Friday, November 9, 2012

Break Even Decision For The 787-10

The 787-10 finalization mode is going forth.  The BA Board does not want to see a presentation document until final checklist items are met.  Mainly, who will buy it, how many units, and when will ROI be met, or more clearly, by what point will production of a 787-10 start making a share holder money. The 787-8 is a sunk cost retiring tremendous risk. However, the road has been cleared, but not yet paved, which enables an investor a calculation of when and how much should be made with a successful air frame.

The 787-9 has not finished testing or started production, those stages would enable a follow on  analysis from production, and a financial snapshot of how this will position Boeing, against its rivals.  The age old accounting formula of break even analysis must make its way through a forest of cost , even though many cost have now become retired in the 787-8  garbage bin of production, short-falls, and mishaps. The 787- 9 should reap a strong and clear path to production bliss with a clearly identified financial methodology for Return On Investment.  Even though sales numbers for 787- 9 are slightly lower than the "eights" numbers,  a generally tepid market awaits to see what the other airlines are going to do, and what the "other" air-framer is going to do relating to the wide bodies. The market won't expand on the 787-9 any further until all the wrinkles are out of Boeing's "Suits".

However, this brings us to the 787-10. The plane everyone would like to have, but, aren't ready to show its hand towards a purchase.  Boeing's board is asking the folks in the Boeing trenches, how  many units do airlines want with initial orders, how fast can that be delivered, and what do customers want in a 787-10?

Its a fixed cost and variable cost balance sheet math question by unit produced. Basic formulation would require these components.

Fixed cost are the investments made as a percentage of total production cost, whether one produces an aircraft or not. it is a summarizing plant, facilities and engineering type investments/cost, whether or not a plane is sold.  However, each airplane sold makes an amount which contributes towards exceeding the fixed cost and that margin is weighed down by Variable cost factor of each unit produced, that are a sum of item costs associated with purchasing inventory items and providing labor when making one airplane reported as  as a factored variable unit cost.  How much does it cost to make, assemble and fly one aircraft out the door to a customer? A 200 million aircraft has all these component costs wrapped under its wing. The break even occurs when Boeing sells and makes enough 787-10's meeting the total fixed cost of the 787-10 project and factors in a production to delivery cost for each airplane. So here is my crude Winging It without regard to actual numbers, but as an illustration for breakeven analysis.

Factors:

-#300 787-10 aircraft sold and delivered at 220 million each = Total Revenue of  66 Billion.

*   Formula : FC+ VC = BE

-   (Fixed Cost + Variable Unit  Cost) = Breakeven point.  Theoretical Question? How many units in sales to equal break even?

In this example If your Fixed cost equal  equals 20 Billion for the 787-10 program and variable cost equals 150 million per unit, you have a 70 million contribution margin for each aircraft delivered from its 220 million sales price.  The BE point in this example, equals 133 units delivered for the 787-10. To have exact numbers from a (Reality Accounting Firm), is a chore. However, a guesstimations can be used as a guide for a determination when Boeing will blink and go for the the 787-10. If they line up a prospectus for 150 units, then they will announce the 787-10 project.
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Additional notes:

Allocations being applied during the 787-8 project will not look  the same for the 787-10. Many R&D items disappear before considering cost on the 10.  The Board is really interested in bottom line numbers derived from the 787-10's Break Even Cost numbers.  You need to know a very strong presales number, otherwise Boeing needs confirmed MOU's in unit numbers from customers. To say "Okay" and let's move on it. With a limit on time, the folks in the trenches need to hit on a presales number by this year's end. Break-even goal is much shorter on the 787-10 than both the Eight and Nines, and many risks have long been retired. I'm just saying, a case for selling 300 units 787-10's, to customers with proven serious consideration, is enough to launch it. 100 units is possibly a pause until a broader scope is established. If Boeing announces soon, it means they have tangible numbers to support the 787-10 beyond the Break Even point, and more opportunity in contributing to project pay-off as a whole.

787-10 News Update 11-16-12