Wednesday, January 6, 2016

Accounting exponentially smooths 787 Ride To Profitability

Math majors and coffee cup geeks seek a smoother answer for 787 profitability, if you develop an extremely risky product like the 787. Boeing kept pouring $Billions at it before delivery and $Billions more after delivery, until it becomes a successful product from the design and development aspect. 

However, there is the financial stream remaining which is equally daunting, as it shadows the project. The 787 program expects a $33 Billion hole before accounting can get its arms around the 787 where it becomes pleasing for investors. In essence, Boeing has a real profit for the program when its $33 Billion money pit is filled.

Accountants like straight lines on graphs, as a lumpy program cost from start-up graphing is to be avoided. The lines must look uniform and organized. The 787 expenditures for its research and development during the 787 program had no known limits, other than it had a ceiling under some company breaking point. Did the 787 program break Boeing's financial back? The answer is "no" for that question. However combined with other successful Boeing programs it was saved with a Boeing holistic profitability margin. The sum of all its parts came to the rescue for the 787 program. Enough time and resources were available to get the 787 financial pig going in a straight line. When Boeing builds about 1,300 787's, it makes money from the start of the program to this point. Additionally, during this time, the 787 reaches beyond a pure breakeven point without footnotes and sunk cost set-aside on current accounting. It will be paid for straight -up!


Quoting them is better definition for those who drink copious amounts of coffee in the morning, and for those who like neat and tidy lines on graphs smoothing out personal problems of a messy slope. Mathematically, the 787 $33 Billion money pit is filled in by the 1,300th 787 delivered.

"Boeing initially set the 787 accounting block at 1,100 units when it began deliveries in 2011. It increased the accounting block to 1,300 in late 2013. Essentially, this means that after 787 production becomes cash positive later this year, Boeing expects to recoup the $33 billion in deferred costs over the rest of the 1,300 unit 787 accounting block. That will be roughly 850 planes."

For a cogent look at Boeing's financial accounting dynamics summarized, I would rely on Motley Fool's assessment as a snapshot in time using Boeing's variables driving the Fool's outlook. In other words it’s a point in time looking forward with all things considered.

"Thus, Boeing expects an average cash profit of nearly $40 million on the last 850 Dreamliners in the accounting block. And since production costs will be declining steadily, the last few hundred could be even more profitable, bringing in perhaps $50 million each."

The best conclusion anyone draws from this, is that Boeing has retired enough risk on the 787 program. The accountants now have free reign for formulating straight lines on the graphs through exponential smoothing, while painting over the lumpy curves of cost on said graph. By a 787 unit #1,300, it becomes midnight and all is well in building 40-24, and a straight line is painted in Chicago. 

Boeing has delivered 363 787's. Boeing has already Booked 1,143 787. They will need selling 157 more 787's before reaching its accounting block of 1,300 booked. At the rate of 135 787's a year delivered, Boeing has  about six years for accomplishing selling 157 more 787’s or 1,300 787's booked. Reaching seven years out allows Boeing to deliver them build and pay back the money pit in total.