Aerospace Company Analysis - Special Accounting Measures

January 2013

Boeing 787 Cashflows and Costs

Boeing Co. could find it difficult to hit its target for break-even 787 cash flow by early 2015 as it seems that 787 costs are not declining rapidly enough for the aerospace company.

During the fourth quarter, 787 unit cost is estimated at $218 million, down from $232 million in the third quarter, although well above the $190 million level that would have helped Boeing pacing to its 787 cash flow guidance.

Boeing expects its 787 deferred production balance to peak at $20 billion in late 2014 or early 2015 as production stabilizes at 10/month, up from $15.9 billion now. This would require its 787 unit production cost to fall below its average program accounting cost by then.

Given Boeing's assumption for low single- digit margins on its initial 1,100-aircraft accounting quantity, this also implies an expectation for a per-unit cost below its average selling price by then.

"Our analysis indicates that in order for Boeing to hit its 787 cash flow guidance, it will need to bring its unit production cost down roughly 50% faster than it did on 777," UBS analyst David Strauss wrote in a note to clients.

Strauss expects Boeing's unit cost would need to drop to roughly $111 million in early 2015 from $218 million in the fourth quarter with its cumulative average cost falling 24 percent with each doubling in production.

At Boeing's current pace of cost improvement, 787 cash burn could worsen to about $6 billion a year in 2013-14 from about $5 billion in 2012.

Boeing expects total 787 production to exceed deliveries in 2013 as 787-9 production begins while deliveries don't start until 2014.

The 787 program was launched in April 2004 with a record order from Japan's All-Nippon Airways (ANA). Fifty-nine customers from six continents of the world have placed orders for 870 airplanes valued over $178 billion, making it the most successful twin-aisle launch of a new commercial airplane in Boeing's history.

The company could convert these orders in to revenue only when it solves the battery issue on the 787 which led the Federal Aviation Administration or FAA issue a directive that led to all in-service 787s temporarily ceasing operations. Boeing said it is committed to working with the FAA, and other applicable regulatory authorities to return the aircraft to service with the full confidence of customers and the traveling public. While production continues on the 787, the company is suspending deliveries until clearance is granted by the FAA.

The company had reported higher than expected 787 deliveries for the fourth quarter at 23, including 11 in December, totaling 46 in 2012. Growth in delivery rate could help the company reduce the cash burn.