Tuesday, May 21, 2013

Forbes Vs The LiftnDrag Breakeven Analysis

May Extra:

Forbes magazine just came out with Boeing profitability prediction number today May 21, 2013. On December 11, 2012 LiftnDrag made observations on the same subject, when will the 787 make Boeing money. Having not analyzed the December 2012 LiftnDrag article I will write this AD Hoc without knowing how they will eventually compare in its analysis.  Trust me, I just read the Forbes article six months later. It will be good for me, good or bad, to test my assumptions and conclusions with Forbes six month later article in light of all Boeing's rollercoaster year of issues in the 787 program, with its fire and smoke.

Forbes Content:

"After the Dreamliner battery fiasco, Boeing BA +0.03% managed to get its 787s up in the air again and resumed deliveries.  The company has improved its cash costs and thus reduced its cash burn over the coming years, according to UBS , but Boeing will have to push hard if it expects bring those costs down to about $110 million per unit, the point at which it will stop losing money selling Dreamliners.  To do this, Boeing will have to be 50% more efficient than it was with the 777."

"The press loves dire headlines where Boeing loves overly optimistic quips on its 787. Hyperbole Of The Dire, versus Optimistic The Magnificent , who will win? Somewhere in between, the truth will win out. Many reports calculates Boeing will not turn a profit until 2021, while the marketing arm for Boeing's stockholders proclaim victory by 2015. However, I believe somewhere in the middle is found the truth.  Boeing will significantly reduce cost of production by 2015. Items they can control will fold into a smooth production."

Forbes: "Over the past few quarters, Boeing has substantially improved its cash costs for the 787s, which averaged about $200 million, but that remains worlds away from the breakeven values which the company expects to achieve by 2015.  Cash burn has improved by about $1 billion per year through 2015, according to UBS’ estimates, which now expects Boeing to go through $4 to $5 billion this year and next, and between $2 and $3 billion in 2015; this year, 787 cash drag will approximate $5 billion, as a $7 billion inventory build offsets a $2 billion advance draw."

LiftnDrag: December 11, 2012

"Remember not so long ago on 7-7-07 Boeing rolled out a 787 looking shell made of mostly plastic without even an idea how long it would take to fly.  Some even said on July 7, 2007,  a following September delivery would occur.  However, the real story unfolded in three more years.  Boeing has so many unforeseen bumps, potholes, and underachiever subcontracts adding to its 787 recipe.  A reporter couldn't  get a straight line from any Boeing official during this time period of 2007-2010. Nobody had a knowledgeable answer to give. The three and a half years of underachieving, schooled the Boeing company. This was not your father's airplane.   Boeing has become the world's foremost expert on building a totally high tech  aircraft from plastics, with "outside the box" design and innovation."  

Forbes: "Estimates indicate Boeing’s 787s will sell for an average $116 million per unit, a 48% discount to the average list price of $225 million.  With 787-9 deliveries not expected until 2014, Boeing’s 787 physical inventory is expected to reach $900 million, with physical inventory then flattening out in 2014 as deliveries match production, while UBS expects a $900 million reversal in 2015 as deliveries move higher."

LiftnDrag: December 11,2012

"In fact they are now building about 5 a month or more. Way better than showing off a shell for photographers that was hand pushed into view 5 years ago.   So what does the financial crowd say, Boeing won't make money until 2021. The press is trying to find malfunctioning cup holders and disgruntled passengers on the aircraft.  Boeing had a malfunctioning Generator set, one out of six installed for redundancy on one new aircraft.  The news bounced around the world so fast that one would think it had crashed with a total hull loss. When in fact the plane operated as designed under the condition of a generator failure.  Redundancy and design considerations were in place long before the first showing a shell of an aircraft back in 2007. Probably none of the generators were even installed until far after the event.  What happened to this most recent glitch will be detailed for the press, once it is known.  A "battery" of people want to know, Boeing, the generator contractor, and the FAA are all in line to find out first." 

"If Boeing wants to hit its profitability target, and begin to make low single-digit margins by 2015, it will have to double its learning curve compared to production on the 777.  Using Wright’s model (which stipulates cumulative average production cost will decrease by a constant percentage each time the production quantity is doubled), UBS finds Boeing was able to reduce cash-costs at a 25% compound annual growth rate through the first three years of production, which indicates “Boeing learned at a rate of roughly 16%, meaning that the cumulative average unit cost over the first 50 units was roughly 16% lower than the cumulative average unit cost over the first 25 units.”

LiftnDrag: December 11, 2012

"However, the press and financiers will have a collective moment of throwing cautionary tales out for the reading public to sell copies, while financial people love conservative analysis sold to investors. So 2021 becomes the outer time limit for a conservative target date for profitability. In the meantime  an investor has time  for buy/sell;  knock yourself out selling short, buying low, or dumping stock, because the crazies are running the market during any week or two period of time. But, long term investors are far more certain of success if picking a spot now and jumping in for a smooth ride.

Final points: To the investor, keep your eye on two big ticket items in your portfolio analysis.
·       One, the accumulation of new Boeing orders after post A-350 introduction, 
·       and how much money airlines are making flying their 787's.  

Don't look at Air India in this exercise, but rather look at All Nippon Airline's bottom line from its efficient air travel business plan.  Since ANA also has a significant number of 787's in a mixed fleet of long haul international, and its national  routes of" Japan only" stops, found in ANA's flight route portfolio. Try to understand what the 787 has done for them.  Another look is for Ethiopian Airlines in what the 787 does for its bottom line.  They will be a good case study, since they own such a smaller number of aircraft and fly long routes. The 787 will have an immediate impact from its operations, where you will see how it drives the bottom line at the end of next fiscal year.  This is a manageable study of its business plan and bottom line. You may gain a distinct appreciation for the 787's financial impact on Ethiopian  Airlines."

Forbes Conclusion:
"In order to breakeven by 2015, Boeing’s learning curve will have to double the rate seen with the 777, with cumulative average cost falling by about 24% with each doubling of production.  If they traced the 16% rate seen in the 777, average cost would fall to about $150 million by 2015, meaning they wouldn't break even until the end of the decade.
Investors have remained bullish on Boeing despite the important setbacks caused by battery fires, which forced the grounding of the entire 787 fleet.  Not only has Boeing dramatically outperformed the market in 2013, it has also left competitors like Lockheed Martin LMT +0.4% in the dust.  Yet Boeing’s gains have come in short when compared to the airlines, with names like Southwest, United Continental , and Delta rallying 40% or more this year.
Boeing has been pretty good at managing what could've ended up being a massive blunder.  It fixed its battery problems and got the Dreamliners back in the air while beating Wall Street’s consensus estimates and improving on their cash costs, as UBS noted.  The company will continue to bleed cash, yet it is setting itself up for better days ahead, but if it still wants to hit its targets, it will have to continue working as hard."

LiftnDrag Down To Business: December 11, 2012
"I said prior in a prior posting, that I believe Boeing will reach Break-even when 150 787-10's are sold or delivered.  I don't know when that will happen but, I believe this can be done well before 2021, but not by 2015. Boeing will have to exhaust a significant portion of its order backlog through deliveries by 2015 to meet that goal. However, by 2015 Boeing will have all risks retired and certainty of "when it will exactly meet, the profitability barrier beyond 2015".  A 2015 forecast for the year 2017 from Boeing, is a better forecast than this years 2012 forecast for 2015. Two years from now a solid view to future will excite the investor and I believe Boeing will state it, will make money by 2017, to 2021. A  financial cushion  of time would lean towards 2018. Boeing will make money on the 787 project as a whole surging past its break even point late 2017 or early 2018.

Why?  By then, Nines are long since airborne and are flying out the door. Eights are half way through the order Que, with refined models popping out the giant doors every three days without hesitation.  2015 is time to secure the market share, because they will know how well the A-350 will perform and also have a new 777-X in the offering.  It means that 2015 is not a 787's profitability year, but the year becomes a major change for the airline wars. It's easy to see Boeing mastering of plastics, to the extent that it will announce the building of a monumental plastic airplane in 2015."
There you have it, this is how I was thinking six months ago, I think Forbes did a great job of presenting its case on Boeing. I still believe, in light of all the recent problems, Boeing has pushed back the break even off the year 2015 and moved further towards my earlier prediction of 2017. Many things need to occur as Forbes has alluded to, in its quest for the Break Even point on this project. What is important to know is that Boeing can and will, execute its 787 business model, and will make money long before 2020 on the 787.  It needs to reach some more milestone to accomplish that goal:
  • Take about 400 or more 787 orders by the end of 2015 
  • Production Maturation is complete by 2015 where it moves 100 units a year consistently.
  • Write a book about what happened back in the day making the first 50 787's.