 Boeing’s (BA, Financial) first moon-shot, 787 Dreamliner, has already clocked 490,000 hours in service with 21 airline operators since it came into service in November 2011. Boeing claims that this aircraft is highly light and efficient as its build with composite materials, and boasts on the 20% lesser fuel consumption feature when compared to other similar wide-bodied jets in the sector. The U.S. airplane manufacturer has even claimed that the Boeing 787 offers about 10% lower cash seat mile cost. But what is of great worry to the company as well as its investors is that besides the huge development costs behind this program, there has been continued expenses till date after the primary Boeing 787 launch due to various faults that have been discovered gradually after its first take-off in 2011. These technical faults have increased the deferred costs on the Dreamliner program, and Boeing has been bleeding cash on this project since the past three years. The question now is whether this project will ever reach a break even and if it will then when can the break even be expected from this project. Let’s delve in further to find out the answers.
The nightmare that never ended…
Initially the first delivery of the 787 Dreamliner was scheduled in 2008 to All Nippon Airways that was the launch customer of 50 such jets. But due to several production delays the first delivery was rescheduled and the plane first entered service towards end of 2011.
Post its launch, several technical snags were discovered which immediately shot up the costs of the Dreamliner program. From engine failures, fuel leaks to wiring problems – all such issues led to massive expenditure by the U.S. airplane maker on safety probe while rectifying these issues.
This, in turn, led to inflation in deferred developmental costs for this aircraft, and Boeing seems to have been bleeding cash ever since its initial launch. In October 2013, Boeing lifted its 787 deferred cost projection from $20 billion to 25 billion on account of increased spending on the 787-10 and related plans to augment capacity at its factory in North Charleston in 2014 and 2015. But, unfortunately, the deferred costs went over the roof, and in the past quarter stood at $25.2 billion. This gave a primary signal to investors that the 787 Dreamliner program has still not taken off in the past three years, though Boeing claims that the Dreamliner program will see better days in the near future.
What are the company’s expectations?
Boeing is expecting the break even to occur on some of the versions of Dreamliner by next year, helping the deferred costs to gradually go down. Boeing is currently holding a production rate of 10 for the Dreamliner, which it expects to reach 12 by 2016 and 14 by 2020.
CFO Greg Smith is of the opinion that once the production rate moves to 12 per month for the Dreamliner, the deferred costs will start coming down drastically. Analysts’ also do agree to the company’s statement as projected by a J.P.Morgan analyst, that the gap between the estimated unit cost and the selling price for the Dreamliner has narrowed down to $45 million in the third quarter of 2013 compared with $73 million in the first quarter.
Attaining break-even by 2015 might not be feasible and may look as an ambitious target, but Boeing is working towards higher efficiency and productivity to improve its cash flows. It’s reorganizing its facilities to extract extra value, holding talks and discussing terms with suppliers and workforce.
Currently, it’s difficult to ascertain if the Dreamliner project will start generating profits after a point in time, but the company is surely working towards reduction of deferred costs on the Boeing 787 and is lowering other related costs as well. Presently the 737 and 777 are the key cash generators in the wide-bodied segment, offsetting the 787 cash loss.
Final thoughts
Boeing has taken a lesson from the Dreamliner project and the management states that they have literally burnt their fingers on the project, while investors are only hoping that this project generates cash in the near-term to fulfil their hopes. But as of now, we can only speak on deferred costs which need to be controlled first, only then could Boeing think of generating cash from the 787 project. Till then, investors can only build on hopes which might see the face of reality in the forthcoming days.
