By Bjorn Fehrm
August 03, 2016, ©. Leeham Co: Boeing released its 2Q 2016 results last week. This is always a good opportunity to look at information regarding its 787 Dreamliner project. Last week’s call did not disappoint even if the information leaves plenty of room for interpretation.
The first information was the production cost of the fourth and fifth Dreamliner that were produced. According to the stock market filing (10-Q), these cost over $500m per unit. The further information we got was the production cost for the 38 Dreamliners that were produced in the quarter and the relationship of the 787-8 costs to the 787-9.
As Boeing uses program accounting, these normally very hush-hush figures have to be shared with the public. Not so with other aircraft OEMs that use unit accounting for production.
The first piece of hard production information that was given was the value at which the Dreamliner prototypes number four and five stood in the Boeing production inventory, i.e., in the program accounting block.
When an aircraft is produced to be sold at Boeing and other OEMs, they will book the production cost of the aircraft as part of inventory. When the sale gets realized and the customer accepts the aircraft, the inventory value is then transferred to Cost Of Goods Sold, COGS.
In the case of Boeing, the value at which the aircraft gets put in the inventory is the actual production cost. The COGS value that gets counted against the price that the customers pays is not that value, it is the average production cost value over the accounting block for the aircraft variant.
This is the key benefit of program accounting, early production has lower COGS and later production is made more expensive than if the true values were used. Unit accounting books the actual production costs as COGS when the aircraft is accepted by the customer.
Now to the value of those early aircraft. Learning curve theory says that the cost of producing the first aircraft in a serial production run is four to five times more than for aircraft number 400, which is the normal production number when one assumes that production costs should have settled down.
The value of these aircraft in the deferred production cost were $1,011m. This shows that the early production costs of the 787 Dreamliner were almost double than what it should have been. At a normal production run, these two aircraft should have cost around $550m to produce.
It can also be interpreted another way. The relief on the very high deferred production cost of $28,684m before the operation (to be amortized over the remaining 870 aircraft in the accounting block of 1,300) meant that each aircraft should amortize $33m on average. To that shall be added amortization of $4.3m in tooling and other costs, so in total $37.3m per aircraft.
The write-down of the $28.7b accounting block by $1bn with only a reduction from 870 to 868 aircraft to divide this over is of course welcome, especially as the $37.3m amortization per aircraft is pretty stiff. Now these 868 aircraft only have to amortize $36.1m per copy.
It’s anyone’s interpretation what the real reasons were for taking Dreamliner number four and five out of the accounting block. Un-sellable aircraft when refurbished or a convenient way to reduce the pressure in the accounting block? Either way, it was prudent to reduce the pressure in the 787 accounting block, even if it was only by a billion.
Before the operations with the prototypes, the deferred production costs increased by $23m in the quarter. This means the production costs of the 787 were $0.6m more than the average COGS variant value for the quarter.
This is in line with the first program accounting positive aircraft being produced in 3Q2016, something that Boeing has forecasted since 3Q last year.