more than change it, it will ripple changes to other parts as the interface dimensions change dependent on where you take out your strength but it is a gradual change, changing dimensions with a thou here and there, no major changes but adjustments which are reasonably easy to implement and which are certified based on already available test data and additional structural simulations. Re cabin, I did ask that during my media flight to Munich, it seems that AW article overdid it, there has been minor changes in the interior but not major ones for batch 3.

      Re higher costs then anticipated for initial production, I have yet to experience a program I or someone else have been managing where this is not the fact. The $494m was probably for old sins as well as for new and was taken against 2013 books, ie when there were still delays cropping up. In projects delays are equal to cost overruns as you pay all those wages but does not get the results as expected ie you have to make provisions to cater for this mismatch. The fact that there are no new talks of provisions indicate things are going more or less to plan at present.

      • Bjorn,

        thank you, well reasoned and measured response, much appreciated as well as the true in depth technical details.

        as an aside on the financial end.

        Years back I was the mechanical maint department for a financial institution that got into Alaska’s version of the prim mortgage house debacle (which we did not this last time as all of them up here learned!)

        Upshot was they had huge losses on the books that went on for 2 or 3 years and finally they took a huge hit one year and wrote them off in one lump.

        The reasoning was it took the doom and gloom and constant attention required off that and let them get on with their plans (some losses were actually recovered eventually and that was a nice bonus)

        I think Airbus accounting is the right way to do it, take the hit, clear the books and get on with life. It has a huge impact on morale and how the company operates.

      • Hi Bjorn

        Quick question, does that mean that the relatively small changes will shave off the excess 3tns purportedly still on tranche 1 and 2 and that tranche 3 will be at the originally specified weight?

        Thanks

        • It is not so easy to answer that, Airbus likes to consider “their” weight at the Airbus specific Manufacturers Empty Weight, MWE, which they define as aircraft without cabin (they are unique in that).

          We should note that it is all about mass really but lest stay with the faulty weight designation as it is part of the accepted names.

          About 20% of an aircraft’s operational empty weight is from cabin related items and Boeing and others (including operators) acknowledge that by focusing on Manufacturers Empty Weight, MEW, which is operators items from something you can fly with, Operational Empty Weight, ie it is including cabin.

          As always with OEM’s they use these different definitions to confuse the one who asks. On an MWE base they might come close to their original target, on an OEW base not as I understand it.

  7. Meanwhile, a decade has passed since the maiden flight of the A380. 🙂

    • Well, the A350 is really just a single deck version of the A380, featuring larger composite fuselage panels and single piece wing covers instead of the smaller aluminium panels used on the A380. Systems-wise, the A350 is very similar to the A380. Even the forward part of the cockpit section is derived from the A380 and is made out of aluminium. Thus, it’s not too much of a surprise that much of the development work for the A350 went so smoothly, partly due to the know-how and the experiences gained from the A380 programme.

      Interestingly, one could imagine a 2nd generation A380 being three-fifty-ized by using A350-type composite fuselage panels and A350-type composite one-piece wing covers. The centre wing box, wing-body fairing, empennage, wing ribs, wing -leading/-trailing edges etc. would remain largely unmodified. Coupled with folding wing tips and next gen engines, you’d have not only a very competitive aircraft, but one that would be future proofed as well.

  8. So, a 2015 Corvette is just a derivative of a model T?

    While the A380 is not a Model T, the A350 is hugely different structural wise form an A380 and to compare the two structures is starching the bounds of credibility beyond reason.

    Composite structure and build vs aluminum is a huge change.

    • Well, I was primarily emphasising systems as the “common link” between the A350 and the A380. However, please keep in mind that the A350 (and 787) composite fuselage and wing covers/spars are made using the familiar “black metal” design philosophy, where only the stringers are co-cured. The composite frames in the fuselage are mechanically fastened to the composite skin while the composite wing covers are mechnically fastened to the composite spars and to the machined monolithic aluminum wing ribs, which incidentally is the way its’s done on conventional alumiuim fuselages/wings. Just take a look at images of unpainted 787/A350 fuselages/wings and you’ll see that there still is a tremendous amount of fasteners used.

      Everything being done today has a ‘black metal’ design philosophy,” says Oldfield. “A lot of compromises are made in using design rules evolved over decades for metals. To fully unlock the potential of composites, we must move . . . to design concepts optimized for carbon.”

      “To change the design philosophy we have to build up a huge body of evidence and conduct large-scale demonstrations, and do so way in advance of any program or take an enormous risk. That’s the dilemma. Is there enough time before the next program comes along?” If it comes soon, he says, composites content will stay where it is on the Airbus A350 and Boeing 787, around 50%. “If it comes along in the 2020s, there is far greater opportunity for more radical concepts.

      http://aviationweek.com/awin/composites-metals-face-next-generation-single-aisle

  9. Yes I know how many fasteners are used

    Systems commonality yes, structure no. You have to design to two totally different standards when using completely different materials even if they appear similar.

    Having followed aircraft seriously since about 1955 or so, I have a pretty good idea of how they are made.

    • Yes, it’s obviously a different manufacturing process. Metallic parts are generally produced close to the specifications needed but not spot-on, with machining providing the final touches to get within the engineering tolerances. In contrast, composite parts are right-sized from the start, so the most precise engineering has to first correctly make the tooling in order to produce right-sized parts, rather than into making the parts themselves. However, this doesn’t change the fact that both the 787 and the A350 were designed using black metal design philosophies; designs that are not really optimised for carbon.

  10. Bjorn: “The fact that Boeing wrestled control in an uncompromising fashion on a project as de-railed as 787 is to their credit, it shows what a strong company Boeing is.”

    The way Boeing has managed this crisis is indeed remarkable. They have silenced many critics, including myself.

    Bjorn: “What I have issue with is top managements way of setting the scene for a project making such advancements on all fronts, it was very naive and unrealistic to ask it in addition to complete in record time and on a record low budget, they never gave the BCA people a chance.
    …The way the project was launched still casts its shadows four years after first delivery. The Dreamliner program was launched on wrong industrial and economical premises and with a too risky project setup. It is still work in progress to master the effects of this bad start to the project.”

    That was the impression I already had when the 787 was launched. I was thinking the exact same thing more than ten years ago, long before any metal, or CFRP, had been cut. As I have said before in various posts I was shaking my head in disbelief when reading the initial reports in Aviation Week circa 2004/2005. In that context the name ‘Dreamliner’ is quite fitting for an unrealistic enterprise that was somewhat disconnected from reality. It appeared to me at the time as if the whole programme had been conceived by computer whiz kids.

    Bjorn: “…the reliability has not climbed as fast as Boeing would have liked in the last year.”

    I am not surprise to hear this but I would like to know where the problems are and where they are coming from: Software? Mechanical? Electrical? Production? Quality?

    Bjorn: “Only through program accounting is Boeing able to report profits on the program. Under US accounting rules, if GAAP accounting were taken rather than program accounting, Boeing would be reporting losses on the 787 for many years to come.”

    That requires further explanation. I would like to know what the differences are between American practices and GAAP’s.

    • Hi Normand, first the reliability piece:
      As stated in the article I believe that the major contribution to a slower improvement than what Boeing would have liked comes from the aircraft’s systems side, i.e. the combination of software and hardware and how that matures and it includes the learning curves of the operators service departments to handle generated warnings or actual faults. The A380 which also broke new ground system wise has had the same experience. A350 rides piggyback on experience gained for A380.

      Re program accounting
      I had an explanation of that in a quarterly earnings article from last summer, here it is:
      Boeing practices program accounting for their large aircraft programs. In short this means that the total anticipated costs of the project is calculated (development-, tooling-, production- and warranty costs) and spread over the accounting block (the number of aircraft they they have good visibility over that they will surely sell). The average cost per unit in this accounting block is then used as cost of goods sold, revenue for goods sold is actual net revenue at delivery.

      This means that the high up-front costs for the 787 program is deferred and will be consumed little by little as the accounting block of 1300 units is worked through. In contrast the high initial costs of the A380 is already shown in the earnings of Airbus over the last years, as of 2015 when the production costs shall equal the net price of an A380 (according to Airbus) any gains in paid price over actual production and warranty cost will add to the bottom line of Airbus.

      It is important to understand these differences when one looks at Boeing’s and Airbus earnings. It can seem that Boeing is gaining a first look advantage when the costs of large programs like the 787 are spread out outside the year of the cost being incurred but late in a program it works the other way, it lowers profits when a direct accounting method would have shown higher profits. In essence it is just two different way to look at costs and how these shall be best accounted for in large projects.

      I shall add to that that the present $27bn does not include the full R&D cost of the 787, a large chunk was written off when the first prototypes were declared unfit for sale. I did wrongly assume that the development cost for 787-10 would not be deferred in an earlier answer, it will, accrued cost so far for developing -10 is part of the $27bn.

      • Thank you very much Bjorn. Like your article your answer is very informative. It reminds me that when Bombardier went through its first restructuring about 13 years ago they had to change their accounting practices to satisfy the concerns of investors. If I understood well what happened then they started to charge R&D on a quarterly basis rather than deferring the costs like they had been doing until then. At the time I thought this was the American way of doing business, but it now appears to be the GAAT’s way, or the Airbus’s way, of doing business. That is why I was so surprised when I first herd of the 787 deferred costs a few years ago.

        I am also extremely surprised that the 787 programme will break-even much sooner than I had anticipated, based on Javier’s projections. Of course the deferred costs will still be there, but it should start to shrink soon. This is very good news.

        • The problem is that this enormous amount in deferred costs will be hanging over their heads from when they reach “break-even” on a unit-cost basis to when they have delivered 1300 units (i.e. current accounting block). However, the accounting block is not the same as break even on a program basis as you’ve got to add R&D costs to the picture as well. Hence, programme break-even may not occur until Boeing has delivered more than 2000 units.

          In contrast, the A350 should reach the point of break-even on a programme basis by the early 2020s. So, post 2020 Boeing has to go up against two fully amortized Airbus programmes with the 787 (i.e. the A330neo and the A350-900). That’s not going to be a trivial undertaking, sales-wise, IMJ.

          • My understanding is that R&D for the 787 is already amortized and the current deferred costs are associated strictly with manufacturing and tooling. If true, this would explain my initial puzzlement when I learned that Boeing had incurred deferred costs on the 787 programme.

            Whatever the case might be, it looks like we have to take into consideration three different cost categories: R&D, manufacturing and tooling. I am not absolutely sure, but I think R&D cannot be deferred whereas manufacturing and tooling can.

          • Bjorn,

            Airbus claimed that the A350 will be profitable by 2019 but it is no clear if it is on a production basis or on a global program basis.

            http://ca.reuters.com/article/businessNews/idCAKBN0K10HC20141223

            Right now, the A350-1000 is still in development and the production rate of the A350-900 is relatively low. Production will ramp up but it will take some times (2018)

            http://www.flightglobal.com/news/articles/airbus-begins-a350-ramp-up-towards-10-a-month-407410/

            I personally don’t believe that the program will break-even by 2019 considering the current low production rate and the total development cost. With the current production rate and planned ramp-up, Airbus will only deliver about 400-450 aircraft by 2019. So considering total development cost, early production cost, delays and penalties, it seems not possible to break-even on the whole program.

            One other possibility is the A350 will generate positive cash flow in 2019 (A350-900 will by profitable before 2019 but the A350-1000 will take more times to be profitable)

            What do you think about this? Do you really believe that the A350 will be profitable on a program basis by 2019?

          • Bregier means cash positive as this is the Airbus way of viewing things. Cost that appears are amortized immediately and don’t carry forward to be paid later. Therefore when the program earns more than the instantaneous cost it generates it is profitable on a Airbus bottom line basis. Profitable on a total program basis is something different, Airbus don’t discuss that normally.

          • Thanks,

            It was also my first interpretation. This issue was discussed on a French forum and here everyone are convinced that the A350 will break-even on a whole program basis in 2019…

        • I am too surprised by the indication that 787-8 might be cash flow positive in 2015 already. I’m still thinking over it. They’re speaking in a conf call thus everything said should rather be factual, though with the safe harbor on forward looking statements you never know :-S.
          E.g. I found very discomforting the exchange Dominic Gates had on the tanker, when McNerney tells him that he doesn’t know where GAO takes figures from that GAO attributes to Boeing… (transcript http://boeing.q4web.com/files/doc_transcripts/1Q15-Earnings-Transcript.pdf) (further clarification from Dominic https://twitter.com/dominicgates/status/593117179295371266)

          Finally, on your recalling Bombardier’s change of accounting practices 13 years ago: I was too young then to follow that closely, but from what I’ve read the same change took place within Boeing around the time of the merger with McD (http://www.bloomberg.com/bw/stories/2002-05-19/boeings-secret), not sure whether influenced by it (“Boeing vs. Airbus” John Newhouse) and that program accounting proved wrong on the MD-11 and forced McD to change at the last minute (http://articles.latimes.com/1996-01-20/business/fi-26819_1_md-11), too late, though.

          • Boeing says that the 787-8 will be cash flow positive by the end of the year. But it remains to be seen if this is going to materialize. It could be part of their strategy to quiet down anxious Wall Street analysts. I was already quite surprised by your own projections which were bringing profitability much earlier than I had myself anticipated. I am no expert in these matters but it has been obvious for everyone that the 787 was going to struggle for a very long time. But Boeing has already surprised me once on the 787 by making the battery problem go away like it nothing had happened. That is itself a miracle. So another one remains possible…

            While reading the Business Week article I asked myself the following question: Is it possible that Boeing could have recently attempted, or intend pretty soon, to change the number of aircraft in the accounting block from 1300 to say 1500, or more? Of course Boeing would only do this if they expect to sell many more aircraft. Which would be very easy to do if the A330neo was not in the way…

            By the way I have read that John Newhouse book about four years ago. I would recommend it to anyone interested in the recent history of Boeing. It remains today a very lucid assessment of the Boeing heritage and what has become of it. In this book, which was written some time before 2007, we can already anticipate the problems that the Dreamliner would eventually have to face.

      • Björn: Boeing practices program accounting for their large aircraft programs. In short this means that the total anticipated costs of the project is calculated (development-, tooling-, production- and warranty costs) and spread over the accounting block (the number of aircraft they they have good visibility over that they will surely sell).

        In Stephen Trimble’s table (in the link below)*, deferred costs include production, unamortised tooling and “other costs”. Hence, deferred costs does not seem to include R&D costs which should be well over $10 billion.**

        I’m also not sure how Boeing is going to “break-even” this year. If you look at the last 4 quarters when production jumped to 30+ per quarter, the loss per unit has only decreased from $37 million to $30 million.

        * http://www.flightglobal.com/news/articles/boeing-787-unit-loss-declines-but-deferred-costs-rise-411502/

        Boeing will not reveal design and development costs of the 7E7, but analysts have estimated the total could range from $7 billion to $10 billion.

        ** http://www.seattlepi.com/business/article/Sharing-the-risk-for-7E7-1121420.php

        • Flightglobal: “Actual losses on each aircraft delivered so far are added to the programme’s deferred production cost. Boeing also has a separate line item for unamortised tooling and other costs.”

          They talk about ‘production cost’ and ‘tooling and other costs’, but not a word about R&D. This basically refers to what I am saying in my earlier post below.

          seattlepi: “It is believed that the development of Boeing’s last all-new jetliner, the 777, cost the company about $7 billion. Boeing has never disclosed the amount. Bair said the design, development and production costs of the 7E7 will be “significantly less” than for the 777.”

          This kind of statement was laughable at the time. Today it’s beyond stupid.

          seattlepi: “Airbus wanted these Japanese companies to take an equity stake in its A380. It didn’t happen. Boeing made it clear to the Japanese companies that they could have only one partner — Boeing.”

          I didn’t know that one.

          seattlepi: “At the time, McDonnell Douglas was struggling and we were searching to find a way to launch a new airplane despite the fact that we did not have the financial depth we had had at other points in our history,” said Pat McKenna, director of the Boeing 717 program in Long Beach, Calif.”

          Boeing could find itself again in that situation if the world economy was to deteriorate.

          seattlepi: “Around the same time, airplane makers Bombardier and Embraer were pioneering the risk-sharing approach with their jets.”

          Bombardier was the first to adopt that practice when it launched its Global Express. Embraer followed suit later on with the ERJ 170/190.

          seattlepi: “But if it can persuade a select group of partners and suppliers to invest up front in the 7E7 and come along for the ride, it will help Boeing make the critical business case to its board for a plane that industry experts and analysts agree the company must go forward with if it is to regain the initiative over Airbus.”

          I which the board had taken a similar decision in favour of the NSA shortly after Airbus launched the A320neo. Well, it didn’t and Boeing lost the initiative.

          • http://lmgtfy.com/?q=R%26D+and+forward+pricing

            🙂

            First line: Down in the Dumps: Administration of the Unfair Trade Laws

            A similar, though more complex, problem exists in the treatment of research and development expenses. Although these clearly need to be included in per unit costs, the effect of these costs on price is another matter. Firms with heavy R&D expenses must, of course, set prices in a manner that will recover those expenses. But the expenses are recovered over time, often over a prolonged period of time. For example, the Boeing Aircraft Corporation will measure its R&D recovery period in decades rather than months or years. Such firms will design forward pricing policies to recover R&D expenses over time; forward pricing will have little connection with the costs constructed by using normal accounting standards. Given that R&D is a continuing process during which products are upgraded from time to time, it is highly likely that the expenses of many individual R&D projects are never recovered. This is also true for firms whose pricing practices are consistent with the norms for their industry, that is, for firms that price fairly.

            Forward pricing is particularly important in the field of high technology, where products are often introduced at prices that are below average variable costs. The objective is to gain consumer acceptance so that production volumes can be increased and per unit costs lowered. Over time, both costs and prices will fall. But the costs will fall more rapidly, with the result that prices will eventually be above per unit costs, and producers will then be able to recover their full operating costs, capital costs, R&D costs, and a reasonable profit. As long as forward pricing is a normal pricing policy of an industry (practiced by US firm as well as foreign firms), it should not be considered unfair simply because it departs from the normal method of constructing value.

      • Hi Bjorn

        So we are cutting to the core of the issue. If I understand you correctly you are saying that Boeing alone has total programme costs of in excess of $36bn+ and counting.

        Another way of looking it is to say that Boeing has incurred $40bn on b787, b747-8 programmes, a similar sum or more than Airbus on a380 and a350 programmes (I appreciate there is still red ink on both programmes for Airbus).

        I suspect that Airbus will gain a greater overall return, at least the a380 still lives on with some chance of generating a return per unit even if the initial programme costs are sunk.

        The accounting treatment suggests desperation aka Douglas in the 60s/70s. Deferring costs in such a manner always augers no good in future years

        • Bob,

          I guess you are adding all the deferred costs that are in Boeing’s balance sheet.

          I was not actively studying Boeing at the time when program accounting was introduced or heavily debated, I thought it was with the McDonell-Douglas merger but now understand it was much earlier. I know there is much written about it, just have’t read it all. It is an accepted accounting practice with its plus and minuses. 737 and 777 are highly profitable programs, any program accounting that remains on them would lower Boeing’s present profits (haven’t checked it there is) so it works both ways.

          A380 has been reducing Airbus profits since the program started, it will contribute to them from next year according to Airbus.

          • Hi Bjorn

            I have the misfortune of originally training as an accountant and as such have learnt more than I care about accounting conventions and standards. In short we should be consider prudence and matching. Prudence would suggest that we do not overstate income or understate cost, in this situation it would suggest writing off any R&D cost and reflect the current production cost in the current accounting period. The matching concept would suggest that, as you suggested we match the costs to revenues and in this case we take account of the learning curve to reflect the expected reduction of cost over the programme life.

            All this is fine but in essence a company with strong financials would adopt a prudent approach by writing off more and taking actual production costs rather than matching. Further when we look at the significant on costs incurred on early b787s it is highly debatable whether the considerable rework is a normal production cost at all. If I were looking to invest I would prefer a prudent treatment of cost than the hope that excessive costs are rolled many years forward and will be offset by the learning curve. This lifecycle costing is risky. Note the learning curve effect is powerful but any disruption to production (supply issues, reduction in volume etc etc) will stop the effect or put it into reverse. In that situation I assume that Boeing then incur substantial write-offs. I think that Going is playing a risky game indeed

          • In response to your point regarding Douglas/Mcd D, as I understand it the aggressive accounting treatment adopted in the latter years of Douglas led it to a position where the poor cash/profit position was masked and this is what subsequently forced it into a shotgun marriage with McDonnell out of necessity rather than choice. Not the sole reason but a major factor nontheless

      • “This means that the high up-front costs for the 787 program is deferred and will be consumed little by …”

        My impression was that the (high) up front cost of manufactured items increases _inventory_ value.
        Largish loss is incured each time an item leaves inventory and is sold ( for a significantly lower amount of cash ).
        One reason keeping the terrible teens in limbo is good for the books.

        What I think is problematic in project accounting ( but also a range of things that are handled differently in GAAP versus IFRS ) is that a present “real” state is overlayed/hidden by projections into the future ( potentially only reflections of managements highflying dreams )

        Thus reporting under these standards does not show anything real. Conservative reporting ( IFRS ) already allows some leeway but with GAAP and project accounting things can really go into the pink clouds.

  11. @ Jacques Xing

    What Bregier was referring to in the Reuters article is what the Americans call ‘cash-flow positive’. But the Europeans have different accounting practices which are derived from the GAAT’s standards. So when the A350 becomes cash-flow positive, say in 2019 or 2020, it will be permanently positive and this will likely reflect the incurred costs for the entire programme. That’s because the R&D, production costs and tooling costs are all accounted for on a quarterly basis without any long-term deferred costs. That’s my current understanding anyway.

    • Thanks.

      Actually I have the same understanding but I want to know other opinions. Currently, the project is still cash negative because of the A350-1000 development cost and because it is more expansive to manufacture the A350-900 than to sell it.

      The A350-900 alone will be probably cash-flow positive before 2019-2020 but the overall program will still be cash-negative because of the A350-1000. And finally, in 2019-2020, the overall program will be cash-flow positive. Afterward, the program will generate significantly cash-flow and we can expect a break-even for the whole program by about 2025.

      Since Airbus doesn’t practice program accounting, we can expect that Airbus will publish important profit by 2019 and onward.

  12. I think that airbus should never do the a350 to tackle the 777 family because and a340-600 enhanced could the job. If you add a genx or trent 1000 plus some aerodynamic changes and more light aluminium alloys they could tackle the 777-300ER really well

    • I like the idea, perhaps we could look at finding the tooling for the A300 or even the VC10 and just fly on the engines to make the difference. What about the Caravelle too?…….. I jest 🙂

      • That can only work for basic airframes that are aerodynamically and structurally competitive and that allow the full scope of FBW twiddling. (i.e. potentially valid for the A330 ( and silently for A340-200,300 and probably -600 too ).
        A300 would not make sense, same for A310 ( rather modern aero but no “real” FBW).
        767,757 are out due to lack of potential.

    • Not true. Of the top 15 top 777 operators, only 2 have more 350’s than 777’s and 787’s in their fleet and on order (QR and JL) What makes QR special is that they have never operated the 777 until taking delivery of the 77W and they’re not replacing them anytime soon so the real number is 1. I used the 787 because some carriers are replacing their 777 fleets with a mix of A350’s. 787’s and 77W’s, 779’s and 778’s. The other 5 777 acrriers worth mentioning are BR who plans to initiate the first of its 3 phase fleet refresh/Replacement. the 2nd phase will include the ordering of the 779 in an undefined amount and at least 10 787-10’s but n mention of the A350 after they made the decision to go with the 787-10.

      What also stands out to me is that with SQ standing on 70 A350’s, they ordered 30 781’s, more than 42% of their A359 total. If the rumors of them ordering the 779 ever pan out that’ll put pressure on future A380 and A35J orders from SQ.

      Then there’s BA who have 18 A35J’s and another 34 787’s on the way between the – 9 and the -10. It’s almost inevitable that the 779 will make it’s way into the fleet an here’s how. They have 48 744’s with 12 A380’s (9 on property). Since the A380 can effectively replace the 744 on a ratio of 2:1, that leaves 24. Say that a quarter of the A35J’s (4) are used in the 744 replacement. That leaves 20. Even if they are not going for a 1:1 replacement, the 779 will eventually find its place in the BA fleet with at least 10 frames.

  13. From THINK-DASH:

    Boeing practices program accounting for their large aircraft programs. In short this means that the total anticipated costs of the project is calculated (development, tooling, production and warranty costs) and spread over the accounting block (the number of aircraft they plan to sell). The average cost per unit in this accounting block is then used as cost of goods sold, revenue for goods sold is actual net revenue at delivery. This means that the high up-front costs for the 787 program is deferred and will be consumed little by little as the accounting block of 1300 units is worked through.

    In contrast the high initial costs of the A380 is already shown in the earnings of Airbus over the last years, as of 2015 when the production costs shall equal the net price of an A380 (according to Airbus) any gains in paid price over actual production and warranty cost will add to the bottom line of Airbus.

    It is important to understand these differences when one looks at Boeing’s and Airbus earnings. It can seem that Boeing is gaining a first look advantage when the costs of large programs like the 787 are spread out outside the year of the cost being incurred but late in a program it works the other way, it lowers profits when a direct accounting method would have shown higher profits. In essence it is just two different way to look at costs and how these shall be best accounted for in large projects.

    http://www.think-dash.com/2014/08/half-time-2014-for-boeing-and-airbus.html

    The above article leaves one issue open. It clearly says that Boeing defer development costs (R&D). Personally I was under the impression that R&D was already amortized on the 787, but it’s never bean clear, really.

    On the other hand, when discussing Airbus accounting practices it does not specify, as it did for Boeing, that the R&D has already been accounted for on a quarterly basis, like production is. Is it an oversight? or does it mean Airbus defer R&D?

    My own (uninformed) answer to this would be that Airbus probably spread R&D costs simultaneously over several programmes and includes them in their quarterly reports. But that is only a guess, for I don’t really know. However, if this is what’s going on it makes it very difficult, perhaps purposefully, to asses INDIVIDUAL overall programme profitability, regardless of cash flow considerations.

    It is one thing to say that a programme is cash flow positive, and an entirely different one to say that it is profitable. Boeing and Airbus are willing to discuss when one of their programme will be cash flow positive, but they will never reveal if the overall programme is going to be profitable or not. It’s a highly guarded secret.

    • Normand,

      copying is the ultimate flattery, THINK-DASH has taken this text word by word from this article by me, including my assumption at the time that R&D was included:

      https://leehamnews.com/2014/08/07/half-time-2014-for-boeing-and-airbus/

      It is more and more clear that R&D is not included, most information says it is “Tooling, Production and Warranty costs”.

      R&D is then taken as running cost in the quarterly P/L like Airbus does.

      • “It is more and more clear that R&D is not included.” Yes that’s what I think more than ever. I just don’t know if they do this for technical reasons or because they don’t want us to know if a particular programme is going to be profitable or not. Or both.

        • I may have found the answer to my question: “The uncertainty with respect to timing and amount of future benefits has often led accounting bodies to prefer that firms expense all research and development costs as they are incurred.”

          That makes sense for R&D. Production cost is a lot easier to evaluate. They do it in circumscribed blocks of aircraft, whereas R&D is a lot more diffuse.

          I also found this: “US GAAP mandates full expensing of R&D.”

          Both citations were taken from the following technical paper:

          “A descriptive analysis of the effects of divergent methods of accounting for R&D and production costs: The case of the international aerospace industry” by Paul André and Denis Cormier.

          The fact that this paper originates from Canada and first appeared in French in a professional accounting journal dated May 2002, strongly suggests that it was inspired by the then undergoing restructuring at Bombardier, which led the company to adopt new accounting practices in order to incorporate R&D costs on a quarterly basis. What I recall from that period is that BBD was pressured by investors to bring its R&D accounting practices in line with the North American aerospace industry, i.e Boeing.

          • That’s my understanding as well. In the US, R&D apparently must be booked as an operating expense and not as a capital expense that can be amortized over many years. However, the question is what exactly is R&D? As sowerbob indicates up-thread, it may look as if the considerable rework required on early 787s should be counted as R&D costs and not as production costs – and since production costs can be deferred it may be tempting to book not-planned-for R&D as “production costs”. The fact of the matter is that when Boeing launched the 787 it was supposed to EIS just 4 years after the official launch, and when reality caught up with the programme, Boeing was seemingly running a R&D and production programme simultaneously for an extended time period.

          • How is R&D expenses for risk sharing partners handled on the Boeing side in this context?

            is R&D cost separately invoiced or is this handled as markup on delivered parts ( value goes into inventory ) and early advances on those deliveries?

            IMU the 787 project was “designed” to have minimal direct Boeing upfront expenditure.
            ( And lots of subsidies that Boeing could easily “disown” )

      • Björn: R&D is then taken as running cost in the quarterly P/L like Airbus does.

        You seem to be forgetting that Reimbursable Launch Investment (RLI) constitutes a significant part of Airbus’ R&D expenses. 😉

        Member State governments advance money to Airbus up to the limit agreed with the US, namely 33% of the total development costs of a new aircraft model.

        This advance is then repaid by means of a levy on the sale of each aircraft.

        The levy is set so that, once an agreed sales target is reached, the whole amount should be repaid with a rate of return, i.e. with interest, over a repayment period of 17 years (i.e. 11-
        12 years from the first delivery).

        The sales target is based on a conservative forecast of future sales, which is established when the investment is made.

        The interest rate reflects the investing government’s objective to earn a good return on its money. It is always in excess of the government’s borrowing rate (i.e. typically 6-8% nominal) and may be considerably higher, depending, for instance, on the anticipated commercial success of the project and on the Member State (Some Member States insist on a higher return).

        Once the actual sales exceed the target, as has happened, investing governments continue to collect “royalties” or “upside” on the additional sales, which will further increase their rate of return.

        http://trade.ec.europa.eu/doclib/docs/2010/september/tradoc_146503.pdf

        • Good point, missed that. Need consider that going forward, thanks.

        • I would still like to know what the secret conservative sales target for Airbus on the A380 is?

          A350 as well. then you can get a fully independent assessment.

          I also believe the US rescinded aforementioned agreement?

  14. @ OV-099

    “In the US, R&D apparently must be booked as an operating expense and not as a capital expense that can be amortized over many years.” Are you suggesting here that this is not the case in Europe?

    My current understanding is that the way productions costs are accounted for will vary drastically depending on where the company is based. But for R&D I think that today they all more or less account for it as the costs are incurred. Now, the modalities might vary from one company to another, but the basic principle of not deferring R&D costs is in my view universally accepted as the right thing to do. Otherwise stockholders would have difficulty to assess their position. Because R&D, like dark matter, permeates the Universe and yet no one can identify it. 😉

    • What about RLI for Airbus, RR etc. and where up to one third of development costs have been financed by loans that must be re-payed with interests, and within 17 years. That’s not cash paying for R&D.

      • Pratt & Whitney Canada (P&WC) is year after year the largest beneficiary of government R&D loans in Canada, similar to RLI in Europe. And I assume that P&WC is following the US GATT accounting rules, like I also assume Bombardier does as well. BBD itself has been a long time RLI beneficiary.

        What’s interesting about Canada is that its aerospace industry benefits from RLI while presumably adhering to the US GATT rules at the same time. In the US a large proportion of aerospace R&D comes directly (B-2), or indirectly (787), from the military.

  15. Okay, accounting standards are broadly similar throughout the developed world and have converged considerably over recent years with US GAAP and IASs becoming consistent with each other. Here are the basic treatments in the UK

    General research – expense as it is unclear whether research is specific in leading to a revenue generating product or service

    Specific research and development – if you can identify the cost in direct relation to a product or service then that cost may either be expensed (prudent) or be amortised (matched to future revenues)

    Production costs – May be expensed as incurred(prudent) or if we have specific issues as identified in the aircraft industry (long life cycle, learning curve effect) then you may adopt a lifecycle costing approach where broadly you estimate the total life costs and spread them over the total life volumes.

    As I understand it (but I have not checked) Boeing has been quite aggressive in matching costs particularly with regard to excess production costs incurred early in the process. Airbus is a lot more conservative.

    This will simply allow Boeing to post higher profits today but will depress profits into the future whilst Airbus has booked the pain early.

    I guess Boeing is under far more pressure to achieve quarterly earnings than Airbus due fundamentally to the short-termist nature of many analysts in the US. Boeing have been bitten before by this re hostile corporate raiders and feel vulnerable in a manner Airbus do not. It underpins too much of their decision making and harms the company as a result

  16. It’s normal loosing money introducing a new airplane, especially there’s a big negative impact on cash flow during production ramp up.

    Boeing didn’t expect this kind of trouble causing massive costs, though they’ve accounted for some problems.

    Beside all that issues, Boeing will earn money with the 787 program – 1100+ orders will be enough to compensate development cost for sure.
    It depends a little on accounting rules when break even is reached, but don’t forget the benefits created!
    Boeing had not been in a new development since 777, all they did was overhauling 747 and 737.
    So like Airbus did with A380 they gained insights and knowledge, developed a lot of new technologies and materials.
    Boeing will benefit from this in all projects like B777x, etc.

    The only question is, if the negative effect on cash situation (from B787) will hinder Boeing to start new projects – e.g. a 757 successor.

  17. We have heard that before but the KC46 program is not doing well.

    And if there was a pretty straight forward upgrade including experience building a 767 tank for Italy and Japan that would be it.

    Getting someone to build your landing gear on the 777x that has never done a gear before just because you are trying to ream a solid supplier does not bode well.

    And GE is doing so well on LEAP X efficiency so ….

  18. Pingback: » Daily Aviation Brief – 28/04/2015

  19. I’m looking at Boeing’s troubles in a very broad industry context — see:

    •KC46, 787 Dreamliner,
    •A380, A400M,
    •CSeries, Learjet 85,
    •F-35 Lightning,
    etc., etc., and so on.

    Look at that list — commercial and defense majors looking at the same result.

    Look at the massive gulf between the relatively successful EIS’s of the Boeing 777-300ER and Airbus A350-900 — and the massive success of the -300ER, in particular, regarding performance, reliability, and program execution. This is clearly not normal in present day aerospace manufacturing (the last 15 years), so what really is going on? What’s the problem? Has the 777-300ER and A350-900 had such stellar histories because the overall 777 program and the A380, respectively, laid down the necessary foundations?

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