Feb. 29, 2016, (c) Leeham Co.: It was inevitable: a class action lawsuit was filed last week against The Boeing Co., its top officers and directors over the investigation by the US Securities and Exchange Commission of the company’s program accounting.
The lawsuit alleges “among other things, that defendants issued materially false and misleading statements and/or failed to disclose that: (i) Boeing’s use of program accounting for its 787 Dreamliner and/or 747 jumbo aircrafts relied on inflated sales forecasts; (ii) Boeing’s use of program accounting for its 787 Dreamliner and/or 747 jumbo aircrafts relied on understated estimates of production costs; and (iii) as a result of the foregoing, Boeing’s public statements were materially false and misleading….”
I’m no fan of program accounting and never have been. I think it artificially inflates profits, or in extreme cases, reverses losses into profits. It misleads all but the most sophisticated of shareholders and analysts following the company go along with this smoke-and-mirrors.
But the Financial Accounting Standards Board (FASB) approves and so do the independent accountants.
Boeing has been using program accounting “forever,” and it’s never made any secret about this. In recent years it also has disclosed what the financial results would be without program accounting.
With respect to the specific allegations above, as one who has followed Boeing closely for decades and who is hardly known as being soft on the company, I think the allegations are without much merit–if any at all.
I don’t think Boeing had the slightest inkling what a disaster the 787 program would be, nor the knock-on effect to the 747-8 program. If executives did, then there would be merit to a lawsuit. But what executive in his right mind would approve a program that would rack up $30bn in cost overruns?
The 787 program was a series of bad, bad and stupid management decisions and executions. There is just no getting around this.
Did the management miscalculate? This is clearly the case. But they did first set the program accounting block at 1,100–far higher than any previously. Later, this was increased to 1,300. I hear it will likely go to 1,600. There have been 1,143 orders to date. The airplane went into service in late 2011. We’re five years into what is likely to be at least a 25 year life (if not longer), leaving 20 years for more sales.
Will Boeing sell 457 more 787s to hit 1,600, a figure that should recover all ~$30bn of deferred production? I don’t see why not, and then some. That’s only an average of 23 787 sales per year. Going to 1,600 in the accounting block should avoid any forward loss charges.
When Boeing launched the 748, I thought this was a good move. Airbus was then in the morass of the A380 wiring debacle that delayed the jet for about two years. I thought Boeing had a window of opportunity to make some inroads into sales. But because of the 787 mess, the 748 suffered as engineers that were supposed to be released from the 787 to the 748 program were retained by the former. Engineers were diverted from the 748 to the 787 and some key engineering work was outsourced, with sorry results.
What was supposed to be a straight-forward re-engining of the iconic airplane evolved into a new wing, some new systems and what former Boeing Co. CFO James Bell ultimately described as an 80% new airplane.
Flutter and other issues emerged. The airplane ran 18 months late and missed its window to steal orders from the A380.
Optimistic forecasts? Boeing has always been far more conservative about the 20 year market for the Very Large Aircraft than has Airbus. Today the forecast is less than half of Airbus’. A large part of the forecast, when the 748 was launched, revolved around cargo demand. But the global air freight demand plunged and never has recovered. Boeing today stubbornly still sees a demand for the 748 and 748F (at least publicly), but changing market conditions make even this lowered forecast unlikely. Still, when the 748 was launched, I didn’t see anything out of kilter.
Another aspect of these two airplanes, the forecasts and financial liabilities related to them, is this: for many years, Boeing has included in its 10Q and 10K SEC filings warnings that “material” forward losses for each program could emerge based on a number of risk factors, including lower than expected demand. Former CEO Jim McNerney was clearly loath to declare forward losses, but he did on the 748. So has his successor, Dennis Muilenburg. I think Muilenburg should as well on the 787, to clean up the books.
Boeing may be guilty of wishful thinking, but I don’t think it’s guilty of the allegations set forth above.