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SQ22
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Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 9:35 am

I know it is a delicate topic, Flightglobal recently shared their opinion about the break even of the 787 programme. We recently had the discussion about an aricle from Leeham on the deferred cost which can be found here:

viewtopic.php?f=3&t=1368881&start=300

in brief according to Flightglobal's opinion:

- a light can be seen at the end of the tunnel that the programme will reach break even, but it is more than a decade of continuous production at the fastest rate away
- what saved Boeing as a company was the 15 year growth in annual aircraft delivery, which they think is also the reason for the success on the stock market
- avoiding such a disaster in the future and structuring the supply chain are driving the entitre strategy of BCA
- with the current backlog to be measured in years outlook for BCA remains strong, but
- industry consolidation of aircraft suppliers may lead to higher prices by less competition

https://www.flightglobal.com/news/artic ... rg-440175/

I think is summarizing some recent opinions which were discussed here on that topic.
 
TheOldDude
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 10:42 am

The title of the thread reminds me of a George Box quote -- "All models are wrong, but some are useful".

To support an opinion on break even one has to model the future sales, models, and expenditures. Without knowing the model and assumptions, the opinion is unsupported. Unfortunately, although the article is devoid of both. It's a puff piece. It's not useful at all.
 
Newbiepilot
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 11:12 am

The article isn't really discussing the deferred cost. It is talking about the supply chain, Boeing pressures on the supply chain and consolidation among suppliers as they fight back. The supplier relationship is what is truly interesting. United Technologies merged with Rockwell Collins would be an incredibly dominant player in the supply chain that could try to bully Boeing and the other manufacturers.
 
MartijnNL
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 11:27 am

SQ22 wrote:
I know it is a delicate topic (...)

Why is a delicate topic? Because of Boeing fans on this website?

SQ22 wrote:
- a light can be seen at the end of the tunnel that the programme will reach break even, but it is more than a decade of continuous production at the fastest rate away

That sounds almost unbelievable for a programme with so many sales.
 
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Dutchy
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 12:47 pm

If we talk about the overall program cost and when that number becomes black, we will be passed the 1.500 delivery mark. The 787 produced nowadays are making money, compared to the production cost, so each 787 helps the bottom line and everything else will be accounting problems. The cost of the program are sunk costs, so if it isn't recovered, you can't help it.
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qf789
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 1:01 pm

This thread is about the 787 programme breaking even NOT about which aircraft is more comfortable to fly in whether its a 787, 777 or A350 and so on. Keep on topic and keep the Airbus versus Boeing rhetoric out of the discussion
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seahawk
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 1:30 pm

It is interesting for the MoM when you look at the relationship with the suppliers. I heard some rumours that finding risk sharing suppliers for the MoM might not be as easy as Boeing hoped and that the ideas of the suppliers would mean way less favourable contracts for Boeing compared to what the had for the 787.
 
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Revelation
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 1:31 pm

MartijnNL wrote:
SQ22 wrote:
I know it is a delicate topic (...)

Why is a delicate topic? Because of Boeing fans on this website?

Yes, and because of the Airbus fans on this website too.

It's pretty easy to see that program accounting is a wedge issue. Some feel it's a special break that Boeing gets that lets it look healthier than it really is and will force Boeing to change the way it does business, whereas others see it as something Boeing has done for decades and the investing community understands and has fully factored in to its valuation of the firm.

I for one doubt we need another full-throated exchange on the topic, but would not be surprised if we have one anyway, because that's what we do.
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ElroyJetson
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 2:34 pm

The 787 is an outstanding aircraft. Despite the accounting tricks (of which I don't really care)....I strongly suspect the plane will make money. People just need to relax. Boeing is not in danger of going insolvent.
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LightningZ71
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 4:13 pm

There are two things to look at:
1) Does each unit of the 787 production bring in more revenue than it costs to produce? From what we know, it does. This means that it is in Boeing's best interests to continue to produce the aircraft.
2) Over the entire life of the program, will it bring in more revenue than the cost to begin development, setup manufacturing, and produce the aircraft for the entire length of production? The general belief, based on Boeing's own disclosures and some believed insider information, is that it will take a long time for all of those sunk costs to be recovered in production.

I have no idea what the long term outlook for the 787 program is, but I can assume, based on past activities and industry trends, that it will meet with a noted reduction in orders in the next 5 years as competing aircraft enter the market and prove that they are equally financially beneficial to their customers for many routes. The 787 is at its best when it is flying the longest routes, but those routes are not a majority of flown routes. Other frames will be offered at lower costs that will have equivalent or better financial performance to their customers. I'm mainly looking at the A330 NEO for that in the short term, and on the low end, a potential MOM market with the 797 and A322 (or whatever they are called). I feel that Boeing will have to continually work on bringing 787 production costs down to be able to make the entire program break even.

Again, most of this is just opinion based on what I've read here and in the various trade magazines.
 
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PW100
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 4:13 pm

Dutchy wrote:
If we talk about the overall program cost and when that number becomes black, we will be passed the 1.500 delivery mark. The 787 produced nowadays are making money, compared to the production cost, so each 787 helps the bottom line and everything else will be accounting problems. The cost of the program are sunk costs, so if it isn't recovered, you can't help it.

That is not my understanding. The $30B deferred (production-) cost has not been accounted for. Therefore they are not yet sunk cost.
If it isn't recovered, Boeing will have to take (one-off) charges, to write that cost off. That will hurt the bottom line. Only at that point it has become sunk cost".
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PW100
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 4:23 pm

MartijnNL wrote:
Why is a delicate topic? Because of Boeing fans on this website?


This:

ElroyJetson wrote:
The 787 is an outstanding aircraft. Despite the accounting tricks (of which I don't really care)....I strongly suspect the plane will make money. People just need to relax. Boeing is not in danger of going insolvent.


Off course the plane will make money, especially when not accounting for $30B production cost (=$100M dollar per delivery to date) . . .

Nobody is claiming Boeing is in danger of going insolvent, so no reason to bring such up.

Most of us don't have problems with creatve program accounting. What some people (inlcuding myself) are having some doubts with, is the sheer amount of deferred cost that is being practiced on the 787 program. It's alomst an order of magnitude bigger than ANY historical program at Boeing.
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 4:35 pm

PW100 wrote:
Dutchy wrote:
If we talk about the overall program cost and when that number becomes black, we will be passed the 1.500 delivery mark. The 787 produced nowadays are making money, compared to the production cost, so each 787 helps the bottom line and everything else will be accounting problems. The cost of the program are sunk costs, so if it isn't recovered, you can't help it.

That is not my understanding. The $30B deferred (production-) cost has not been accounted for. Therefore they are not yet sunk cost.
If it isn't recovered, Boeing will have to take (one-off) charges, to write that cost off. That will hurt the bottom line. Only at that point it has become sunk cost".


That is a definition question, sunk cost and accounting ways.

wikipedia wrote:
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered


https://en.wikipedia.org/wiki/Sunk_cost

But you can exchange bottom line for cashflow, writing off these costs will hurt the profitability in that year and the equity, but not the cash flow. As long as the cash flow is positive, Boeing will survive, and I haven't seen any indication that the cash flow will be negative.
Many happy landings, greetings from The Netherlands!
 
texl1649
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sat Aug 12, 2017 4:46 pm

The cost is sunk, the cash flow is real, and the impacts of the sonic cruiser and 787 programs will directly affect boeings ongoing/future mom, NSA, and services ventures. Some of the sunk costs, for instance, went into the massively over built 787 wing autoclaves/facilities. Boeing is basically reclaiming wing production from contractors (Japanese).

It's all a lot more nuanced than a message board discussion will allow, especially when it comes to the labor discussion. The financial stuff is pretty easy, and really amounts to the fact that the 30b is spent, and now being carried to minimize taxes paid for the next ten to fifteen years.
 
kitplane01
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sun Aug 13, 2017 2:50 am

Newbiepilot wrote:
The article isn't really discussing the deferred cost. It is talking about the supply chain, Boeing pressures on the supply chain and consolidation among suppliers as they fight back. The supplier relationship is what is truly interesting. United Technologies merged with Rockwell Collins would be an incredibly dominant player in the supply chain that could try to bully Boeing and the other manufacturers.


I'm sorry I cannot find the article, but at Aviation Week and Space Technology they speculated that any supplier that gets too big will have a hard time getting additional orders from Boeing and Airbus. Boeing and Airbus have an incentive to maintain a situation where suppliers compete, and no supplier becomes dominant.
 
kitplane01
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sun Aug 13, 2017 2:54 am

PW100 wrote:
Dutchy wrote:
If we talk about the overall program cost and when that number becomes black, we will be passed the 1.500 delivery mark. The 787 produced nowadays are making money, compared to the production cost, so each 787 helps the bottom line and everything else will be accounting problems. The cost of the program are sunk costs, so if it isn't recovered, you can't help it.

That is not my understanding. The $30B deferred (production-) cost has not been accounted for. Therefore they are not yet sunk cost.
If it isn't recovered, Boeing will have to take (one-off) charges, to write that cost off. That will hurt the bottom line. Only at that point it has become sunk cost".


Your understanding is wrong in two ways.

1) A sunk cost is created when the money is spent, and the money has been spent. This is basic economics.

2) The costs are accounted for. I understand that you don't like program accounting (and that's a reasonable position) but there are entries in the Boeing accounts that reflect the money that was spent.
 
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flee
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sun Aug 13, 2017 8:29 am

kitplane01 wrote:
2) The costs are accounted for. I understand that you don't like program accounting (and that's a reasonable position) but there are entries in the Boeing accounts that reflect the money that was spent.

Yes, and the irony of this all is that the sunk costs are capitalised and shown in the Boeing Balance Sheet as an ASSET.

This intangible asset is then amortised (written off) in the Boeing Profit and Loss account with each delivery of the 787.
 
Newbiepilot
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Re: Flightglobal opinion: Dreamliner break-even remains a moving target

Sun Aug 13, 2017 11:41 am

Revelation wrote:
MartijnNL wrote:
SQ22 wrote:
I know it is a delicate topic (...)

Why is a delicate topic? Because of Boeing fans on this website?

Yes, and because of the Airbus fans on this website too.

It's pretty easy to see that program accounting is a wedge issue. Some feel it's a special break that Boeing gets that lets it look healthier than it really is and will force Boeing to change the way it does business, whereas others see it as something Boeing has done for decades and the investing community understands and has fully factored in to its valuation of the firm.

I for one doubt we need another full-throated exchange on the topic, but would not be surprised if we have one anyway, because that's what we do.


It also Gets discussed with a pro vs anti-American standpoint since accounting practices differ around the world. Most people on this website are not accounting experts and program accounting is not something people normally see. Most also don't understand the logic behind how publicly traded companies in the United States manage capital, equity, cash flow, capitalization, sunk costs, etc. I know I don't understand all those terms and have read many posts incorrectly using them. We end up discussing the 787 program accounting and connecting it to other avenues of the Boeing company that is certainly beyond my understanding.

This is a delicate topic because of the lack of accounting knowledge on this website, and tendencies to have A vs B or Pro vs Anti American debates can send the discussion in a negative direction.

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