Boeing celebrates 787 delivery as program's costs top $32 billion
Boeing delivers the first 787 Dreamliner to All Nippon Airways (ANA) this week, but it has spent a staggering amount to get this far: more than $32 billion, according to a conservative estimate by The Seattle Times.
Seattle Times aerospace reporter
Boeing's tab for the 787: $32 billion and counting
DEVELOPMENT COSTS (ONE-TIME INVESTMENT):
MORE THAN $15 BILLION
R&D: This covers direct airplane-development costs. Boeing Commercial Airplanes spent $20.5 billion on R&D between 2004 and mid-2011.
Analysts estimate $4 billion went to develop Boeing's other new plane, the 747-8. If 75 percent of the rest was spent on the Dreamliner, that produces an estimate of $12 billion.
Capital expenditures: This covers spending on plant and equipment. Boeing's capital expenditures from 2004 through 2010 were $10.2 billion; assuming 20 percent was for the 787, that's $2 billion. This year Boeing estimates its capital expenditures at $2 billion; with heavy spending on the Charleston final assembly site, assume 50 percent is for the 787, adding $1 billion. That's a total of $3 billion for capital expenditures.
DIRECT COST OF BUILDING ABOUT 40 DREAMLINERS:
This excludes the cost of the first three airplanes off the line, which Boeing wrote off as an R&D expense. As of June 30, about 40 additional airplanes were rolled out or partially built.
Inventory: Work-in-process inventory related to the 787 program as of June 30 was $12.7 billion.
Supplier advances: $1.9 billion as of June 30
Tooling and certain other costs: $1.7 billion
BUYING OUT PARTNERS IN SOUTH CAROLINA:
AT LEAST $1 BILLION
In 2009, Boeing bought the 787 rear-fuselage plant in Charleston from Texas-based Vought for $580 million in cash (plus forgiveness of Boeing's advance payments to Vought, included in the direct costs total above).
Boeing also paid an undisclosed amount to Vought and Alenia of Italy to buy the larger, adjacent Global Aeronautica 787 midfuselage-assembly plant. This acquisition easily boosts the total cost above $1 billion.
Penalty payments: Payments to suppliers and customers for the three years of delays. Analysts believe these could reach several billion dollars, but they cannot be easily quantified since each penalty is individually negotiated.
Source: Boeing SEC filings, as of June 30
Reported by Dominic Gates
Boeing is set to deliver the first 787 Dreamliner to All Nippon Airways (ANA) of Japan on Sunday in Everett, but it's far from the end of the journey for a jet that has reshaped the company.
To reach this milestone, the company has spent a staggering amount: A conservative estimate by The Seattle Times puts Boeing's total investment on the program so far at more than $32 billion.
That massive sum, half spent on development costs and half on manufacturing the jets already built, means profitability for the plane won't come before well into the 2020s — if ever.
Boeing pitched the 787 from the outset as a "game-changer" that would wow passengers with its comfort and bring profitability to airlines with its fuel economy. It chose to build the plane out of carbon-fiber-reinforced plastic composite and tasked partners around the globe with manufacturing large 787 sections. Those decisions dramatically changed the way airliners are built, but also brought more than three years of delays.
Far from reducing Boeing's investment, the unprecedented outsourcing swelled it enormously.
"The plane may be the best plane ever produced, but in losing money it may also be the record holder," said Adam Pilarski, a senior vice president with the aviation-consulting firm Avitas.
A senior Boeing engineer, who spoke anonymously because he isn't authorized to talk to the media, said the company managed to "dig ourselves a tremendous hole." Yet he's optimistic that as production stabilizes, Boeing can squeeze out costs and "we can do a good job of pulling that back."
Seven years and five months after the jet program launched in 2004, thousands of engineers and production workers will celebrate the first delivery at the Everett factory Monday.
A second Boeing engineer, one who has flown on 787 flight tests, thinks it will ultimately prove a winner with both airlines and passengers.
Looking out of the jet's big windows in flight, passengers will notice the upward curve of its composite wings, he said. Even those who have only watched the jet from the ground are impressed by this distinctive note of aerodynamic grace.
"The airplane flies beautifully," he said. "Pilots love the way it handles."
Tickets are already selling well for ANA's early scheduled flights after the initial charter flight in late October.
"This is a damn fine airplane," the senior engineer said.
Ready for service?
For those working on the Dreamliner, relief at the pending delivery is mixed with concern over how the early planes will perform.
The jet ANA will fly away Tuesday, Dreamliner No. 8, is one of the planes that had to be structurally reinforced and modified after its initial botched assembly.
When ANA pilots flew it last weekend, it was still experiencing minor problems, according to two people with knowledge of the flight.
A clunking sound in the nose gear, traced to a small gap in the hinge that swings the gear, had to be plugged with a shim. A fan in one of the compressors that feeds air into the cabin failed and had to be replaced, a repeated problem since the program's earliest flights.
In addition, the flight-control system is producing nuisance messages, false alarms that must be investigated each time. A software fix is in the works, but in the meantime such messages could delay flights and affect ANA's flight schedule.
Boeing spokeswoman Lori Gunter said the 787 team is "on track" to make the delivery.
But an experienced mechanic working on No. 8 believes that jet simply isn't ready for service. The engineer who flew test flights fears it won't immediately meet the standard of reliability required by ANA.
The senior engineer, however, dismissed such "bugs" as normal in any new program. "They won't be nearly as bad as they were for the original 747."
Aviation consultant Pilarski said the first delivery begins an extended proving period during which Boeing will have to respond quickly to early customers if anything goes wrong.
"Theoretically, the plane should do well," he said. "We have to see how things work in real life.
"Boeing is very good at adapting and making changes."
In the meantime, the Dreamliner has changed Boeing.
First, in conceiving its global-supply system for the plane, Boeing delegated design and manufacturing responsibilities as never before. The wings were made in Japan, the horizontal tail in Italy and the fuselage assembled in huge pieces by partners in Charleston, S.C., and Wichita, Kan.
Then, to fix the unreliability and tardiness of that supply chain, Boeing was forced to buy out the partners in Charleston.
In 2009, Boeing expanded that site into a full manufacturing complex with its own final assembly line, creating a permanent counterweight to its Puget Sound-area plants.
Boeing executives say they've learned hard lessons with the Dreamliner and won't outsource so much work on the next new jet. Yet doing work in-house no longer means it has to be here.
Still, Boeing's ambitious plans for the Charleston site — which may be Boeing Chief Executive Officer Jim McNerney's and the Dreamliner's most enduring legacy at Boeing — remain a strategic gamble.
Pilarski, of Avitas, thinks the South Carolina complex will take a considerable time to get up to speed, and in the meantime will increase costs on the 787.
"There's a reason people get paid good money in Seattle. They've been doing it a long time," Pilarski said. "It's not as easy as it sounds. ... I believe Charleston will initially be more expensive."
A 2004 Boeing internal analysis obtained by The Seattle Times showed that executives projected then that they would spend $5.8 billion to develop the Dreamliner.
But with each delay, that tab has soared. At the company's annual investor conference in May, McNerney conceded that the missteps on the Dreamliner have cost Boeing "billions upon billions" in additional development dollars.
A money pit
Based on Boeing's published financial results, The Times estimates development costs have swollen to at least $15 billion.
Boeing doesn't report its development costs for specific jet programs and declined to comment on that part of The Times estimate.
Apart from that $15 billion, the company spent an additional $16 billion to build the 40 or so jets that were rolled out or partially completed by June 30, according to its latest regulatory report. (That figure doesn't include the first three planes, which Boeing has written off as unsellable.)
At least $1 billion more was spent to buy out the partners in Charleston.
The only way to dig out of that money pit is to quickly reduce the cost of building the jets.
The initial planes in any program are vastly more expensive than those built once production is humming. The "learning curve" on the assembly line, the rate at which those costs come down, determines profitability.
Including advance payments to suppliers and some tooling costs, the average direct cash cost to Boeing of manufacturing the airplanes built so far — excluding those first three off the line — is $400 million each. Consulting firm Avitas estimates those planes sold for about $100 million or less.
In a June analysis, David Strauss, of UBS, wrote that even if Boeing manages to get costs down as fast as it did on its previous all-new plane, the 777, the manufacturing cost for years will vastly exceed the revenue coming in.
"We see 787 burning $4 billion in cash on average annually through 2015," Strauss wrote.
He figures Boeing's outlays for building the jets will swell from $16 billion now to $35 billion by 2019 before cash flow on the program becomes positive.
It could take 1,900 planes before Boeing recovers those costs, Strauss estimated. Only after that would it begin recouping the $15 billion in development expenses.
Using a much more optimistic alternative assumption on how fast Boeing could get its costs down, Strauss reckons Boeing could break even after 1,100 deliveries. An analysis by Doug Harned, of Bernstein Research, came up with a similar number.
"You probably don't have another airplane program where you produce 1,000 units and you didn't have a penny of profit," said analyst Pilarski. "Over a decade, you don't even make a penny."
Can the program ever make it into profit?
Eventually, sometime in the 2020s, well after the first 1,000 deliveries, Boeing would hope to be making 20 percent margins per airplane — an estimated profit of about $23 million per 787 jet, based on the average value of the various Dreamliner models. It would take an additional 650 deliveries or so at that optimal return to recover the $15 billion in one-time development expenses.
Yet the senior engineer puts his faith in the dramatic leaps in productivity and cost-cutting that Boeing has made on the 737 and 777 programs.
"Lean (manufacturing) will save the program eventually," he predicted. "Break-even won't be as far out as current ugly projections suggest."
Airlines need reliability
The Dreamliner's advance sales were stellar. And even with more than 140 cancellations in recent years, Boeing still has 821 on order.
But if the company is ever to make a profit on the 787, it must be a big hit with the first airline customers and produce many more follow-on orders.
Stan Sorscher, a staff researcher with Boeing's white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA), said it will be hard to match the early record of the last all-new plane that Boeing delivered 16 years ago, the 777: more than 99 percent reliability.
"It's not going to be as reliable from day one as the 777," said the Boeing engineer who's flown test flights.
That's because Boeing built "a more complicated airplane, with newer ideas, new features, new systems, new technologies."
ANA is about to perform a reality test on all that innovation. For the Dreamliner, first delivery is truly just the beginning.
Dominic Gates: 206-464-2963 or email@example.com