Pontifications: Getting there from here on Boeing’s deferred production costs

Hamilton ATR

By Scott Hamilton

Aug. 22, 2016, © Leeham Co.: Boeing’s deferred production and tooling costs for the 787 program continue to be a focus-item by some

Boeing 787-9

Boeing 787-9. Photo: Boeing.

aerospace analysts, media and observers: will the company be able to recover these costs, or will it inevitably have to take a write down.

Some Wall Street aerospace analysts believe Boeing can’t recover all the costs.

For example, Ron Epstein of Bank of America Merrill Lynch concluded Boeing will only recover about $14bn of the $29bn in deferred production costs.

Rob Spingarn of Credit Suisse pegs the recovery number at about $22bn.

These figures are before Boeing took a $1bn pre-tax “reallocation” to research and development for costs related to two more of the first six test airplanes last month in advance of the July 27 earnings call.

Boeing officials are confident they will recover the costs. LNC spoke with Wall Street analysts and Boeing to paint a picture of how Boeing expects to accomplish this.

From the 2Q2016 10Q

Let’s start with the language in Boeing’s 2Q2016 10Q Securities and Exchange Commission filing. The dollar figures are in millions.

At June 30, 2016 and December 31, 2015, commercial aircraft programs inventory included the following amounts related to the 787 program: $34,123 and $34,656 of work in process (including deferred production costs of $27,673 and $28,510), $2,412 and $2,551 of supplier advances, and $3,707 and $3,890 of unamortized tooling and other non-recurring costs. At June 30, 2016, $22,966 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $8,414 is expected to be recovered from units included in the program accounting quantity that represent expected future orders.

Important data

This language is incomplete insofar as it doesn’t include some important data.

  • When referencing the $8.4bn in costs “to be recovered from units included in the program accounting quantity that represent expected future orders,” Boeing says there are 88 787s sold but outside the accounting block that need to be factored in. While lawyers and accountants craft the language that goes into the 10Q, from a layman’s perspective, the cost recovery appears to be more appropriately characterized as “included but not limited to” future orders. (This is LNC’s)
  • Boeing says there are currently 869 undelivered airplanes in the accounting block. This is comprised of 636 that are current, firm orders in the block, 88 outside the block and 145 orders yet to be sold. This can be either brand new orders or conversions of options and letters of intent.
  • According to the Ascend data base at June 30, there are 272 options and 215 letters of intent for the 787. There are also letters of intent for options.
  • Thus, as reported in the 10Q, the total deferred costs are $27,673M, plus $3,707 in unamortized tooling and non-recurring costs.
  • This breaks down to (at June 30) 636 undelivered aircraft for the deferred and unamortized tooling and non-recurring per firm order in the accounting quantity of $22,966M/636.
  • The deferred and unamortized tooling and non-recurring for expected future order in the accounting quantity is $8,414M/233.
  • At July 31, the Boeing website show 712 787s as undelivered. The difference between 712 and 869 represents the unsold positions inside the accounting block and those 88 aircraft outside the block.

Extending the Accounting Block

Many believe Boeing has to extend the accounting block, perhaps by several hundred airplanes, to recover the costs. LNC has been among those believing this.

But extending the accounting block, if it happens, for the 787 may turn out to be more of a routine business practice rather than an admission that more airplanes have to be sold to cover the deferred production and tooling costs.

Boeing routinely extends the accounting block on its mature 7-Series programs. The accounting block on the 737 was extended by some 200 in the most recent quarter. Over the decades, this program has seen many block extensions. The same is true for the other 7-Series programs, including the 777 Classic.

The accounting block can also be contracted, as was recently the case for the 747 program after a write off for the 747-8.

Boeing extends the block when it is confident the sales support the move. This includes, as described above, firm orders, reasonable confidence options will be converted to firm orders and new sales campaigns will yield orders.

The reason those 88 787s mentioned above are not in the current accounting block is because the delivery dates are too far into the future. As these dates come closer in—and this trigger point remains unclear to outsiders—some of those 88 may still remain outside a reset accounting block because those delivery dates are still too far in the future.

It is fair to say that the closer Boeing gets to reaching the current 1,300 accounting block number, the more likely a new figure will be issued. The company reported 1,161 sales through July 31.

Getting there from here

How does Boeing recover its deferred costs?

Simple math, based on the 10Q, would paint the following picture.

  1. Through July there have been 1,161 firm orders in the accounting block. $22,966/1161=$19.78m per airplane in profit, on average.
  2. Through July there are 139 “expected orders” remaining in the accounting block of 1,300. $8414/139=$60.53m per airplane profit required to recover this cost.
  3. Total of $22,966+$8,414=$31,380. $31,380/1,300=$24,138.

We already know the assumption in #2 is flawed because Boeing told LNC there are aircraft outside the block. Profits on these sales will go toward the deferred costs.

  1. In an article by Dominic Gates of The Seattle Times on this topic after the first quarter results, Boeing told Gates an average must be used, not a segmentation between the two deferred numbers. In this, the 10Q language, on its face, seems misleading. Through July there have been 1,161 firm orders in the accounting block. $22,966/1161=$19.78m per airplane in profit, on average.
  2. Through July there are 139 “expected orders” remaining in the accounting block of 1,300. $8414/139=$60.53m per airplane profit required to recover this cost.
  3. Total of $22,966+$8,414=$31,380. $31,380/1,300=$24,138.

In an article by Dominic Gates of The Seattle Times on this topic after the first quarter results, Boeing told Gates that an average over the entire program should be used, not a segmentation as inferred by the 10Q language. In this, the 10Q language would appear to be misleading in a literal reading and certainly by omission of the complex factors that are behind the language.

Whatever the per-airplane profit number is, Boeing won’t disclose it because the margins are considered commercial proprietary.

Wall Street analysts, and others, try to “engineer” the margins. Doing so with accuracy is impossible from the outside. Doing so within “shouting distance” may or may not be possible. In any case, Boeing won’t confirm any margin estimate by analysts or anyone else.

Boeing has said it expects that eventually the 787 program will produce margins similar to previous wide-body programs. Analysts believe these margins have been in the 17%-19% range.

Boeing has also said the 787-8 margin is single digits. But this, too, is a wide range: 1% to 9.9%.

It also comes down to if unit cost accounting or program accounting is being assigned to the margin and whether research and development and SG&A allocations are included when discussing margin, say analysts.

Reducing costs, increasing margins

Boeing officials gave guidance to analysts and said on earnings calls and elsewhere repeatedly that reducing costs combined with increasing margins is the path toward recovering the deferred costs.

At the Boeing investors day in May, corporate CFO Greg Smith addressed the issue. The following is a transcript, worth repeating verbatim.

Greg Smith: So, while we expect earnings to grow over the remainder of the decade, we expect cash flow to grow even at a faster pace, largely driven by the

Greg Smith, CFO of The Boeing Co.

Greg Smith, CFO of The Boeing Co.

improvements and the production increases, 787 cash, and just overall disciplined cash management efforts.

We’re covering 787 deferred production over the remainder of the decade [and] will be a driver of cash flows going forward. And our confidence in that recovery really comes from four major areas.

So, first, the largest benefit comes from shifting the delivery mix from more -9s and -10s and remember we designed these airplanes to be more producible and there’s significant commonality between these models. So, our overall expectations around mix in the cost base going forward, is already sold.

And second point is improving pricing, on the remaining 900 aircrafts in the accounting block, which is another key driver. We’ve previously had – again, think about early on in the program, early pricing disruption, customer settlements clearly impacting on profitability and cash all in that deferred production, that will not be the case going forward.

And again, our expectations around pricing are essentially already sold within that cost base. These two elements of mix and pricing will account for approximately 70% of the 787 deferred production recovery.

The third point, we’ve also benefited from supply chain step down, remaining 900 airplanes compared to the initial 400 delivered. Once again, this is largely based on existing firm supplier contracts and this will account for approximately 25% of the recovery of the initial $29bn of deferred.

And last, but not least, internal productivity is expected based on similar learning curves, we’ve captured on other programs, as well as projects in work that you’ve seen some of them yesterday for step-down function and efficiencies.

But with that said, this is the smallest piece of the equation around deferred. So, the path to recover 787 deferred production balance of the $29bn is clearly grounded on existing contracts with customers and suppliers. Another driver of cash flow is higher production rates I discussed.

We do plan to increase rate on 787, 737 and 767 and have modest growth in the Defense business. Specifically, for 2016, we continue to expect operating cash would be approximately $10bn. With the continued expected further growth in operating cash flow in 2017, we expect backlog growing deliveries and capture additional productivity as well as the 787 cash improvements I talked about all helping us in 2017.

Smith said about 80% to 85% of the supply chain’s 25% contribution to cost reduction is already under contract.

Holding production rate

Since this May conference and answer, Boeing last month said increasing the production rate of the 787 from 12 to 14/mo is unlikely, based on current demand projections. This will delay recovering the deferred costs by 4-6 months, Boeing said.

Robert Spingarn, the aerospace analyst for Credit Suisse, told LNC that maintaining rate 12 has about a 10%-15% impact on cost reduction.

Cash loss vs book profit

Spingarn last December issued a note in which he concluded Boeing will recover only about 75% if the deferred costs. In reaching this conclusion, Spingarn used an average production cost among the three family members of $105m, eventually declining to +/- $80m.

He also used current sales prices of about $115m for the 787-8, $125m for the 787-9 and $145m for the 787-10. (These are numbers for the December 2015 note, remember.) These are similar to the sales price figures LNC was hearing from our market sources as well.

Because of the deferred costs, which included three years of delays and customer penalties on the early deliveries, Boeing had a cash loss on every delivery. Boeing said the cash break-even point was in the fourth quarter of last year, roughly five years after the entry-into-service of the first 787-8.

Boeing booked profits on the program from the first delivery. This is through its use of program accounting, about which LNC has written many articles.

53 Comments on “Pontifications: Getting there from here on Boeing’s deferred production costs

  1. Whether Boeing I does or does not cover its deferred costs on the B787 is the big picture issue but I am drawn to the extension of other programs accounting blocks. So Boeing has consistently extended the accounting block for other programs over time as orders permit. Although I can see a logic for this there is again considerable scope for profit manipulation year on year. It allows Boeing to decide in which year it makes a profit and to reduce costs and enhance profits in an earlier year by pushing back costs into future years. This is a fairly dubious way of playing accounting rules in my opinion.

    Regarding FCF it does look like the B787 program is eventually getting well. This must be a blessed relief for all involved. In fact in the new paradigm of low WB sales the B787 could be the one commercial program to be in a position to generate cash for the near to medium term.

  2. As far as I can tell, Boeing can extend the accounting block on the 787 in perpetuity without calling a write-down, if these two things continue to be true:

    1. They continue to sell the plane at a price that is greater than the production cost;

    2. Total cash coming into the company is bigger than what goes out.

    The first is likely to hold true for the time-being. The 787 was a marketing success, if a failure of industrialisation.

    The second is historic. The boom days of the 737 and the 777 made up for the cash shortfall of the 787 program, thus avoiding technical bankruptcy.

    Something has to give, however, and that is funding for the next major development after the 787 – presumably the 737 successor. Boeing won’t be able to fund development from income on the 787 or other airplane programs. Any repetition of the 787 disaster will bring down Boeing. It makes for a much more cautious company

  3. I have a suspicion the 88 aircraft outside of the 1300 aircraft accounting block relate to 787-10 sales, which by all accounts will have a separate accounting block to the rest of the 787 program.

    If we consider this aircraft is still in development and will shortly be in flight testing, Boeing will still be spending considerable amounts of money on this program. Overall Boeing are predicting the 787 program will be in a cash positive position, so from this perspective we can almost safely assume the rest of the 787 program (787-8 & 787-9) are cash flow positive.

    This should give Boeing confidence.

    I suspect separating the 787-10 from the rest of the program pragmatically gives Boeing a clearer break even horizon.

    .

  4. LNC: “Boeing said the cash break-even point was in the fourth quarter of last year.”

    – I did not realize we were there already. I am confused, because it seems to contradict earlier reporting this year. Did I miss something?

    LNC: “Whatever the per-airplane profit number is, Boeing won’t disclose it because the margins are considered commercial proprietary.”

    – That is the 30B dollar question.

    LNC: “It also comes down to if unit cost accounting or program accounting is being assigned to the margin and whether research and development and SG&A allocations are included when discussing margin, say analysts.”

    – The Dreamliner programme is not only a nightmare for Boeing but is also clouded in mystery. It is not normal for observers and analysts to be unable to accurately asses the 787 situation. It has become a hide and seek game. With its current accounting practices Boeing is confusing everyone and may end up fooling itself in the end. The more I look into this programme the more frustrated I become over its lack of overall clarity. After 9/11 Bombardier was facing bankruptcy and had to modify its accounting practices, which were at the time similar to Boeing’s. BBD took a lot of flack from business analysts and had to tell it the way it was and in real time. Boeing needs to clean up its house and stop second mortgaging it.

  5. The words make clear that Boeing will not make a profit on 1300 airfames. To shift focus, will Airbus make a profit on 800 airframes? Perhaps it is to early to tell, but perhaps the answer is no!

    The introduction of CFRP is a significant shift! Both Boeing and Airbus are committed. Time will tell whether the shift provides profit. As of today neither are in profit!

    • A350?

      And Airbus A350 has gone far better than Boeing (though the current issues may prove interesting)

    • @ Philip

      All the portents are that the A350 program will cover its costs over the block they currently have. By all accounts the investment is half that on the B787 and the end result on EIS was a more mature product hitting most if not all its target performance.

      The current FAL issues notwithstanding the A350 has stood out as a program without too much drama. The development process has been (from the outside) on object lesson on how these things should be run.

      • A large part of the reason the A350 has come out cheaper, is that Airbus had just finished the A380. This meant that the design teams were up to speed and had learned many important lessons. Also it meant that it was a smaller, less risky technology leap.Baring this in mind, and the fact that all the development cost of the A380 seems to have been lost, perhaps some of it should be lumped into the A350. I think this is a good example of why program accounting on its own isn’t really a good idea. Ofcouse engineer’s have their own ways of bankrupting aerospace companies

        • You have just described the a good reason for Boeing to have replaced the 737 and 777 lines with clean sheet designs. The 777 esp is nearly as expensive as a new design and with development teams up to speed could have been a much better plane for not too much extra cost.

          • The one fundamental thing that Airbus has going for it is the consistency of design and development over time. There appears to be a clear design philosophy and progression of programme to programme that is now lacking at Boeing. How does the B777x leverage off the B787? How does the MAX link in any way to either of those programmes? Airbus on the other hand seem to iterate from one to the next encompassing new technology within an existing framework. If the A330neo turns out as uncompetitive in 5 years you can see the adoption of A350 tech to be grafted directly onto a successor project in a way not possible it seems at Boeing.

          • I don’t think that’s entirely accurate.
            The 787’s wings and engines were rolled into the 747-8. The new GE engine for the 777x shares much with 787 model tech. The triple 7x also incorperated wing tech from the 787. It will also have the larger windows, higher pressure and humidity of the 787.
            The MAX doesn’t share much other than cockpit displays but then again it’s a much smaller older design.

  6. Well all that makes my head hurt.

    787 got put so far into the hole by mgt (not industrialization issue ) that it will never deliver cash cow cash levels needed to keep the pyramid going. .

    So as was noted, where do you get future skim from?

    • “So as was noted, where do you get future skim from?”

      – For the foreseeable future we can eliminate the 787.
      – For the immediate future we can eliminate the 777.
      – For the long term future we can eliminate the 737.

      That leaves the KC-46. But what kind of margins can we expect from this programme? Boeing needs a product leader to support its other programmes as they go through different business cycles. But in commercial aviation you don’t create a successful product by managing the company from one quarter to the next. It may have worked in good times, but the party is over and it’s time to sober up.

      “You cannot escape the responsibility of tomorrow by evading it today.” Abraham Lincoln

      • I should remind you that right now the KC46 is 179 (?) hulls.

        And its in the hole what 1.5 billion or so.

        Its not to the rescue.

        737 will probably have good returns but severely hampered by lack of an A321 competitor.

        • Right now just 4 test aircraft plus the first lot is ordered. So just 18 new KC-46 orders.

          Due to less USAF fighter jets maybe less tanker required. On the other side the thirsty AF-35 may need a bigger tanker.

          Deferred production costs or this kind of accounting is a tool to keep the top boni high…

          • The Seattle Times: “We still see this in the long run as a franchise program, a market of around 400 aircraft … Without question, this is an investment worth making,” [Muilenburg] said.

            You have to believe him, because Boeing is always right. Until proven otherwise. 🙂

          • MHalblaub:

            They will get the entire first lot, that is needed.

            Its the follow on that is in question.

            While they are old, the KC135s have been re-engine (operational, the non re-engine are parked in so called ready reserve which is a joke but another story)

            They have an excellent corrosion protection program in place, hulls are not worn out (too few hours) .

            And the USAF in all its glory has the F-35 going into full production (probably), KC46, TX, A10 replacement (that is a joke but …..) The B21 a new ICBM.

            KC10 is long in the tooth and a fuel hog.

            Something in that is going to give, I suspect they will find that the KC46 will be limited to the 179 or maybe a small follow on order.

        • At over 3200 orders it hasn’t been hampered much. They will make plenty off it.

          • Rather difficult to disagree with that providing the pricing is anywhere near sensible

          • That’s the hard part, its pretty competitive at the A320 level and they get nothing in the A321 segment.

            So like the 777 and 747 in its heyday, Airbus can command very good returns on the A321

      • “For the foreseeable future we can eliminate the 787”

        The 787 program is expected to go cash flow positive this year.
        As for the 737 being a long term drain, well analysts seem to disagree.

        • IMU Cash flow positive is a distraction floated here.
          Cash flow positive is not the metric that needs to be met to not add further into deferred cost.
          Cash flow positive would work for IFSD accounting i.e. Airbus though were losses are booked when they occur.

          • Yep, what kind of cash flow would you have if you took 32 billion and invested it at 5% interesting?

            That is cash positive (or so we would hope)

            So for 5 years you lost 5%, now you need to get 10% just to break even for 5 years and you still have not put money back into anyone’s bank.

            Reality is you need to get 10% for 10 or 15 years to actually be cash positive.

      • The B787 will become the ultimate cash cow if it manages to strangle the A330neo. This market is very interesting, how long will the NEO be around? If it is quietly shutdown in 5-7 years time (400 frames) then the B787 will have a monopoly in what appears to be the most important part of the WB market by far. The B787 has a life of 30+ years of production in front of it and as time goes on it is likely to be a massive cash generator.

        • Historically Airbus have sold A330 CEOs in the 80-100 USD mil range. Since then the EUR and GBP have dropped 30%, so allowing for US content they can probably make money on 60-80 USD million. I guess the current order book covers development costs of the 330NEO, so I suspect anything over 80 million USD will be profitable for an A330NEO and 65 million for an A330R. 788/789 currently cost 115/125 million, similar CASM and slightly more payload/range. Do you see 2000NM or 10 ton being worth 50% more capital expense, because I don’t if you don’t desperately need it?

          Payoff from new materials is questionable, or 777-X would sure not be conventional Al.
          Aero advances seem to be minimal these days, although a CRP wing has some advantages.
          El architecture limited benefit.
          Most improvements are in the engine department.

          Conclusion is that 787 will not kill 330NEO, and as soon as new engines get put on one the same thing will happen to the other, an 330NG might at most need a new wing at most. So I have no doubt Boeing will need to invest more in the 787 before they see any profit, if ever. Airbus will use the 330 to make sure Boeing stays starved of development capital.

          • Interesting, you are effectively suggesting the A330neo has a long life ahead of it. Certainly that is possible. If that is the case it will end up being the ultimate cash cow in the industry. 2000+ sales on a relatively unchanged frame over 30 years. I was under the impression from Airbus hierarchy that even they saw it as a stopgap/ disruptor giving them 5 years grace to decide on something new

          • The 787’s big advantage over the A330 is that it can accommodate 9 across seating (with normal seat widths), rather than 8. It was that fact, which killed off the A350 Mark I.

            I think the 787-10 will eventually be the gamechanger. Airbus doesn’t have anything that matches it on pure CASM.

          • MartinA :

            I don’t buy a new A330 wing. Not worth it. Its claim to fame is low cost and that increases the cost hugely.

            I always though 250 airframes and so far the sales are not there. Longer term, will have to see.

            Right now its in the downturn cycle so it could get cancelled. It will be interesting.

            Airbus is making two significant different versions of the A330 now as well.

          • I can’t see them going ahead with the A338, but it’s Boeing competition is the B788 which is also dead. You might be right about new wing not being worth it. Unlikely with current fuel costs, but you never know.

            I agree the NEO and the R are quite different. I suspect the days of developing a range of aircraft with the degree of commonality we have seen in the past might be over. Since de-regulation operators have become a lot more demanding.

            The crunch for Boeing here is the A330 is nearly as good but a lot cheaper. Boeing are going to have to get B787 costs down just to compete as the existing backlog gets produced, and to fill the extra slots in the near future if they want to up production. That means getting their deferred costs back likely goes to the right of the arrival of new engine tech and an RE program comes into the cost of the program as well. It all ensures that Boeing is short of cash for future developments. Not to mention the dreaded share buybacks.

            I think RR or P+W will insist on sole supplier status for an A330NEO mk II as their price for doing an engine for the A380NEO. It gives them guaranteed volume using a similar engine.

          • @Martin

            so I suspect anything over 80 million USD will be profitable for an A330NEO and 65 million for an A330R. 788/789 currently cost 115/125 million, similar CASM and slightly more payload/range. Do you see 2000NM or 10 ton being worth 50% more capital expense, because I don’t if you don’t desperately need it?

            IMJ, the MTOW of both the A338 and A339 could possibly be increased from 242 metric tonnes by another 10-plus metric tonnes – thus equaling the MTOW of the 787-9/-10. Airbus/JL has already been talking about 245 metric tonnes. If the MTOW of the A330-900neo were to be raised to the same level as the MTOW of the 787-9, the payload/range capability of the A339 should pretty much equal the payload/range capability of the 787-9.

            In section 7-2-0 (Landing Gear Footprint) of the Aircraft Characteristics Airport and Maintenance Planning documents for the A330* and A345/A346** (e.g. pages 453-458 and 351-352, repectively), one can see that the main gear tire pressure for the 242 metric tonne versions of the A332 and A333 is 14.9 bar (213 psi), while for the A345 and A356 the main gear tire pressure is 16.1 bar (234 psi).

            In Section 7.2, page 111 (Landing Gear Footprint) of the 787 Airplane Characteristics for Airport Planning***, one can see that the main gear tire pressure for the 788 and 789 is 15.75 bar (224 psi) and 16.03 bar (228 psi), respectively.

            Interestingly, the main gear tire size is the same for the 787-9 and the A332/A333/A345/A346 (i.e 54 x 21 inches). The main gear for the A332/A333/A345/A346 has a longer but narrower footprint than the 787-9 main gear — i.e. 1.981 m vs. 1.51 in centreline length, and 1.397 m vs. 1.52 m in centreline width. It’s easy to see, therefore, that the landing gear footprint for the MLG on the 787-9 is some 17 percent smaller in area than the landing gear footprint for the wing landing gear on the A332/A333/A345/A346.

            Hence, if the main gear tire pressure of the A338 and A339 were to be raised to 16.1 bar (234 psi) — in addition to perhaps some additional strengthening of the MLG legs, Airbus could IMJ increase MTOW by at least 10 metric tonnes. In contrast, the 380 metric tonnes Versions of the A345/A346 have 3 MLGs where the two main gears are sizewize identical to the MLG of the A330. The centre landing gear of the A345/A346 has a slightly smaller centreline width, though (i.e. 1.176 m vs. 1.397 m). As the 380 metric tonne version of A345/A346 is supported by 3 MLGs, it’s not unreasonable to assume, therefore, that using only the A345/A346 wing landing gear x 2 can support two thirds of 380 metric tonnes, or 253.3 metric tonnes, which BTW is virtually identical to the MTOW of the 787-9 (e.g. 254 metric tonnes.

            * http://www.airbus.com/fileadmin/media_gallery/files/tech_data/AC/Airbus-AC-A330-Jan16.pdf

            ** http://www.airbus.com/fileadmin/media_gallery/files/tech_data/AC/Airbus-AC-A340-500-600-Jan16.pdf

            *** http://www.boeing.com/assets/pdf/commercial/airports/acaps/787.pdf

  7. Nothing other than a gut feeling, but I fear the American taxpayer will take a bath on this issue.

  8. FF: “The 787’s big advantage over the A330 is that it can accommodate 9 across seating (with normal seat widths), rather than 8. It was that fact, which killed off the A350 Mark I.”

    Boeing indeed made the 787 larger than the A330, and after some hesitation Airbus responded tit for tat by making the A350 larger than the 787. At the time it must have been a humbling experience for Airbus. But they had the courage to make the right decision and change course before it was too late. Unfortunately this process seems to work in only one direction across the Atlantic.

    • @Normand Hamel

      It must indeed be a humbling experience for Boeing that the A330-900neo at 8 abreast should pretty much equal the 787-9 at 9 abreast on fuel burn per seat. IMJ, the A330 has an incredibly good cross-section. While being able to comfortable seat passengers at 8 abreast for mainline major carriers and network legacy carriers, it can offer a reasonable 9 abreast configuration for Asian LCCs carrying mostly a large percentage of east Asians — who appear to be on average stereotypically shorter and smaller than Africans and Caucasians. At 9 abreast, the A330neo would seem to have a significant lower fuel burn per seat.

      • “It must indeed be a humbling experience for Boeing that the A330-900neo at 8 abreast should pretty much equal the 787-9 at 9 abreast on fuel burn per seat.”

        It is not so much a humbling experience as a humiliating one. 🙂

    • Didn’t take much courage when all the airlines were screaming at them how bad the original 350 offering was!

  9. Geo: “The 787 program is expected to go cash flow positive this year.
    As for the 737 being a long term drain, well analysts seem to disagree.”

    Analysts have a tendency to focus on short term revenues. And with the kind of backlog Boeing enjoys with the 737 there is nothing to worry about, right? Well, enjoy it while it last… A 737 replacement is something that must me considered and prepared many years in advance. And, I repeat, there is no long-term future for the 737. After 2020 the backlog will melt away at an increasing rate. For the 737 is passé.

    In regards to the 787 the situation is different. When I said “for the foreseeable future” I did not mean never. Even though the 787 is, or will be, cash-flow positive this year it doesn’t change the fact that the order book will likely dry up in the coming years. And the 787 business case needs a B2B ratio above 1 and a production rate higher than 10/month. Both of which will sooner or later no longer be possible. But the situation could change, for better or worst.

  10. @Geo

    The original A350 was good, but not good enough to compete with the 787, which was being marketed by Boeing as the Second Coming. The Mark 1 still exits today and is now called the A330neo, which is giving the 787 a run for its money. After the Mark 1 bashing Airbus had to go back to the drawing board, like Boeing had done when the airlines told them they did not want a faster plane like the Sonic Cruiser but a more economical one like the Dreamliner. The difference is that the A350 Mk 1 was a conservative design while the Sonic Cruiser was nothing but. What Airbus was proposing was a logical evolution of the very successful A330. With the Sonic Cruiser Boeing was trying to initiate a revolution. And an ill-advised one. Despite being a great admirer of Boeing at the time I did not see any value in the Sonic Cruiser. I thought Boeing had lost its mind. What I did not know at the time is that it had also lost its soul. And later on I also found out that it had lost its spirit and lacked the courage it had displayed in the 1950s when it launched the 707. This kind of mettle was obviously missing when Boeing shelved the NSA in favour of the MAX after Airbus launched the A320neo.

    Boeing lost its soul when it was “acquired” by MD.
    Boeing lost its mind with the Sonic Cruiser.
    Boeing lost its way with the Dreamliner.
    Boeing lost its spirit with the MAX.
    Boeing lost its lead with the 777X.
    Boeing lost its battle with Airbus.

    • Boeings engineer’s probably share the blame, they must of told management the technology was ready. With the push that it created and forced Airbus into, it probably is now.

    • I think airlines rejected the A350 mk 1 more because it didn’t offer them anything they couldn’t get with the B787. On the other hand they foresaw that the B777 was too heavy to successfully continue in the same market space. Hence the demand that Airbus really replace the B777 than the B787. A & B don’t directly compete, they always leave a little space between their products, and airlines wanted another. lighter, long range 300-350 seat option.

      • “I think airlines rejected the A350 mk 1 more because it didn’t offer them anything they couldn’t get with the B787.”

        True. But there is an important aspect that we must not forget and which haunts Boeing today. In that crucial period the Dreamliner was sold for peanuts because Boeing was confident it could be fabricated for much less money because it involved a carbon fuselage that could be woven together very fast and which required very few fasteners. So few that they could’t be found when they needed them. But that is another story. The airplane was also built in large modules that came pre-stuffed and which could be snapped together in four days, ready to go for a test flight. All this looked very good in a Power Point presentation (we don’t say “on paper” anymore). But we soon found out that Boeing had lost its way, and in a bigger fashion than it had after Phil Condit took the helm and ordered an increase in production rate just when they were migrating from paper to computer. Again, that is a another story. All this to say that the 787 was not only more advanced than the A330 but also cheaper. Today the A330neo represents an interesting alternative to the 787 while bringing good margins to Airbus. Not so for Boeing with the 787.

        • Boeing’s problem today is the A330NEO will keep margins for the 787 down. Cash flow cow it won’t be.

          • Yes, and the irony here is that the A330neo is the airplane everyone rejected when it was originally proposed as the A350 [Mark 1]. At the time Boeing was facing only one small problem: the A350. Today Boeing has to deal with two big problems: the A350 XWB and the A330neo.

            I have been saying since the start of the programme that the A350 XWB was designed to hit two birds with one stone: the 787 and 777. I had it all wrong. For Airbus actually hit one bird, the 787, with two stones, the A350 XWB and A330neo.

            If you keep your head down for too long, whether you are inside a cockpit or on an ice rink, you may get hit by something you never saw coming.

    • Normand:

      While you have some good points I do wish you would get over the nattering about the Sonic Cruiser.

      Its like saying the A300 was a mistake. Sure it was a wash at best, it led to the A330 which is obliviously a hue success (helped along enormously by Boeing muck up, but still a major success regardless)

      You continue to ignore aircraft evolution and design.

      777 started out as a 3 gnien beast, so the 777 is a bust because it morphed into two engines? Really?

      Boeing had a lot of airline interest in the Sonic Cruiser. When they fleshed it out and submitted what the cost was per aircraft and fuel burn, it was, ahh no, we are not going to commit.

      Boeing, Really? but we thought?

      Airlines: yea that was before we saw the cost, we can’t make money with the cost and fuel burn and pax numbers involved, some market, no where close to being enough. We got carried away, lovely bird but sorry no go.
      But we really like the weight saving of CFRP, new engines would help fuel burn a lot, that part is really good

      Boeing, well, hmmm, how about this (they sketch out a tube and wing) rough size, costs and economics with pax load.

      Airlines: Wow, that does look good, get back to us on hard costs and fuel burn and lets talk in 4 months?

      Boeing: Sure, sigh, and we thought they were really committed, darn.

      Boeing 4 Month latter: Ok, here is the current outline, what do you think

      Airlines: WE LPOVE IT, pull out check book and start writing checks (NW being the first)

      that is roughly how it goes.

      • “I do wish you would get over the nattering about the Sonic Cruiser.”

        The reason I brought back the Sonic Cruiser was in reply to Geo who had mentioned that customers had rejected the A350 Mk 1. I wanted to remind him and other readers that this had also happened to Boeing not long before that. And like for the original A350 it gave us a much better aircraft in the end.

        But I have something to confess. I have still not gotten over the fact that Boeing has seriously considered such an absurd concept as the Sonic Cruiser. It showed two things to the world: One was how many brilliant minds were still working for Boeing in those days. The other is how disconnected from reality this company had become. Imagine this: at the turn of the Third Millennium Boeing comes out with an aircraft that INCREASES fuel burn, just to save half an hour across the Atlantic!

        But in a way this is understandable coming from a company that was still trying to recover from a huge trauma, having been acquired, with its own money, by a rival that had already destroyed another manufacturing jewel of commercial aviation. And what was feared by everyone at the time is fast becoming a reality.

  11. What I really would like is to see what we could of the Russian MC-21 and the RC widebody thing.

    I can’t imagine a successful Russian Chinese program.

    • I recon once the Russians design it the Chinese will split. It has happened before in other industries. I sure hope, for their sakes, Russia doesn’t fall for it. If they could sort out production tech they are perfectly capable of becoming the next Airbus/Boeing, but I am sure the Chinese won’t accept them as partners longer than it takes to get their hands on the design.

    • The Russian/Chinese WB program would put Airbus out of business. With monsters like the A340 and A380 they don’t need much help to go over the side.

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