Leeham thinks Boeing is not managing to make production of the 787 efficient enough to be able to make money on production with the accounting block at 1300.

"Within two quarters we also reach half time for deliveries at 650 aircraft. Production cost improvements must now create a margin, so that the $30b deferred costs to date can be amortized by remaining units. Is the margin created? Not so far"

https://leehamnews.com/2017/07/20/boein ... more-24180

Anyway surely Boeing will make money from the ancillaries even if producing the planes will result in a loss?
Unfortunately most of the article is behind paywall but thoughts?

I think there are a number of people that have been wondering if a write down or expansion of the accounting block is coming on the 787. We've seen some write downs with moving production costs on early airplanes to R&D. 787 has continued to sell and it is likely possible that the accounting block can increase.

On a side note, I hope this thread sticks to the information posted on production cost and doesn't turn into an A vs B flame war.

The article really doesn't say much.....it just repeats the initial accounting block figure of $30 billion that at this point is very old news. The last number I saw has indicated that the $30 billion dollar figure has been reduced about $3 billion and decreases with every plane delivered.

As to whether the this decrease is "fast enough," ah.....I dunno....is it ever fast enough? Unless Boeing makes a fresh statement regarding the situation call me dubious. Leeham rarely has anything positive to say about Boeing, and wave the Airbus pom-poms whenever they can.

What all the reports indicate, and what Boeing confirms, is the accounting block is improving....the break even point was reached over 1 1/2 years ago, and the numbers get better with every plane delivered. Whether or not this is "fast enough," only Boeing knows for sure.

ElroyJetson wrote:

What all the reports indicate, and what Boeing confirms, is the accounting block is improving

It is clear that the overall financial status of the 787 program is improving however I don't know that the accounting block is improving. Estimation of the accounting block as I understand it already factored in later deliveries making a profit per plane. Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

Cerecl wrote:

Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

I don't think anyone expects the accounting block number to reduce. The question is whether Boeing can show a profit with the current accounting block. If not, they have to write off the loss, or try to make an argument that the accounting block quantity should increase, which would give them more frames to amortize against. Right now, I don't think anyone believes the sales number would support an expanded accounting block.

glbltrvlr wrote:

Cerecl wrote:

Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

I don't think anyone expects the accounting block number to reduce. The question is whether Boeing can show a profit with the current accounting block. If not, they have to write off the loss, or try to make an argument that the accounting block quantity should increase, which would give them more frames to amortize against. Right now, I don't think anyone believes the sales number would support an expanded accounting block.

This confuses me. Unless we aren't speaking about the same thing. The 787 accountinh block is 1300 airplanes. Total orders for the 787 are about 1275. It is entirely feasible that the total number of orders for the 787 will exceed the accounting block either this year or next. Why do you think the sales numbers don't support an expanded accounting block?

Newbiepilot wrote:

This confuses me. Unless we aren't speaking about the same thing. The 787 accountinh block is 1300 airplanes. Total orders for the 787 are about 1275. It is entirely feasible that the total number of orders for the 787 will exceed the accounting block either this year or next. Why do you think the sales numbers don't support an expanded accounting block?

Accounting blocks aren't intended to capture the entire production of a given model. They are intended to spread the higher costs of frames in the beginning stages of production against the efficiencies gained once production settles down.

This is a pretty good explanation about why investors question changing the size of accounting blocks: https://seekingalpha.com/article/390118 ... erent-time

glbltrvlr wrote:

This is a pretty good explanation about why investors question changing the size of accounting blocks: https://seekingalpha.com/article/390118 ... erent-time

That's the guy who is being laughed at around the globe for announcing that EK has ordered the 787 when both the airline and Boeing deny it ?

Boeing previously said they needed an average profit of $70M per 787 to break even in the 1300 accounting block IIRC.

glbltrvlr wrote:

Newbiepilot wrote:

This confuses me. Unless we aren't speaking about the same thing. The 787 accountinh block is 1300 airplanes. Total orders for the 787 are about 1275. It is entirely feasible that the total number of orders for the 787 will exceed the accounting block either this year or next. Why do you think the sales numbers don't support an expanded accounting block?

Accounting blocks aren't intended to capture the entire production of a given model. They are intended to spread the higher costs of frames in the beginning stages of production against the efficiencies gained once production settles down.

This is a pretty good explanation about why investors question changing the size of accounting blocks: https://seekingalpha.com/article/390118 ... erent-time

Yes an accounting block shouldn't be the entire production run but that is not what you said:

Right now, I don't think anyone believes the sales number would support an expanded accounting block.

Strato2 wrote:

Anyway surely Boeing will make money from the ancillaries even if producing the planes will result in a loss?
Unfortunately most of the article is behind paywall but thoughts?

In the end it makes little difference in that the 787 deferred production costs, like the A380 development costs, are sunk costs. The money has already been spent and chasing after it would be futile, so you make decisions to optimize future economic outcomes while ignoring past costs. At some point, Boeing will have to do one or more of three things:

* Write down some portion of the deferred costs (they did this in 2016 by reclassifying $1.2 billion in costs assigned to two flight test aircraft to R&D when they determined they wouldn't be able to sell those aircraft). This typically results in a one-time hit to earnings as a spacial charge.
* Increase the size of the accounting block (as many have suggested they may do). This spreads the costs further to the right on the time axis.
* Increase the amount of costs assigned to each aircraft produced going forward. This is the only way they'd be able to avoid increasing the size of the accounting block without taking special charges as in the first option.

In any event, it really only matters much if you're a shareholder. And IMO the larger worry is the $26 billion in retiree health care & pension liability they're carrying on the books.

Another flattering unbiased report from Leeham on Boeing.

(Sarcasm off)

glbltrvlr wrote:

Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

It can only reduce if airlines cancel existing orders and do not place new orders ever.

Cerecl wrote:

The question is whether Boeing can show a profit with the current accounting block. If not, they have to write off the loss, or try to make an argument that the accounting block quantity should increase, which would give them more frames to amortize against. Right now, I don't think anyone believes the sales number would support an expanded accounting block.

As of last Thursday, the 787 order book is already at 1350 - 50 more than the current Accounting Block. So we're very likely going to see an increase in the 787 Accounting Block in 2018 should 787 orders continue to be placed. I expect the next Block will be around 1500-1600 frames.

" .. In the end it makes little difference in that the 787 deferred production costs, .. "

The accounting method makes quite the difference.
( Then both airframers account their devel cost directly.)
What Boeing does is convert outlay from production to a "negative asset".
This turns deferred losses into a highly energized bungee cord eager to release
its energy at the slightest financial road bump.

Newbiepilot wrote:

glbltrvlr wrote:

Cerecl wrote:

Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

I don't think anyone expects the accounting block number to reduce. The question is whether Boeing can show a profit with the current accounting block. If not, they have to write off the loss, or try to make an argument that the accounting block quantity should increase, which would give them more frames to amortize against. Right now, I don't think anyone believes the sales number would support an expanded accounting block.

This confuses me. Unless we aren't speaking about the same thing. The 787 accountinh block is 1300 airplanes. Total orders for the 787 are about 1275. It is entirely feasible that the total number of orders for the 787 will exceed the accounting block either this year or next. Why do you think the sales numbers don't support an expanded accounting block?

The original accounting block was 1100 planes Boeing has already extended the accounting block once to 1300 planes, it is far from certain that Boeing will get permission to extend the accounting block again. The securities regulator will decide that.

Stitch wrote:

glbltrvlr wrote:

Therefore, unless the production cost unexpectedly comes down faster than expected the accounting block will not reduce in number.

It can only reduce if airlines cancel existing orders and do not place new orders ever.

Cerecl wrote:

The question is whether Boeing can show a profit with the current accounting block. If not, they have to write off the loss, or try to make an argument that the accounting block quantity should increase, which would give them more frames to amortize against. Right now, I don't think anyone believes the sales number would support an expanded accounting block.

As of last Thursday, the 787 order book is already at 1350 - 50 more than the current Accounting Block. So we're very likely going to see an increase in the 787 Accounting Block in 2018 should 787 orders continue to be placed. I expect the next Block will be around 1500-1600 frames.

Highly unlikely that the accounting block will be extended, there are already complaints with the SEC on the "creative" use of program accounting at Boeing.

zeke wrote:

glbltrvlr wrote:

This is a pretty good explanation about why investors question changing the size of accounting blocks: https://seekingalpha.com/article/390118 ... erent-time

That's the guy who is being laughed at around the globe for announcing that EK has ordered the 787 when both the airline and Boeing deny it ?

http://www.strategicaeroresearch.com/ is the site that has the "done deal" announcement, not https://seekingalpha.com ....

https://seekingalpha.com/article/390118 ... erent-time seems to be a good discussion of accounting blocks.

And what people here seem to be missing is that the expectation is that the by the time all frames in the accounting block are sold, you are supposed to have covered all the deferred costs. If you can't, you need to take the excess uncovered cost as a loss. An alternate is to increase the accounting block size. You can do that if you can legitimately claim that you expect to sell more frames. Clearly Boeing is over 1300 already so expanding the accounting block is a viable approach.

ElroyJetson wrote:

The article really doesn't say much.....it just repeats the initial accounting block figure of $30 billion that at this point is very old news. The last number I saw has indicated that the $30 billion dollar figure has been reduced about $3 billion and decreases with every plane delivered.

Well, let's look at Boeing's 2017Q1 figures from their own website...

Deferred Production Costs = $26.992billion
Unamortized tooling, etc = $3.851billion
Total = $30.843billion

That total is a reduction of just $90million compared to 2016Q4. Given they delivered 32 787s in Q1, that represents an average reduction of just $2.81million per delivery.

At the end of Q1, the 787 backlog was 679 frames. $30.851billion over 679 frames means that Boeing needs to reduce deferred costs by $45.42million average per delivery. Last quarter they managed $2.81million. Even if we increase the deliveries to the current accounting block of 1,300 (i.e. a backlog of 768), they still need to reduce it by over $40million per delivery in order to clear it in the current accounting block.

It's little wonder that many analysts believe Boeing will have to take a significant charge at some point in the future.

ElroyJetson wrote:

As to whether the this decrease is "fast enough," ah.....I dunno....is it ever fast enough? Unless Boeing makes a fresh statement regarding the situation call me dubious. Leeham rarely has anything positive to say about Boeing, and wave the Airbus pom-poms whenever they can.

Look at the figures above! It's currently nowhere near fast enough and it has nothing to do with Leeham. IMHO, the Leeham article was pretty much just a factual summarisation of the current state of play.

ElroyJetson wrote:

What all the reports indicate, and what Boeing confirms, is the accounting block is improving....the break even point was reached over 1 1/2 years ago, and the numbers get better with every plane delivered. Whether or not this is "fast enough," only Boeing knows for sure.

Wait. What? How does an accounting block "improve"? That's like trying to measure the robustness of different planes.

Yes, Boeing is reducing deferred costs with each 787 delivery. Is it fast enough? The answer to that is as plain as the nose on your face and everyone knows it.

Stitch wrote:

I expect the next Block will be around 1500-1600 frames.

I'm sure that's what Boeing wants and needs. However, it remains to be seen if the SEC will allow it.

An accounting block of 1500 to 1600 will still not be enough to clear the accumulated deferred costs. It does however kick the issue down the road and allow Boeing to continue to pay big executive bonuses etc.

scbriml wrote:

Well, let's look at Boeing's 2017Q1 figures from their own website...

Deferred Production Costs = $26.992billion
Unamortized tooling, etc = $3.851billion
Total = $30.843billion

That total is a reduction of just $90million compared to 2016Q4. Given they delivered 32 787s in Q1, that represents an average reduction of just $2.81million per delivery.

At the end of Q1, the 787 backlog was 679 frames. $30.851billion over 679 frames means that Boeing needs to reduce deferred costs by $45.42million average per delivery. Last quarter they managed $2.81million. Even if we increase the deliveries to the current accounting block of 1,300 (i.e. a backlog of 768), they still need to reduce it by over $40million per delivery in order to clear it in the current accounting block.

It's little wonder that many analysts believe Boeing will have to take a significant charge at some point in the future.

This is the best summary in this thread regarding 787 program deferred production cost.

scbriml wrote:

Stitch wrote:

I expect the next Block will be around 1500-1600 frames.

I'm sure that's what Boeing wants and needs. However, it remains to be seen if the SEC will allow it.

Accounting block represents the production the revenue and cost of which can be estimated with a degree of certainty. In practice this is often 5 or 6 years of production. When there are less than say 5 years production left in the accounting block, Boeing will certainly increase the accounting block.

scbriml wrote:

Stitch wrote:

I expect the next Block will be around 1500-1600 frames.

I'm sure that's what Boeing wants and needs. However, it remains to be seen if the SEC will allow it.

The SEC has no real say in this. They can only challenge an accounting block change if it appears to be very unreasonable. It would not be unreasonable for Boeing to increase the accounting block size to at least 1500; and perhaps higher than that based on current sales and sales rates.

I was actually projecting that Boeing would do the accounting block change by the end of last year... The data was there to support it. If anything; they are being extraordinarily conservative in their actions on accounting block size at this time.

The fact that some people question and object is also meaningless. Some people object, question, and complain about everything.

Have a great day,

scbriml wrote:

Yes, Boeing is reducing deferred costs with each 787 delivery. Is it fast enough? The answer to that is as plain as the nose on your face and everyone knows it.

100% spot on. Rather than attempt to extend the accounting block, I expect Boeing will pick a year and take much of it as a large write-off.

That will clear the books, and Boeing can start to book larger profits going forward and more importantly justifying larger bonuses for management.

David

kelvin933 wrote:

The original accounting block was 1100 planes Boeing has already extended the accounting block once to 1300 planes, it is far from certain that Boeing will get permission to extend the accounting block again. The securities regulator will decide that.

scbriml wrote:

I'm sure (a 1500-1600 accounting block is what) Boeing wants and needs. However, it remains to be seen if the SEC will allow it.

The Accounting Quantity is calculated from orders and deliveries so as orders increase, Boeing has the ability to increase the Accounting Quantity accordingly. And the Accounting Quantity does not need to match the actual order book. When Boeing set the original 787 Accounting Quantity at 1100 frames in 2011, they had 860 firm orders. When they raised it to 1300 in 2013, they had less than 1000 (they ended 2013 with 1030).

For the past four years Boeing has been averaging over 60 787 sales a year and Boeing currently has five years of production booked. So with 1250 orders in hand and five years of production already secured, I see no pushback from the SEC for 1600, much less 1500.

The SEC issue will be realistic sales expectations, and how long you carry this magnitude of losses forward.

If you extrapolate deliveries in the last quarter, and apply that reduction rate in deferred costs to the remaining balance, Boeing needs to nearly double the size of the current accounting block.

A write off is inevitable. It's just under whose watch it occurs.

When it is all said and done many many moons from now...the 787 will be lucky to break even. Great airplane. Tremendous cost savings for the airlines. Just not so much for Boeing. They built a state of the art airplane but they were in way over their head. The good news is that their next model which will most likely similar in nature albeit smaller in size will be pure profit because they have already paid up front for it's development costs give or take a few billion.

Boeing will expand the block and probably take a partial write down before the reengened/refreshed versions are launched in about 8 or so years. As per above Leeham is not particularly fond of Boeing and certainly the opinions of doom are common in their analyses.

scbriml wrote:

ElroyJetson wrote:

The article really doesn't say much.....it just repeats the initial accounting block figure of $30 billion that at this point is very old news. The last number I saw has indicated that the $30 billion dollar figure has been reduced about $3 billion and decreases with every plane delivered.

Well, let's look at Boeing's 2017Q1 figures from their own website...

Deferred Production Costs = $26.992billion
Unamortized tooling, etc = $3.851billion
Total = $30.843billion

That total is a reduction of just $90million compared to 2016Q4. Given they delivered 32 787s in Q1, that represents an average reduction of just $2.81million per delivery.

At the end of Q1, the 787 backlog was 679 frames. $30.851billion over 679 frames means that Boeing needs to reduce deferred costs by $45.42million average per delivery. Last quarter they managed $2.81million. Even if we increase the deliveries to the current accounting block of 1,300 (i.e. a backlog of 768), they still need to reduce it by over $40million per delivery in order to clear it in the current accounting block.

It's little wonder that many analysts believe Boeing will have to take a significant charge at some point in the future.

I've been looking into that some time ago and some sources claim, deferred production costs reached some 38 billion USD at some point. That at least is a step forward.

If they extend the accounting block size to the point of having all deffered costs accounted for, they still need to recover all R&D costs, needn't they?
So for the overall programm, how many deliveries are we lookingt at in total? 3500? 4000? 5000?

piedmontf284000 wrote:

When it is all said and done many many moons from now...the 787 will be lucky to break even. Great airplane. Tremendous cost savings for the airlines. Just not so much for Boeing. They built a state of the art airplane but they were in way over their head. The good news is that their next model which will most likely similar in nature albeit smaller in size will be pure profit because they have already paid up front for it's development costs give or take a few billion.

Exactly true. Out of $30 billion at least $15 billion was "tuition money" to give Boeing leaders and engineers the training to develop a program like that. It's money that will never be seen again. But it gave them skills to do the 787 and other programs. Airbus same with A380. The goal is that the same lessons can be applied multiple times. And it appears to be true.

I wish Boeing could just acknowledge loss on the 787 program, and take the write down. It will probably be about $ 20 to 25 billon, but at least it would stop all these treads about the deferred development and production costs. The 787 program will never be good business for Boeing, no matter how swollen up to accounting block is made to be. The reality is hard competition from Airbus, where the A330 keeps the prices in this market segment relatively low. Boeing will benefit from all the acquired know-how from the 787 program, and this will put Boeing in a better position on the next development project (the MOM/NMA).

diverdave wrote:

scbriml wrote:

Yes, Boeing is reducing deferred costs with each 787 delivery. Is it fast enough? The answer to that is as plain as the nose on your face and everyone knows it.

100% spot on. Rather than attempt to extend the accounting block, I expect Boeing will pick a year and take much of it as a large write-off.

That will clear the books, and Boeing can start to book larger profits going forward and more importantly justifying larger bonuses for management.

David

I think that is the opposite of what would happen. A one time loss would kill the stock price. Slowly driving down production costs and increase margin for each airplane while slowly writing down production cost to R&D is far more likely.

MaxiAir wrote:

I've been looking into that some time ago and some sources claim, deferred production costs reached some 38 billion USD at some point.

Using Boeing's own numbers, the highest figure I can see is $32.418billion at end 2016Q1 ($28.651billion in deferred costs and $3.767billion in unamortized tooling).

The number dropped by over $1billion 2016Q2 but that was mainly thanks to a significant write-off and some "reclassification" of costs. The last three quarters have seen reductions of $166million, $281million and $90million. 2017Q2 numbers are awaited with interest.

Is Leeham saying anything new compared to 3-6 months ago when he argued (and many of us agreed) the program is not on a pace to pay down the deferred costs in the existing block?

Flighty wrote:

piedmontf284000 wrote:

When it is all said and done many many moons from now...the 787 will be lucky to break even. Great airplane. Tremendous cost savings for the airlines. Just not so much for Boeing. They built a state of the art airplane but they were in way over their head. The good news is that their next model which will most likely similar in nature albeit smaller in size will be pure profit because they have already paid up front for it's development costs give or take a few billion.

Exactly true. Out of $30 billion at least $15 billion was "tuition money" to give Boeing leaders and engineers the training to develop a program like that. It's money that will never be seen again. But it gave them skills to do the 787 and other programs. Airbus same with A380. The goal is that the same lessons can be applied multiple times. And it appears to be true.

As far as I understand it, the development cost is a separate category from the deferred production cost. Or is that not what you're referring to as tuition money?

Anyways, on the tuition money analogy, I get the strong sense, for reasons that I can't discuss in detail, that quite a few within Boeing's leadership didn't take their classes seriously and graduated with a D+ average.

That's in addition to giving degrees to freshmen. What I mean is the general business trend in the US of favoring MBA's over experience. Without going into specifics or naming any companies, I'm familiar with several instances of fresh young faces with MBA's replacing seasoned engineers in the lower and mid-level management in large companies, and the results have not been good in most of the cases I'm familiar with.

The 787 will be the first widebody to break 2000 frames.

I'm not worried about it.

Newbiepilot wrote:

I think that is the opposite of what would happen. A one time loss would kill the stock price. Slowly driving down production costs and increase margin for each airplane while slowly writing down production cost to R&D is far more likely.

Big write-offs is exactly what is done in corporate America and yes at Boeing. Look at the tanker program.

You take your big writeoffs and the stock takes a dive. A year later, your annual profits look a whole lot better, the write-off is in the past, and the stock is higher than ever. CEO gets a big raise and more stock options. Everybody lives happily ever after except the folks who sold when the stock plunged.

David

Varsity1 wrote:

The 787 will be the first widebody to break 2000 frames.

I'm not worried about it.

I think 2000 frames crashing should indeed be a security concern for Boeing....

iamlucky13 wrote:

Is Leeham saying anything new compared to 3-6 months ago when he argued (and many of us agreed) the program is not on a pace to pay down the deferred costs in the existing block?.

I don't think there is any new information because Boeing has not yet released 2nd quarter financial numbers yet.
787 program accounting and deferred production costs is something that has been known for years.

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

StTim wrote:

An accounting block of 1500 to 1600 will still not be enough to clear the accumulated deferred costs. It does however kick the issue down the road and allow Boeing to continue to pay big executive bonuses etc.

If the accounting block was increased to 1,600 that would mean that each 787 delivery still needs to reduce the deferred costs by $28.88million. While that's a lot nicer number than $40.16million (for 1,300), it's still more than 10 times what they managed in Q1 this year. The real killer is, each delivery that fails to hit that number, increases the number for all subsequent deliveries.

Newbiepilot wrote:

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

I guess you missed some articles "Boeing’s advantage going into 2018" and "Propelled by MAX 10, Boeing thumps Airbus at Paris Air Show".

I'm really not sure why you see an article outlining Norwegian's challenges as "presenting Boeing in a negative light". Norwegian's issues have nothing to do with the fact they operate an all-Boeing fleet and the article says nothing negative about the planes Norwegian flies. Or do you think Norwegian doesn't have any challenges and Leeham is making it up?

If you need to restore the balance in your life, you can go here: http://www.strategicaeroresearch.com

Newbiepilot wrote:

iamlucky13 wrote:

Is Leeham saying anything new compared to 3-6 months ago when he argued (and many of us agreed) the program is not on a pace to pay down the deferred costs in the existing block?.

I don't think there is any new information because Boeing has not yet released 2nd quarter financial numbers yet.
787 program accounting and deferred production costs is something that has been known for years.

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

There's grounds for believing that what Leeham says may be accurate. After all, the 787 has had it bad financially, Norwegian haven't been convincing in some aspects and of course the NMA market is uncertain, we don't really know who wants it, and what specifications airlines want it to have. There may be a slant against Boeing, but that doesn't mean the arguments are invalid. They tend to argue their cases quite well. I think they make a lot of very valid points.

Side note, Norwegian are an Airbus customer.

ScottB wrote:

Strato2 wrote:

Anyway surely Boeing will make money from the ancillaries even if producing the planes will result in a loss?
Unfortunately most of the article is behind paywall but thoughts?

In the end it makes little difference in that the 787 deferred production costs, like the A380 development costs, are sunk costs. The money has already been spent and chasing after it would be futile, so you make decisions to optimize future economic outcomes while ignoring past costs. At some point, Boeing will have to do one or more of three things:

* Write down some portion of the deferred costs (they did this in 2016 by reclassifying $1.2 billion in costs assigned to two flight test aircraft to R&D when they determined they wouldn't be able to sell those aircraft). This typically results in a one-time hit to earnings as a spacial charge.
* Increase the size of the accounting block (as many have suggested they may do). This spreads the costs further to the right on the time axis.
* Increase the amount of costs assigned to each aircraft produced going forward. This is the only way they'd be able to avoid increasing the size of the accounting block without taking special charges as in the first option.

In any event, it really only matters much if you're a shareholder. And IMO the larger worry is the $26 billion in retiree health care & pension liability they're carrying on the books.

Yes, good analysis. Just write off the sunk cost, it will hurt the bottom line, but in real terms, it doesn't make a difference for the cash flow. If in the end the B787 will be profitable for Boeing, only time will tell.

Newbiepilot wrote:

iamlucky13 wrote:

Is Leeham saying anything new compared to 3-6 months ago when he argued (and many of us agreed) the program is not on a pace to pay down the deferred costs in the existing block?.

I don't think there is any new information because Boeing has not yet released 2nd quarter financial numbers yet.
787 program accounting and deferred production costs is something that has been known for years.

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

The 787 has a lot of financial baggage with it - hard to deny. I wish a write-off would happen so we can all move on with our lives.

Norwegian is struggling. Not a lot of news to argue with there.

The "NMA" is about the most unclear program that I've witnessed take place as far as business case goes. I'm sure it'll be fine but it's far from a slam dunk outcome.

I'm sure there's a bias there at some level, but calling a spade a spade isn't in and of itself a bad thing. It's just not enjoyable for everyone, which I get.

scbriml wrote:

If the accounting block was increased to 1,600 that would mean that each 787 delivery still needs to reduce the deferred costs by $28.88million. While that's a lot nicer number than $40.16million (for 1,300), it's still more than 10 times what they managed in Q1 this year. The real killer is, each delivery that fails to hit that number, increases the number for all subsequent deliveries.

If Boeing hasn't reduced, or at least not reduced the deferred production cost by a significant margin, why would anyone think they will be able to do it by a big enough margin if you increase the accounting block by another 300 aircraft? For me its not so much that they still have the big amount that still needs to be paid back in the books, its that its taking way to long right now where you would have expected the number being paid back to be bigger.

Isn't the idea behind the accounting block that you pay back your cost over the accounting block? The idea is surely that if the program were to stop getting orders that it would at least pay back its cost if they only delivered the current block. In that instance Boeing has failed miserably as it will need to have either a few more accounting block increases or write off costs on the program.

scbriml wrote:

Stitch wrote:

I expect the next Block will be around 1500-1600 frames.

I'm sure that's what Boeing wants and needs. However, it remains to be seen if the SEC will allow it.

I doubt the SEC will have much of a beef with Boeing here simply because the existence and size of the deferred costs have been disclosed and clearly explained. As long as FASB allows program accounting under GAAP it's unlikely Boeing will have to change the practice. And if people on this site -- who are not necessarily accountants or investment professionals -- can figure out that Boeing probably can't cover the deferred costs in the current program accounting block, you can bet that the people who get paid to do that for a living know what's going on, too.

Wouldn't it be smartest for Boeing to preemptively tell the shareholders that for the next couple years, all bonuses will remain at the same level while also keeping stock buybacks etcetera, that where possible MOM development cost will be subtracted from the deferred cost, and that they will end up with a net profit of 0 for the next couple years, so they can begin with a clean slate when they start MOM production? This would enable them to reap all the seeds they'be sown while not being held down by their deferred costs which will otherwise be hard to retrieve.

This of course assuming the MOM will be developed.

I'm a finance student but also interested in communications and stock market psychology, so I might be totally wrong about this, but I think this might be their way out of this mess.
Of course, please let me know if I'm wrong. I'm all up for learning new things

MaxiAir wrote:

If they extend the accounting block size to the point of having all deffered costs accounted for, they still need to recover all R&D costs, needn't they?

R&D costs are (and have been) booked against earnings in the year they were incurred so the bulk of those have already been accounted for (excuse the pun) in the early 2000s with the rest booked more recently during the 787-9's and 787-10's development.

One thing that hasn't been mentioned in this thread so far (may have been in the article but I can't read it due to the paywall) is the past and future mix of 787 variants and how that could affect the gross margins on future deliveries. Taken from Boeing's website, this is a summary of the 787 program:

787 Model Summary Through June 2017
Model Series Orders Deliveries Unfilled
787-9 681 225 456
787-8 425 340 85
787-10 169 - 169
787 Total 1275 565 710

Also taken from the Boeing website are the list prices for the different variants:

Model List Price
787-8 229.5
787-9 270.4
787-10 312.8

So, the fact that a majority of the deliveries to date have been for the -8, and future orders are weighted heavily toward the -9 and -10, Boeing should be able to achieve at least higher ASP for future deliveries as compared to past deliveries. Now, as we all know, nobody pays list price for an airplane but, even so, ASPs should be higher in the future.

Additionally, from what I've read, the -9 and -10 have had fewer production related issues as Boeing incorporated many lessons learned from the -8 into the design of the larger models. So it's possible that they have a better handle on direct costs for each of the larger models. So it wouldn't surprise me if the future gross margins on each 787 increase by a fair amount.

All that said, I don't think they'll be able to break even with regards to deferred production costs by the time they deliver 1300 787s.

scbriml wrote:

Newbiepilot wrote:

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

I guess you missed some articles "Boeing’s advantage going into 2018" and "Propelled by MAX 10, Boeing thumps Airbus at Paris Air Show".

I think you missed my point. I am not disputing Scott Hamilton, but saying that after the good showing at Paris Air Show and the positive presss, maybe he felt the timing was right to bring up 787 program accounting again? Nothing new regarding program accounting or the 787 has happened recent. Why not wait until the next earnings? Leeham usually has about 3 to 1 ratio of positive Airbus stories to positive Boeing stories. A few months back I counted them. Leeham news is pretty factual. I guess I violated my own suggestion of not going A vs B in this thread. Oops

MrHMSH wrote:

Newbiepilot wrote:

iamlucky13 wrote:

Is Leeham saying anything new compared to 3-6 months ago when he argued (and many of us agreed) the program is not on a pace to pay down the deferred costs in the existing block?.

I don't think there is any new information because Boeing has not yet released 2nd quarter financial numbers yet.
787 program accounting and deferred production costs is something that has been known for years.

Leeham news is known for its negative commentary regarding Boeing. In addition to this article the one prior is "Is Norwegian in Trouble, part 2?" (Remember they are an all Boeing operator) and prior to that is "business case for NMA remains uncertain". After a good showing at the Paris Airshow, maybe Scott Hamilton feels the need to publish some articles that paint Boeing, its factories or customers in a negative light.

There's grounds for believing that what Leeham says may be accurate. After all, the 787 has had it bad financially, Norwegian haven't been convincing in some aspects and of course the NMA market is uncertain, we don't really know who wants it, and what specifications airlines want it to have. There may be a slant against Boeing, but that doesn't mean the arguments are invalid. They tend to argue their cases quite well. I think they make a lot of very valid points.

Side note, Norwegian are an Airbus customer.

Totally agree that he's not spinning the 787 program accounting and deferred costs. The costs are real and Boeing is aggressively cutting costs to make up the hole. My comment was in reference to iamlucky13 asking if anything new was going on. I don't think there is any big revelation recently.

And regarding your side note, I said operator not customer. Norwegian is not an Airbus operator.

Stitch wrote:

MaxiAir wrote:

If they extend the accounting block size to the point of having all deffered costs accounted for, they still need to recover all R&D costs, needn't they?

R&D costs are (and have been) booked against earnings in the year they were incurred so the bulk of those have already been accounted for (excuse the pun) in the early 2000s with the rest booked more recently during the 787-9's and 787-10's development.

Thanks for your explanation, but booking them against earnings is indirectly making the 737 pay for 787 R&D, isn't it? So for a clean break even of the programm itself we are talking about more than 4000 frames, realistically, which it will never reach. So Boeing played all accounting tricks there are

Newbiepilot wrote:

MrHMSH wrote:

Side note, Norwegian are an Airbus customer.

And regarding your side note, I said operator not customer. Norwegian is not an Airbus operator.

Read what he wrote, not what you want to see! He said customer, not operator! Norwegian has a significant number of A32Sneo on order and that was the risk Leeham was seeing for Norwegian. They are not biased towards Airbus

Another point that most people seem to ignore. Boeing uses Program Accounting and Accounting Blocks for all their commercial aircraft. The 737, 767, 777, and 747 also have accounting blocks; and in most cases the overall block size changed during the life of the program. So, from an accounting principal standpoint there is absolutely nothing unusual about their 787 accounting block. What is unusual is the size of the deferred cost vs the size of the accounting block.

As others above have pointed out; most of the upcoming production are planes sold after all the mess and it's quite likely that Boeing may well recover a lot more per aircraft than the past average.

Have a great day,

MaxiAir wrote:

Thanks for your explanation, but booking them against earnings is indirectly making the 737 pay for 787 R&D, isn't it? So for a clean break even of the programm itself we are talking about more than 4000 frames, realistically, which it will never reach. So Boeing played all accounting tricks there are

It has nothing to do to being dishonest or using an accounting trick. Boeing is required by US securities laws to record R&D expenses in the quarter they are incurred so they do not have the option to defer their recording as they are allowed to do with production costs under Program Accounting.

And yes, as the largest revenue generator the 737 is picking up most of the tab. But the A320 picked up most of the tab for the A330, A340, A350 and A380 as it to was is Airbus' largest revenue generator.