Sunday, May 10, 2015

Boeing to shut down 787 surge line by year end to take advantage of production efficiencies; start up 777X production

On Friday Boeing announced the decision to shut down the 787 temporary surge line in Everett and move the assembly of airplanes from that line to the main lines in 40-26 and 88-30.  By the end of the year both lines will be producing 5 787 per month.

The decision to close it down is certainly not a shock but to shut it early was a surprise.  Efficiency gains that were realized earlier than expected on both the Charleston and Everett lines allowed for cost reduction that come with merging the three lines into 2.  Boeing figured that it now costs less to produce 10 airplanes in 2 line than it does on 3 lines.  Boeing will start converting the line to in order to do assembly activities on the 777X which is slated to start production around 2017-2018.

The switch over will down gradually over the next 6 months.  Charleston should be at 4 by the start of July while 40-26 will be producing 5 and 40-24 will be at 1.  By November, the switch over from 40-24 to 40-26 and 88-30 should be complete. The last 787 to be built on the TSL will load around October and in November all future assembly activities will be done either on 40-26 or 88-30. ZB236 (LN 381) will be the last aircraft built on 40-24.  This airplane is for AerCap and being leased to KLM.

Boeing started production on the 40-24 surge line in the 3rd quarter 2012 as means to reduce schedule risk associated with opening the Charleston line as well as a means to catch up on deliveries delayed by the repeated Dreamliner production issues.  The line no has fulfilled its mission and 40-24 will now be used to support production of early 777X airplanes.

Beverly Wyse's statement to BSC employees regarding the surge line shutdown:

Today Boeing Commercial Airplanes announced that we’ve finalized plans to close the Everett 787 Dreamliner Temporary Surge Line (TSL) later this year to allow the 777X Program to transition into the factory space currently occupied by the TSL and begin production preparations for the 777X. We are confident that the timing is right for this transition, and our ability to do so this year is a testament to our teams’ capabilities. 

With the phasing out of the TSL, BSC Final Assembly will produce five additional airplanes, meaning that we will transition to our Final Assembly production rate of five per month earlier than planned.

We continue to work on improvement with some of our suppliers, and we’re confident in your ability to execute this plan. I am committed to insuring that BSC remains stable and that we follow our site overtime guidelines so our teammates enjoy time off with their families. 

This is great news for our site further demonstrates the very high level of confidence that the Boeing executive leadership team has in your abilities. Boeing South Carolina has quickly earned a reputation for successfully rising to any challenge with our “Bring it On” attitude, and if any team can do this -- and do it successfully, it’s you! 

As always, thank you for your hard work and dedication!

The 6 787-8 that were ordered from an unidentified customer late last month will be coming from the lot of early build 787s (also known as the "Terrible Teens").  The customer ordered Roll Royce engines throwing into doubt about who is the end user.  I had speculated that the order is for Ethiopian or a lessor with a n agreement to lease the airplanes to Ethiopian given the news over the past month or so.  However, Ethiopian's current fleet of 787s use GEnx engines.  IT's still very possible that the airplanes can end up with Ethiopian who don't mind using the Trent-1000 engines.

From the firing order it also appears that TUI Travel has ordered the 787-9.  It's still too early to know how many but the order must be one of the unidentified 787-9 orders that is listed on Boeing's order and delivery web site (there are 4 separate orders).  Also on the firing order is 2 additional 787-9 for united Airlines (LN 443 and LN 445).  They had recently reduced their 787-9 order to 16 so I believe the changes hadn't made it way through the system.  I fully expect that LN 443 and LN 445 will be allocated to another 787-9 customer within the next couple of months.

787 Full Production Table
787 Build Location By Operator 
787 Build Location By Customer


Andrew Boydston said...

Pre Paris Airshow are always an interesting time. Boeing has adjusted its firing order with an apparent wrap-up of loose ends, and its just before Paris! My speculative nature tells me, its maybe part of a large deal to be announced at the Paris Airshow, that is why Boeing is making new slots assignments available before hand, as part of something bigger coming this way. I can't help myself when things change, something else is there to fill-in the change space for the bigger picture.

tommy said...

Regarding the TUI -9 plane, I'd suggest the possibity that they are converting it from a -8 order. They might be far enough along the process for boeing to update the firing order, but to yet finalized to conversion so it won't appear as a -9 order on boeings order page yet.

This might also be the case for a number of LAN and Air Canada planes. They both have more -9s in the firing order than they seem to have ordered.

Piotrek_ said...

About these terrible teens. 3rd option is situation, when Ethiopian ordered 787-8 frames already build with RR engines' pylons and this is reason why order is for frames with RR. Customer will just simply buy GEnx-1B and these will be attached to frames. I'm pretty sure that LN14 has already pylons for GEnx, but we will be sure in June - engines hanging on LN14 is scheduled for 14th June.

Barbara Seced said...

Hi Uresh:

I read what you wrote about the terrible teens with attention. As much as I always agree with your analyses on the aircraft, I am wondering why it would make sense for the terrible teens to end up with Ethiopian. First, as you mentioned, the aircraft have the "wrong engine". More importantly, Ethiopian said that it wouldn't buy them, but would lease them... Would that make any sense then to see these aircraft end up at a lessor?

Just wondering

Uresh said...

Because it has been widely reported that Ethiopian has been in talks with Boeing to acquire 6 of the terrible teens, something that the CEO of Ethiopian has not disputed himself.

Barbara Seced said...

Thank you.

This is the latest I read, but it might be outdated, I guess...

April 2015:
Ethiopian Airlines (ET, Addis Ababa) CEO Tewolde Gebremariam says his airline would lease, rather than acquire, between six and eight early model B787-8s from Boeing (BOE, Chicago O'Hare). In February, the Ethiopian national carrier was linked, along with Réunionaise operator Air Austral (UU, St. Denis de la Réunion), to separate deals for so-called "Terrible Teen" B787s.

“We want to lease them but we will not purchase them. The issue is still under discussion,” Tewolde told The Reporter newspaper.

Vab Andleigh said...

Uresh, how does the sale of these 6 terrible teens impact the financials of Boeing?

E.g., in the absence of formal figures presented by Boeing, for the purpose of this discussion let's assume a production cost of $200M per plane (teens), and sales cost of $100M. And with regards to program accounting, assume $26B program cost over 1300 planes, or $20M amortized per plane.

For cash flow statement, $100M is added to cash on hand assuming all costs of production were spent earlier.

For income statement, $100M in revenue and $200M in cost of production, resulting in $100M loss per plane.

Is that correct?

Also, what does this sale do for the total program cost? Do we reduce it by the $200M production cost since we recognized the loss? Or by a smaller $20M per plane amortized R&D + build cost?

Daniel D'Arcangelis said...

The way I understand the program cost method is that for the income statement, the expected cost for the first 1300 planes is what is booked on each sale.

So let's add one more number to the example - lets say the expected cost per plane for the first 1300 planes is $130M. So if the actual cost on this plane was $200M and the sale price was $100M, on sale of this plane:

Cash flow +100M (as stated).

Income statement is -30M (100M - 130M).

70M gets added to deferred production costs (200M - 130M).

Karl Perez said...

Thanks Daniel for that accounting explanation. I know a bunch of people are a little confused with the accounting method. Some think Boeing is cooking the books with this kind of accounting system when the reality is that it will impact income and cash flow sooner or later, just not all at once.

Daniel D'Arcangelis said...

Thanks - perhaps good to illustrate how this balances out down the road.

Say 2 years from now, production efficiencies are gained such that the cash cost of producing a plane is $90M. Customer buys one of these for $150M (it is not a "terrible" teen after all). The estimate of 130M / plane still applies.

The result of this hypothetical sale are:

Cash flow: +150M

Income statement: +20M (150M - 130M)

Deferred production costs are reduced by 40M (130M - 90M).

So this continues until you've cleared the deferred production cost to zero.

This is actually a better representation of profits from the program than something closer to actual cash flows, assuming the estimates are reasonable and made in good faith. Boeing can't just skip the early-build planes and jump to the cash-flow positive ones, so moving some of the cost of those early-build planes to the later ones better accounts for the learning-curve.

Gianfranco said...

LAN airlines has confirmed that 4 of their 787-8s (from their initial order) have been converted into 787-9s. So the initial order was for 22 787-8 and 10 787-9. Now it is 18 787-8 and 14 787-9 (with 6 of them taken via AerCap/ILFC).

tommy said...

Boeing issued a press release today indicating that TUIs final two -8s have been converge to -9s, and that a third -9 has been ordered. The two -8s were originally due in 2016, and presumably still are, while all three -9s are due within the next three years.

Additionally, Air Canada said in their financial notes covering the first quarter on their investor relations website that they had converted all outstanding -8 orders into -9s during the quarter. I am. It sure why Boeing has not updated their info yet...

Paul Clark said...

Congratulations tommy for digging out the info about Air Canada's orders. It's been rumoured for a long time but is finally now in black and white. For anyone else seeking to read it first hand it's hidden away at item 6.6 on page 26 of a May 12th document commenting on the First Quarter 2015 results. It is confirmed that AC's B787 fleet will comprise 8 B788s (all already in service) and 29 B789s (to be delivered by end 2019 with 8 expected by March 2016). Additionally AC holds options and purchase rights over a further 23 B787s (types unspecified). This has helped Boeing achieve a major milestone, as the B789 order book has now exceeded 500.

Vab Andleigh said...

@Daniel D'Arcangelis

Thank you for the detailed explanation of program accounting -- this is very helpful!

So many news articles & analysts sensationalize the magnitude of the deferred production costs of 787 (and other aircraft), but few if any ever explain program accounting in detail, or why it matters

So if I'm understanding everything correctly, this means:

* there is no "fake-ness" in program accounting since cash flows represent real costs to Boeing to pay suppliers, workers, construction and you can't hide that

* program accounting, by amortizing investment costs of new 787, allows Boeing to report smaller income losses now but will eventually pay up in the form of reduced future income gains

* selling these six 787 teens will actually increase deferred production costs by roughly $300-400M, despite being a good thing for Boeing to clear that inventory and improving its near-term cash flow (also why Boeing can't state a peak deferred cost due to timing of these deliveries)

* Boeing's efforts on improving productivity now should have a big impact on future income gains given there is at least 900 more aircraft to build within this 1300 aircraft lot and there's a big incentive for Boeing to get build cost down now, kind of like paying extra on a mortgage to pay it off faster

Bob Livingston said...

Uresh, I do not know where to post this so here it is. Line 316 should not be ready for delivery to Scoot. It should be Line 308

Uresh said...

I show 308 as ready for delivery not 316.