The 787 Marches On With July Numbers

Boeing has had a solid July 2017 with its deliveries of 12 787, completing a 90 day run of 36 of its type delivered. The program as depicted in the first chart showing only at a -1 backlog change for the year , indicating a production increase to fourteen monthly units is possible. Boeing already knows what orders will unfold in the next five months. Having a twelve a month pace for the last 90 days and during the 787-10 first test copies flying, suggests preparation for 14 a month delivery pace is an already a planned production change for 2018.

Fig. 1

In figure 2 below the 12 a month delivery schedule is on track.

Fig. 2

Fig. 3 The tracker indicates 2017 a robust 787 year.

Fig. 4 Program history to date.

Fig. 5 Program 787 model balance for delivery and orders.

Boeing Cash Drives Its Stock

A Movie actor has its time in the fame. It seems like a movie made by an certain actor becomes successful no matter the theme. It also seems the actor's run at stardom will never end. Then without any kind announcement the star actor fades almost over night. Nobody really know why this phenomenon occurs. I remember back ten years ago when Julia Roberts made a movie she made $20 million and was the highest paid female actor in the business. She was a cash kind of person. Her stock in movie making was the highest. But what happened? Julia no longer pushes out movies every year but remains a much loved actor by all kinds of movie goers.

Boeing is a cash kind of entity, will they repeat the profile of a superstar and fade as fast as it comes onto the scene? Fortunately a business is the kind of entity that must reinvent itself every so many times it comes to market. Julia Roberts can't control the scripts offered nor her age changing the audience appeal. Boeing too can control what it is and appeal to an ever fickle aviation audience. Thus bringing back a full circle of cash driving Boeing stock valuation.

Boeing's second quarter 2017 just reported the best quarter since 2009. Its stock value is driven by cash infusions from sales. The definition of a Boeing sale is an airplane delivered and does not reflect an airplane ordered. Going back to production numbers becomes a critical determiner for cash flows. The mix of product delivered is the the secret of Boeing's cash. If producing and delivering less aircraft than last year an entity would expect a lower cash receipt account. Boeing played some tricks on the way to the bank. It delivered aircraft which made more money when recognizing a lower cash received  trend  based on units delivered.

CNBC Quotes:

"Monster cash flow," said analyst Robert Stallard at Vertical Research. The results were "about as close to perfect as it gets from Boeing," he added."

"Boeing has cut spending aggressively by streamlining production, reducing payrolls and winding down development costs. Its 787 Dreamliner contributed about $530 million in cash in the quarter."

If repeating a 1/2 billion cash quarter every quarter, it won't be long before Boeing pays back all its developmental markers enough to reinvent itself again.

Boeing refuses to be a retiring starlet, It's in it to win it!

The trend line has an arrow tip pointing right at a NMA type. The ducks on lake Washington are lined up in a row. Research the market, find launch customers, and find cash to build it. Boeing hired a administrative assistant only to make check marks on its lists of things-to-do which is finally checked-off after the recent 2nd quarter reports.

Since Boeing has controlled its production costs and has an over abundant backlog of aircraft on order, Its a matter of executing its plan without interruption. This only takes time and the outlook ahead says Boeing has already stocked up enough time to improve all its production metrics. The 787-10 is a matter of time as is the 777X. Boeing has learned how to complete a plan as it had learn with the 787 program. The Max program is the symbol of completeness for its single aisle offering. Its competitor in that division has a major engine nightmare. Boeing took its lesson many years ago when it found CFM to do the job with immense reliability for the 737 program. Now Airbus has stalled its big idea for two engines choices for its A320 NEO. The P&W gear driven engine is in some refinement trouble and backs the Airbus delivery goals off a bit thus strangling its cash flows opposite of what Boeing enjoys at this time.

Almost a 1,000 days later Airbus delivers 100th A350

One metric is aircraft production. In the same amount of time for producing wide bodied aircraft the question remains what is the difference between Airbus' A350 and Boeing's 787?

Here is the raw data based on Airbus 100th A350 delivered today July 27, 2017, which happens to mark 955 days later from its 1st A350 delivery.

What did Boeing do with its first 955 days from the 787's first delivery?

Last year, March 2016, was a Winging It blog

which illustrated where the two programs were at about 500 days out from first delivery. Boeing had the lead with 50 787's and Airbus with 16 A350's in about the same amount of production time. Boeing's production margin in 2016 was 34 units ahead of Airbus during the same length of time in days comparing both productions effort. However, Airbus has since picked of the pace as it delivered its 100th A350 today, July 27, 2017. It now lags Boeing by 41 units built during its first 955 production days. Airbus only lost ground in the last production period since March 2016 by 7 units. Boeing produced 141 of its 787 in the same number of days Airbus had when it reached its 100th A350 delivered today.

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. 

It Had No Stealth It Had No Counter Measures

Want to blow some treasury change then fire missiles and take out a US Reconnaissance Aircraft. It was just after the Vietnam war conflict. Pilots came to an airshow featuring the SR-71 and a question came from the crowd. 



Were you ever or almost shot down flying over Vietnam? 

One pilot had a wry smile and said no! He did elaborate further with his closest call in an SR-71 on recon patrol over North Vietnam. 

He elaborated, "The adversary has a devastating weapon nicknamed the SAM missile or Surface to Air Missile. Pilots would often refer to them as flying telephone poles. The closest call I had was during one such flight as my radar picked up a pack of flying telephone poles coming at the SR-71. Having no defensive countermeasures, our training said to put the pedal to the metal engaging afterburner mode. 

Was I endanger? Yes, and no. Yes because they were entering my flight level and no it was the SR-71 which did not have stealth or needed it back then. It had exceptional speed as the brochure indicates that of Mach 3+. The brochure is correct it does go Mach 3+ but fails to define what the plus stands for and that that is only known by a few on the ground or in the air. I hit the "plus throttle" and watched in amazement how blips on the radar dropped off the screen. The SR-71 flew almost through China before I turned around and came back for refueling."

In 1971 there was speed before stealth as an SR-71 flies faster than a speeding bullet. These many years later the U.S. has had almost sixty years to make something more advanced in every aspect to the SR-71's capabilities. Satellites and newly developed drones are replacements for the SR-71. Does the US need a vastly improved version of the SR-71? NASA had its hands on a few since the 1990's. A futuristic SR-71 would skip off of space and back to the atmosphere for look at the ground. No need for a fighter jets going that fast because missiles would carry the "fight load" going faster than even a ramjet. If speed is the combative determiner then no pilot would be needed in the air frame. The pilot would be in some basement complex at a military base near you. 

The last sixty years of black projects the industry has moved the standard into new realms where the SR-71 remains a modern marvel made by people before computers were available.

United Airlines May Be Deal Making Its A350's Away

After pondering the United Airlines dilemma of what to do with its 25 A350-900's converted to A350-1000 and another 10 A350-1000 it had ordered, an idea came forward. The total book value of the two orders equals $12.6 billion at list prices. The total order contracts are estimated for about $6.3 (50% of list) billion for which United is on the hook for and it would like to move forward with another plan. Its 747-400's are in need of retirement and United is back filling the jumbo with 777-300ER's. So far the tally is eighteen 777-300-ER purchased to four A350-1000's delayed, moving those back to a later date for delivery.

The smoke signal is plain. United  has other plans for its planes. How can United get out from under a long standing order without financial mishap?

• Trade out $12.6 billion in orders to other airlines.
• The trade out may amount to $6.3 billion in actual United contractual book orders(based on 50% of list price).
• Seek out A350 customers who need an Airbus build position
• Seek out Airbus customers who would agree in a three way deal with Airbus for other types.

The above short list can get more innovative as time marches on. United has signaled a bailout on its Airbus wide body orders with the four delayed A-350's and more 777's taken into United's fleet. The game is afoot with its unwilling Airbus partner, but having some victory is better than no victory for Airbus.

The log jam starts with slow A-350 sales in the market place, and then a slow production start as compare with Boeing's own problematic 787 start-up. United may have to rely upon Airbus customers trading for a mix of single aisle A320-321's, A-330's and A-350's which takes time to arrange equaling about $6 billion in trade on United's books. That number represents a lot of single aisle, like a 117 of the A-320's ordered by an Airbus customer at list price. United must find both A-320 and A-350 customers to get out of order hell while convincing a not so happy Airbus to go along with this type of suggestion. It is not known at this time what it would cost United Airlines just to burn its order up it has from Airbus. 

There lies the United conundrum, whether to trade away orders with others in a three way deal with Airbus or just pay Airbus some agreed upon amount for dropping the Airbus order.

Another United option is sale and leaseback for its 35 A-350 on order and then cut away leases one by one as its 747 fleet ages out. This would be over a decade worth of selling to lessors and leasing back its A-350's over time. United must have a fleet plan for such a leaseback strategy. It would eventually cause a Boeing back-up on 777 delivery and handcuff United options into an Airbus wide body fleet. 

A permanent solution is selling its A-350 order to other Airbus customers at United contract price with Airbus. This last option is what United Airlines could be doing, and it maybe why they are incrementally pushing back delivery times like its first four A-350's it had ordered.

Beyond Approach Or Compare Is The F-35

5^th Generation departs from flying as a combatant and becomes a platform for deception and delivery. Russia declares superior horsepower from dubious engine reputation and a world’s best dog fighter claim. If this was World War II then what Russia makes of it is that it has a dog fighters chance, becoming a valid Russian claim. 

The Russian Su-35 or its unfinished PAK T-50 is possibly not 5^th generation. Fifth generation is not designed as an improved dog fighter but an aircraft that has the best super computer installed. The American F-35 has stubby wings and a powerful engine surrounding its computers. The dog fight or attack is fought in cyber space and Lockheed brings computers to the battle. Out of tradition it mounts a fighter pilot in a cockpit, so the pilot can monitor systems which are monitored by satellites and ground installations back the helmet.

The next time a glitch is reported in a long line of F-35 problems a sense that firm-ware or software lies beneath the problem. Because the aircraft works at computer speed and not Mach 1.6.  Pilots sometimes suffer hypoxia or lack of oxygen to the brain. This is a signal the human has not caught up to what the F-35 can do. The Russian pilot is subjected to extreme dogfight conditions as well. The Su-35 is some trick pony dancing about the sky waiting to find its incoming dance partner, a missile. 

If war became a rock fight, then the Su-35 is a marvelous dodger of rocks. If war becomes serious, then the F-35 is more deadly in a turkey shoot and the Su-35 becomes the turkey after coming from its airshows.

Can other nations duplicate American technology and its Research and development engine? The F-35 journey started over 15 years ago and possibly started in the 90’s. The concept is an open challenge not constrained by conventional thinking. The Russians and Chinese have gone down two different roads. 

The Russians choose to build superior dog fighters. 

The Chinese are emulating the F-35 at every turn. Remembering how the US industrial complex can’t figure out what it has done with the F-35, it seems hard to believe the Chinese have duplicated or exceeded America’s unrefined F-35 technology currently tested and delivered at its Initial Operational Capability (IOC).

The problem with the F-35 is that it is a twenty year project before IOC. However, the current plan is for a ten year IOC which falls short of time for how much the US is biting off with its 5^th generation fighters.

A 4+++ generation fighter is a superior dog fighter but the fifth generation fighter is a wicked adversary that remains unseen and fights before a dogfight starts, hence no need for Mach 2.0 or stunt maneuvers Russia is perfecting. Jet speed and maneuverability is not fifth generation. Computer speed and system management is the fifth gen. battle space. 

Lockheed calls it fusion with six eyes and a dozen computers or more. The pilot is there out of a traditional belief a pilot is needed to hook its brain into a helmet and becomes a vital link in its operation as its computer waits for a pilot input.

Fifth generation is not a reflection of traditional fighting because it attacks without the Marquis of Queensbury rules. Go fast enough, go long, and then shoot when invisible from any searching electronics as an undetected assassin. The theme of warfare has changed and so the chest thumping becomes a trite example of gen. 4++, or also known as a superior dog fighter. True fifth generation is not a dog fighter it is an assassin with all the bells and whistles. China can’t steal that attribute fast enough just as America can’t fix it fast enough on its F-35's.

War makes pressure which makes diamonds. The American industrial complex is in the money making mode and it is not pressurized by war. Therefore, the F-35 initial capability seems like a lump of coal awaiting a catastrophic pressure for its true purpose, that of a diamond cutting tool of war. The only saying worthy of its current condition comes from Grecian ancient times. “The mills of the Gods grind slowly but oh so fine”.

Boeing In Talks With Oman Over more Wide Body Aircraft

Airbus has 10 A330's in Oman's fleet along side 6 Boeing 787's. Oman has opened discussions with both makers in a bid for competitive pricing. The Oman fleet has a definite edge for Boeing as the 10 A-330's were chosen probably over the a waning 767 passenger model.

Airlinefleets.net data provided for the Oman Fleet chart below

Since the purchases of the A-330's from 10 years  ago, Boeing has done a lot of cooking in its industrial kitchen. Even though Oman's A-330-200 has received upgrades in its fleet a taste for the 787 spoils its fleet composition. Having a propensity for 737 NG's at 35 units, the transition for more 787's is a natural expansion for its wide body division.

An A350-900 for Oman maybe more aircraft than Oman needs and the 787-8 could be obtained for a low price when buying 9 of its type replacing any aging A-330's and seeking a fleet commonality for its single aisle division.

Oman has stated its seeking the best price in the competition and will know in three or four months what the decision will become. It is a just in time announcement for the Dubai Airshow where it can make the most publicity out of a wide body purchase.

Logic suggests a Boeing deal in the offing. Logic also says an Airbus deal is possible at the right price and Airbus is starving for sales this year for its A-350's booked. The hint is out that Boeing may have big announcements coming forward and Airbus would like to steal one from Boeing in the worst way. Boeing also is on a a "down year roll" and would like to keep the numbers coming in as it could throw sweeteners Oman's way since it has a solid 737 NG fleet. If the 787 in Oman's fleet has proven itself worthy during its operations, and Boeing makes a great deal possible for Oman's fleet line-up from single aisle to dual aisle then the wide body announcement will fall Boeing's way and Airbus can do little to stop Boeing sales momentum it has achieved during 2017.

Even though, "counting chickens before they hatch", is a silly thing to do Boeing has the leveraged position for this opportunity. Airbus will have to give away some wide body orders to win the day.

It Has Been Said, Emirates Will Buy 50-100 787's

But, the when and in what numbers are the mysteries. Based on many factors such as historical orders for Emirates, market conditions for expansion, and Boeing sweeteners for a big deal spells out opportunity for Emirates. In a humble opinion it can be stated that the mid point between 50-100 units is 75 units with options. Refining the proposition of how many 787's could be ordered, a settling number could be fifty 787-9's and Twenty-five 787-10's with another 50 options for 25 each of the 787 types making a Emirates deal. This would total 125 787's in play going forward with future options included. 

However, no one is talking about numbers only that a deal is settled upon and is to be announced at some future date. More speculation when an announcement will be made becomes the job of bloggers. Common sense and blogging sometimes becomes an oxymoron as sense and blogging are usually opposed to one another. The book count for Boeing 787's may surge in 2017 as earlier predicted by this blog. A target number in mind was for more than 50, 787's ordered in 2017. If and only if Emirates who is just down the road from Dubai shows up at its Airshow with spectacular Boeing news will the Winging It blogging finds its redemption.

Read Winging It Blog March 18, 2017 for additional predictive commentary.

Quote from Blog:

"This brings us to the point of what will happen in the wide body order market for 2017. The players are the 787, 777X and 747-8. The 747-8 is a scratch out as it fades gracefully into the horizon. The 777X has had a quiet period for some time and it will burst out 20 Singapore Airline orders with the 777-9X and then save Boeing's 787 wide body order year another of its 19 787-10's before years end. This is already written into a Letter of Commitments from customers. Only the final contract language remains to be completed with signatures included. Boeing should go plus fifty 787 orders in 2017 and then another 25 777 orders during the year. This does not even count on the Emirates order that could be completed at year's end. If it isn't confirmed during 2017, the Emirates status will be most definitely solved in 2018."

Winging It missed its prognostication of 50 and is short by 25 787's, as Boeing has booked 75, 787's YTD without even an Emirates order yet revealed.

The introductory paragraphs above is an update for the March 18, 2017 blog article. A bold prediction during 2017 orders moves toward 150 units on the books after the Dubai Airshow This indeed would be a blow to Airbus A350 aspirations at a critical time in the airplane market.

If 787 order assumptions are missed by Winging It, then the 75 787's already ordered is a great year and it troubles Airbus.

United Airline Pushes Back From Terminal Transactions.

United Airlines ordered 35 A350-1000, but it has since pushed back the delivery of its first four of the type on order.

Reading too far into the significance of this push back would be premature. A good background report is provided by:

Flight Global: 

United defers first four A350s

Considering the Boeing order fire drill is a start. United had ordered 100 Max 9's it also had ordered 65 737 Max 7's and then converted those orders with Max 8's and then converted most of its Max 9's into 100 Max 10's. The United whirlwind is a dynamic churning out orders with conversion on its mind.

The Airbus A350-1000 push back is to be expected considering trying to follow what United is trying to do. United has aging wide body 767 and 747 models. It also has a mixed fleet of Boeing and Airbus. Something has changed in its leadership thinking and has reopened consideration for other replacement strategies. Below is a view "sans" recent 737 Max orders in its fleet chart of airplanes in service and future delivery. Notice no A350-1000's or Max are listed for future delivery.

  

Fig. 1

United has 14 -747-400 units in its fleet. It also has 88 777's in its fleet. Consider the 767 and 757 as types to be dismissed from the fleet. Counting the 747, 757, and 767 units, the total is 142 units that would be replaced in the near term. The 737-10 Max sounds like it will replace the 757 fleet. The 777 fleet is vulnerable to the A350-1000 replacement. However, since the Airbus wide body order is for only 35 A350-1000 units, the 777X has emerged. The consideration for new 777-300ER are on the table for a relatively cheap price . Boeing needs to fill the 777-300-ER model production until the 777X is ready. The 777-300-ER door opens for United at a way cheaper price than taking delivery on the A350-1000. United fleet of 88 777's only has 14 777-300ERs in the mix of large body aircraft. 

The 777-200 are its oldest 777's in the fleet. There is an immediacy for replacing old 777's for which the A-350 1000 could not deliver in a timely manner for United's plans. Hence the A350 push back. What is not known at this time is how the 777X could play into United's fleet strategy. Boeing maybe offering United a wide body deal it can't refuse. The Airbus order now becomes an impediment to United's fleet replacement plans as it has yet to be delivered and Boeing would make room for a United deal if it would order some 777-300ER's by this fall. A wide body replacement flow from Boeing could retire the United inventory just as each 747 and 777 needs to go from aging considerations.