Reaching an ever-elusive breakeven point on Boeing’s 787 programme slid still further from the company’s grasp in an otherwise profitable fourth quarter and 2014 overall.
At the beginning of last year, Boeing chief executive and chairman Jim McNerney projected that deferred production costs would peak at around $25 billion by the end of 2014, signaling the programme’s break-even point on a unit basis.
Boeing surprised investors, however, by hitting the $25 billion mark in the third quarter. The dubious milestone suggested the programme is digging an even larger financial hole for itself before it becomes profitable.
Three months later, those fears appear to be realised. The delivery of the first 787 with a unit cost lower than the sale price is projected to occur “shortly after” Boeing raises the production rate by 20% to 12 per month in 2016, says Greg Smith, Boeing’s executive vice-president and chief financial officer, speaking during an earnings call on 28 January.
Meanwhile, the 787 programme added another $960 million in deferred production costs in the fourth quarter, raising the overall total to $26.2 billion. Smith also warned these costs could increase at similar levels for the next two or three quarters.
In response, Cai von Rumohr, a stock analyst and managing director at Cowen Group, told Smith that it “sounds like” Boeing will add another $2.5 billion in deferred production cost over the next three quarters, raising the overall total to at least $28.7 billion.
By that time, Boeing will have delivered more than 300 787s that cost more to build than the sale price. The per-unit loss does not show up on Boeing’s balance sheet, however. Accounting rules allow Boeing to determine the cost of a sale by pulling forward an average of projected profits over a pre-determined block of aircraft, which in the case of the 787 is 1,300 aircraft.
That accounting policy eases the fiscal strain on Boeing’s balance sheet for pricey new aircraft development programmes.
If Boeing reported individual losses on the 114 787s delivered in 2014 based on the discrete costs of building each aircraft, the commercial aircraft division would have reported an overall operating loss of $122 million last year. Instead, the practice of bringing forward average unit profits over a production run of 1,300 aircraft onto current deliveries helped the division post a $6.4 billion profit in 2014 instead.
Until the end of last year, Boeing never intended for the deferred production costs for the 787 programme to rise above $20 billion. As costs continued to rise, Smith said the increases were necessary to overcome production problems as the rate increased to 10 aircraft per month and the 787-9 entered final assembly. Boeing also decided to expand the programme’s second final assembly line in North Charleston, South Carolina, last year, leading to additional costs.
Even so, deferred production costs were supposed to stabilize by the end of 2014. The costs are continuing to rise because of three main issues, Smith says. Finalising cost-saving new contracts with 787 suppliers has been postponed, he says. Boeing’s costs to build each aircraft are declining, but more slowly than expected, he says. Finally, Boeing is making more investments to improve the reliability of the aircraft and productivity on the assembly line, he says.
“The things we’re doing on this programme every day are all about driving cash and profitability over the long-term,” Smith says.
Despite the internal cost growth, Boeing is hitting other key goals on the 787 programme. Deliveries in 2014 exceeded the company’s planned guidance. A production bottleneck at the midbody join position in North Charleston early in 2014 was overcome. Boeing still expects the 787 to become cash positive in 2015, which includes airline advances on 2016 deliveries and pulling forward average projected profits.
Source: Cirium Dashboard
