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.
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.
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.
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 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.
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.
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.
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.