Wednesday, July 22, 2015

787 results from Boeing's 2nd quarter 2015 earnings call

Boeing released its 2nd quarter 2015 earnings this morning.  In it they revealed that cumulative deferred production cost increased by $790 million over the quarter (compared to $793 million during Q1' 2015).  Total 787 program deferred production cost now stands at $27.7 billion, a number which is not expected to decrease meaningfully until production hits 12/month sometime next year (a goal toward which they are tracking well).  They should see a drop in the growth of deferred production cost in the 4th quarter of this year.

As I reported earlier, Boeing had delivered 64 787 up to June 30th, 2015 and over 290 since program deliveries started.  Production is now balanced between both the 787-8 and the 787-9.   The 787-8 saw production cost decline 35% over the first 210 deliveries but more impressive is the -9 cost reduction of 30% over the first 34 deliveries.  The -9 should be more profitable for Boeing than the -8.  This is significant as Boeing has more 787-9 and -10 (assuming that the largest 787 derivative also follows a similar cost reduction curve as the -9) to deliver than the -8s.  This means that higher margin potential for the remaining deliveries is greater.  Boeing sees that the -9 has higher level of  profitability next year.  This is all attributable to lessons learned in the 787 program as well as smoother entry into service  for the -9.

In addressing 787 deliveries for the second half of 2015, CFO Greg Smith said:

"On deliveries, certainly we expect the back half to be healthy on 787 deliveries. But as you know, quarter to quarter, Cai, purely from customer ability to take the aircraft, that moves around a little bit. But we're comfortable about where we are on our guide. If we have the opportunity to change that, we'll do that. But I'd say we're well on track to hit that, our objective on about 120. So I think we're in pretty good shape there. But again, the back half will be important for us."

Thus Boeing is hinting that the third quarter 787 deliveries may be big and I'll be watching that very carefully.

9 comments:

Nick Johnson said...

The insignificant decrease in additional deferred production costs during the 2nd quarter makes it hard to understand how Boeing is going to break even some time in the next several quarters, much less reduce the outstanding balance. Boeing is already delivering close to 11 787s per month, so an increase to 12 seems unlikely to have that much of an impact, considering that losses were almost the same for the past 2 quarters.

Karl Perez said...

I think is a combination of higher sale price obtained the higher you go on the delivery order and each aircraft part being consistently cheaper (hopefully) to manufacture the more you make of them. So yeah, the brake even for price sold and what it cost to make that particular airplane should meet soon, otherwise the 1300 frames that Boeing claims is needed to brake even on the program as a whole won't come close.

Karl Perez said...

I think is a combination of higher sale price obtained the higher you go on the delivery order and each aircraft part being consistently cheaper (hopefully) to manufacture the more you make of them. So yeah, the brake even for price sold and what it cost to make that particular airplane should meet soon, otherwise the 1300 frames that Boeing claims is needed to brake even on the program as a whole won't come close.

Daniel D'Arcangelis said...

1300 is not a break-even point. It is the number of planes Boeing thought they could reasonably estimate revenue and expenses for back in 2013. See the update near the beginning of the following article.

http://leehamnews.com/2013/10/23/boeing-earnings-call-live-update/

Karl Perez said...

@ Daniel D'

That is an interesting quote by Boeing in that article.

If they talk about "accounting block" and that is not similar to "breakeven" then that is confusing for folks like most of us that don't understand these tricky accounting methods. But what is the difference between accounting block of 1300 planes sold and the breakeven point for the program as a whole? Maybe when they talk about breakeven, they mean it on a single aircraft level (what the plane is sold for and what is cost to make it). Am I off by much?

Daniel D'Arcangelis said...

The 'breakeven' being discussed now, I think, is in relation to an individual plane. Boeing spent $32B before a single plane was delivered, so it seems unlikely they have recovered anywhere near that just yet.

FWIW, here's the way I understand the program accounting method: Boeing knows that those early aircraft are going to cost a lot to build, and that later aircraft will cost less. So they pick a number they think can reasonably sell (1300), estimate the cost to build all 1300 aircraft, then divide by 1300.

Say the average per plane comes to $100M. That first aircraft off the line cost, say, $200M in cash to produce. When that plane sells, Boeing books the cost as $100M, and puts $100M into "deferred production costs".

A few years later, efficiencies have been gained. Plane 350 cost only $80M in cash to build. Still, we book the cost as $100M. And reduce "deferred production costs" by $20M.

If the estimates are dead-on accurate, "deferred production costs" will get down to 0 when plane number 1300 is delivered. If the estimated cost was too low, it will take more planes to zero out deferred production costs. If the estimated cost per plane is way too low, Boeing has a big problem. If the estimate was too high, it will take less deliveries to zero out the deferred production costs.

Note that the above has to do with costs only - not a mention of revenue. Illustrates that this is not a break-even number at all. Presumably, Boeing is pretty sure they can sell the planes at a price well over the estimated cost - if they didn't they would have killed the project.

Karl Perez said...

Thanks Daniel for the explanation. It is more or less what I understood. People like me simple mind it think of it this way: A company spend certain amount of money to develop and produce a product, then try to figure how many unit (or services) of such product they need to sell at a specific amount to recover the money invested and what it will cost to produce such product. In Boeing case, people talk about 30 billions in the whole for the B787, but I believed that it includes the money that it costs Boeing to developed the plane plus what it costs them to build the number of plane till today. So if we divide that 30 billion over the 1300 planes, that comes out to about 24 million profit that must be made per plane. Right now is not looking good for them, but the more they build and the better pricing they get (as well a producing each plane a bit cheaper), the closer they get to that number.

Daniel D'Arcangelis said...

So yeah, to "break-even" on 1300 planes given $30 billion up-front cost, You do need a gross profit of at least $24 million per plane.

But there is nothing happening to indicate they won't make plenty of money over the life of the program.

For an airplane manufacturer in real trouble, look at Bombardier. They've bet the farm on the new C-Series, and things really aren't looking good there. They recently diluted shareholders by about 30% and took on hundreds of millions of more debt to stem the tide until deliveries can start in the next couple of years. They've sold less than 250 of these planes, and they are small so they list around $60-70m each. Also "paused" the new Learjet which had already eaten up more than $1B in development costs. That is a company in a precarious position. Boeing will be fine.

Kashoo Arlequin said...

Hello Daniel, could you please detail the calcs for the CSeries, using same learning curve and other parameters as for the 787: what would be the number of deliveries at which deferred cost would be zeroing (by comparison to 1300 for the 787) ? Thank you!