Monday, August 24, 2015

Prospective 787 customers and August production and delivery review

On the heels of QANTAS' return to the 787 order book, I thought it would be good to review other potential 787 orders that may firm up by year end.  This is by no means an exhaustive list but the more visible ones.

QANTAS – They still have 15 options (delivery slots with a delivery date) and 30 purchase rights (no specific delivery date).  QANTAS exercised the 5 options for delivery from 2017 to 2019.  The remaining 15 options are for 787-9 delivery slots from 2020 to 2021 while the 30 rights are for delivery from 2021 to 2025.  As I had mentioned previously, I expect that QANTAS will take a piecemeal approach to exercising these options and rights as they come due depending on business conditions and new route development plans.

Emirates - This order has been rumored to be going Boeing's way though Tim Clark has poured called water on these rumors by saying that he 787 doesn't have enough thrust to operate without payload restriction in Dubai hot and arrid environment.  Still I do expect that Emirates will pull the trigger on an order comprising of 787-9 and 787-10 at the Dubai Air Show during November 8th through 12th.

Qatar Airways - Qatar has taken delivery of 22 out of 30 787-8s that they had ordered.  They will receive the remainder of their order of 8 aircraft by the end of the second quarter of 2016.  They still do have 30 options left and I do believe that they will exercise them also for a combination of 787-9s.  I'm not sure if they will be in for the 787-10 given Qatar's 787-8 experience with the Charleston team and the 787-10 will be built exclusively in Charleston.

El-Al - The Israeli airline announced that they will be taking on 15 787-8 and 787-9 through a mixture of direct purchases from Boeing as well as leases.  They also will have 13 787 options for future growth.  This order should be firmed up in the next few weeks.

Hainan Airlines – They have said that they are committing to ordering 30 787-9s with deliveries starting in 2021 but this order has yet to appear on Boeing’s order and delivery web site. They may be the unidentified customer that had ordered 30 787-9 in two separate tranches (24 and 6).  Interestingly, there are 2 787-9 on the 787 firing order that are being leased to Hainan.  These airplanes should be delivered next year.

Phillipine Airlines – They’re looking to increase their widebody fleet and are looking at an order of 6 A350s or 787s.  Word is that the A350 has the edge in this contest.

Turkish Airlines – Turkish Airlines has been saying that they are evaluating the 787 for years but have yet to announce a decision.  The airline has bought form both Boeing and Airbus so this order, when it does come, can go either way.

If any readers have any other information on potential orders that are coming up or that would be announced, please feel free to add it to the comments section.

Production and Deliveries

As we’re getting closer to the end of August, the delivery schedule for the remainder of the month is becoming clearer.  Boeing has delivered 6 787s thus far but expects to deliver 8 aircraft in the next one week.  Four of these airplanes still have yet to conduct their C-1 customer acceptance flights which all should be flown tomorrow, August 25th

LN332-C1-8/25, Del-8/31
LN333-C1-8/25, Del-8/31
LN334-C1-8/25, Del-8/31
LN335-C1-8/25, Del-8/28

At the end of the month I expect that Boeing would have delivered 14 787; 6 787-8 and 8 787-9, 2 787-8 for American, 2 787-9 each for Vietnam Airlines and AerCap (leased to LAN), 1 787-9 each for Air Canada, Air New Zealand, ANA, and United.  Finally 1 787-8 will be delivered each to AerCap (leased to Thai), BBJ (Sultan of Brunei), Scoot, and CIT (leased to Aeromexico).

If the remaining 8 deliveries occur then Boeing would have 14 for August, 90 for 2015 and 318 program deliveries.  That would mean that Boeing would need to deliver an average of 7.5 787s per month for the remainder of the year in order to meet its 2015 delivery goal of at least 120 787s.  I believe they can deliver 135 by year end surpassing their goal by 12.5%.

787 Full Production Table


1coolguy1 said...

With the $26 BILLION in program deferred costs, it is clear the program was not only managed poorly, the sales side engaged in a sales price and discount program that was unwarranted and reckless.
The 787 had a 3+ year delivery jump on the A350 and the prices these planes have been sold at is nothing short of either criminal or reflective of the sales side not talking to the production side, as amazing as that sounds.
Given the absurd discounts given, the price for 787's has been set: The industry talks and moving prices up is extremely difficult.
This may seem too simple an explanation yet I haven't heard a better one.

Daniel D'Arcangelis said...

The sales price has nothing to do with the deferred production costs. The fact that deferred production costs are high right now is expected. Might quibble over how expected the exact number is right now, but the fact there is a balance in that account is proof of nothing you state. You may want to keep an eye on the A350 figure as they start delivering planes, although I'm not sure that Airbus even reports a similar number - not because they wouldn't be racking it up if they used program accounting, but because they may not use the program accounting method.

Program accounting is a much better method for the average investor who may look no further than the big financial statements or earnings per share, assuming the estimates used are reasonable. The method particularly makes the Income Statement much more useful to a novice investor. Compared to the cash-flow method you suggest anyway. That is why this method is GAAP in the US.

It is only confusing if you look at the financials, see "deferred production cost", and then don't bother to research the method used and skip straight to the uproar. It really isn't much different at all than the accounting for depreciation. But most everyone who is up in arms over "deferred production costs" understands what depreciation is already.

greg smith said...

Thinking Eva may finally firm up their dreamliner order.
Thought Oman Air committed to the -9 as well.

1coolguy1 said...

"The sales price has nothing to do with the deferred production costs"
A more untrue statement has never been uttered.
Deferred production costs are those costs in EXCESS of the selling price.
Simple arithmetic: Sales price: $120m, production cost: $150m = AN ADDITIONAL $30m to the deferred production cost account.
If the sales price in the example had been $190m, the deferred production cost account would decrease by $40m ($190m - $150m).
End of story.

HK Expat said...

There's also a Xiamen Airlines top-up in the works.
Oman Air conversion to 9s as mentioned above.
KLM conversion to 10s.

Uresh said...

Conversions don't count, just orders that add to the total order total

1coolguy1 said...

Is there any way to track what each version was selling for originally and what they are selling for today? It should be much more yet with the A350 now online, the price appreciation has surely been limited.

Daniel D'Arcangelis said...

1coolguy1 -

"Deferred production costs are those costs in EXCESS of the selling price."

Nope. Wrong.

Deferred production cost is the extent to which the cash cost to build specific planes has exceeded the estimated average cost for the accounting block. Deferred production cost goes up at the start of the run, then goes down to zero once the planes start to cost less than the estimate.

If you want an explanation of the basics with numbers, I've done it twice on comments in other posts in this very blog.

Jamie Hogan said...

You are both partially right:
Instead, Boeing’s programme accounting method defines a block 1,300 aircraft expected to be delivered and builds in a predetermined cost and operating margin for each aircraft delivered within the block.

Actual losses on each aircraft delivered so far are added to the programme’s deferred production cost. Boeing also has a separate line item for unamortised tooling and other cos

Daniel D'Arcangelis said...

The point is that the amount added to the deferred costs on a particular plane is not:

"Cash" Cost ($150M) - Sale Price ($120M) = $30M

It is:

"Cash" Cost ($150M) - Estimated Cost ($100M) = $50M

That is a big difference in correctly understanding this account. I added an estimated cost figure to coolguy's figures to make the point - the $100M is not an actual number reported by anyone.

Another way you might look at the above figures is you know you had a $30M credit to cash - you recieved only $120M for the plane that you paid $150M to build, so cash was reduced by $30M. You booked the plane at a $20M profit (Sales Price - Estimated Cost) - credit to equity. What is the offsetting debit of $50M of these 2 credits? Deferred production costs.

Then in a few years, the numbers shift as production improves and costs come down.

"Cash" Cost ($80M) - Estimated Cost ($100M) = -$20M

We sold that plane for $120M as well - a "Cash" profit of $40M.

Looking at the accounting equation, we have a Cash debit of $40M. But we only booked a profit of $20M ($120M - $100M - we're still using the estimated cost figure like we did before). Where's the other $20M credit to offset the debit? We reduce deferred production costs.

What this recognizes is that the $150M spent to build the earlier airplane includes 2 components. 1. The cost to build that particular plane and 2. An investment in learning how to reduce costs on future planes. You can't build LN500 without first building LN 1, 2, 3 . . .

The result of all of this is that a statement that "$27B of deferred production costs indicates the sales team engaged in an unwarranted and reckless campaign." is making a completely invalid connection. The 787 may or may not be a commercial failure - the deferred production cost balance at any point in time doesn't indicate one way or the other on that statement.

grahamj said...

Also, when it comes to "deferred production costs", we cannot look at this situation properly without considering losses of sales. If we assume that Boeing is selling the 787 at an average price of $120 million, and it should be sold at $140 million to keep the deferred production costs in check, how many of the 1100 or so sales would have been lost? Certainly some of those sales would have gone to Airbus, and some would have not been made at all (price affects the value proposition to the airlines).

Peter said...

I read this week that KLM converted I think 4 of their -9 to -10 variants. Not really new order but a bit of life for the larger. I wouldnt be surprised to see them start to replace their 747 fleet with those in the future.

Traveling Man said...

All I know is that the longer the explanation and the more accounting tricks and obfuscating terms you need, the shadier it appears to average Joe. That's a fact.

My take is that Boeing is selling them cheap to grab a larger share of this segment of the plane market. Knowing that airlines often stick with the same manufacturer when buying new planes to replace their old ones.

Daniel D'Arcangelis said...

I agree with graham - a lower price certainly attracts more sales.

What I don't get is why people are so insistent on connecting the accounting method to whether or not the plane will make or lose money.

It's like me complaining I'm not losing weight and blaming the weight gain on the notebook I use to track calories. I'm not losing weight because I'm eating too much, not because of how I track it.

Karl Perez said...

Traveling Man: "Knowing that airlines often stick with the same manufacturer when buying new planes to replace their old ones."

Well, that does not do you any good if you keep selling them the new planes also at a discount price. I believe Boeing misjudge how much it would cost them to build the B787 when it was launched, now they would have to sell it at a higher price, but there is competition (both the A330NEO and A350)from Airbus so there is only so much they can get for them before customers look elsewhere.

1coolguy1 said...

To put the 787 deferred production costs into perspective, the inflation-adjusted deferred production cost on the 777 was $3.7B. The 787, at last count, is up to $32B!!! per Wikipedia:

This program's financial failure together with the other gross missteps under McNerney will surely comprise one of the most financially debilitating CEO tenures of all time.
KC-46 - late and over budget
747-8: late and over budget
737 Max: Late and hundreds of sales lost to Airbus playing catchup.
Wow - did this GE jerk have ANY WINS???

Anonymous said...

Lets talk about the blog."Production and delivery review".
That is were the comments should be about in my opninion.

Anyone (Uresh?) have any idea when L/N 356 KLM first 787-9 will do her B1 and C1 flight in september?

Thanks for the great job you are doing here!

Thetime Boom said...

Hi there, is there something wrong with charleston's chain production? I have seen that avianca's airplane ZA670 had a roll out schedule for 8/20th, then it changed to 8/27th and now it says 8/30th and its been in the position 5 for quite a while.

Uresh said...


Uresh said...


John E said...

OMG! This argument shows why dynamic, forward-thinking companies are seldom run by accountants!

The sales price was NEVER the problem! The price is set through discussions with customers about how much they would pay for an airplane that offers the operating metrics of the 787. Once that price range is determined, the final design of the airplane is made to fit within that range. PERIOD. The 787 program isn't some federal government cost-plus contract where Boeing can go back to their customers and demand more money to offset unforeseen production costs.

The production F-UP, and the HUGE deferred production costs that resulted, were probably the result of some ACCOUNTANT with a PowerPoint presentation outlining how much Boeing could save by outsourcing the majority of the 787 design and production to key suppliers around the world!!!!!

Ellerslie Observer said...

The discussion on the rights and wrongs of deferred production costs is not relevant, it's money spent. What matters is whether the production process is getting more efficient, so the plane generates profit for further aircraft development such as the 757 successor. From Uresh's fantastic tables it appears that the production process is finally settling down to a smooth, efficient process. Thanks for all your hard work, Uresh.

David Cummings said...

As for a new 757 why don't they just re-open the 787-3 series? OK it's a wide body but they know how they will build it and test it etc, seems a no brainer to me. The 787-3 would have the range of a 757 wouldn't it?

David Cummings said...
This comment has been removed by the author.