Tuesday, July 25, 2017

Implied, Boeing 787 Deferred Costs Have Run Out Of 787's (Updated)

A complex subject indeed. A blog is no match for the topic of Boeing's deferred costs from its 787 program. The first point is defining what the beast is and the second is how much has the beast devoured of Boeing's profit margin. Finally, Bloomberg wrestled the topic in 2016.

During 2016 Bloomberg estimated that Boeing moved a total of $32 billion loss into an accounting pit which would not affect its annual profit loss statement. In essence, the $32 billion Boeing spent on its 787 program is set aside as a deferred cost to reach a zero balance at a future date. Boeing says, "when the 1300th 787 is delivered". Currently Boeing stands at 575 787 delivered. It has booked 1,275 787's. Boeing has estimated it will pay for the program by the 1,300th 787. It should exceed 1,300 orders by year end 2017. But most certainly reach the sales goal during 2018 without concern.

Therefore 1,300 delivered 787's minus the 575 already delivered gives Boeing about 725 units to pay off the remaining estimated $27 billion deferred costs. The $27 Billion is a debated number which would take another thousand pages of technical text book writing to nail it down. So an estimated $27 Billion deferred cost number is for Boeing to explain to investors.

Boeing started making money on each delivered 787 during 2016 and has since profited a little for each 787 delivered since that recognition of per unit profit. Unit profit is not a program accounting element. However, going from $32 Billion down to $27 Billion deferred costs is a $5 billion reduction of that type of cost.

What is the deferred cost beast? The accounting theory takes a journey from 787 program inception to eventual profitability. Accounting does not match a delivery with the programs total debt at the time of each delivery. Unit Accounting Example; If Boeing had spent $10 Billion getting to its first units delivery then the first unit would recognize a $10 billion loss at delivery. As the program goes forward with real time delivery, it also incurs additional R&D costs during the program's journey. In March of 2016 Bloomberg asserts a $32 billion cost hole, but Boeing had already delivered about 400 787's when the deferred cost account topped out at with Bloomberg's estimated total. 

Defining the deferred costs beast comes from program accounting theory. The program someday will deliver 1,300 787's at which time will have paid off all cost set aside on its books. Boeing looks at the over-arching accounting block of the program and not a unit by unit chiseling away of debt with each 787 delivered. Program accounting does not know at any given time what additional cost may arise, but does know with some certainty when a program matures to profitability.

Winging It 787 program status March 2017:

The units Boeing has yet to deliver going forward must contribute with each delivery towards a reduction of debt and Boeing bets it will do so by unit 1,300.

The $32 billion dollar hole has shrunk by $5 billion with its last 175 787's delivered. This indicates for every one 787 delivered it reduces the deferred cost amount by about $28 million per unit. With 725 units expected in the its current accounting block that pace suggests Boeing can reduce about another $20 billion of its $27 billion money pit when it reaches its 1,300th delivered.

Boeing has other ways of reducing its programmed deferred cost. It is making more money per unit over-all than last year profit making metric. 

Additionally, the 787-10 will contribute a lot more profit dollars per unit than the 787-8 or the 787-9. 

Finally, Boeing has taken an aggressive production cost reduction on plant assembly through efficiency, which allows a smaller cost for each unit delivered. 

This is an ongoing Boeing production efficiency program with no ending during the 787's production lifetime. Boeing hopes to increase its per plane profit from $28 million upward to $37 million per unit from this day forward. Boeing needs to find an additional $9 million per unit in order to meet its block accounting goal of 1,300 units.

Boeing doesn't reveal airplane prices during a sale and it is estimated the average sales prices is 51% of actual list price. It is much like a window sticker price on a new car. Nobody pays sticker. The Airline industry does not pay a list price. 

Before break-even analysis can be reported, the variable and fixed costs are identified per unit delivered. Boeing has not publicized its cloudy trail of costing for the 787 program. That is needed for further analysis in order to isolate its contribution margin per unit. How much does each unit's profit contribute during the length of time during its program? 

Boeing set the length of time by 1300 units delivered where its program debt will be extinguished. The 1,300 unit block is not a break-even even point. The program debt set aside as deferred cost becomes a program pacing method as costs are added and production efficiency value reduces its debt-set-aside during the program execution. The 1,300th unit is an estimation from out of its production of an intersection as a zero balance is achieved with its deferred cost account. 

Points to Ponder:

  • On-going production costs are part of break-even analysis.
  • A per unit profitability is a source for paying down any Boeing liability.
  • Unit profitability is a margin between sales price and production unit costs (using variable and fixed cost accounting).
  • Deferred Costs reduction is a "use" identified when "sourcing" production profits for its reduction.