FlightBlogger Archive 2007-2012

Boeing CEO floats mystery fourth 787 to bolster program profitability

Written by

Jon Ostrower

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Boeing 787 Dreamliner N787BA ZA001

On Wednesday’s Boeing earnings call, CEO Jim McNerney was asked about the near, middle and long term prospects for achieving profitability on the 787. McNerney answer did not provide much in the way of clarity on the program’s profitability, instead saying those details – including the accounting block size – would be available at first delivery.

Rather, McNerney answered with the following quote, outlining the ingredients to profitability  suggesting a combination of productivity and lean manufacturing, a more varied mix of 787 models, reducing the shipset cost with suppliers, improved pricing with increased demand and introduced the idea of even adding “a new model or two” to the product offering.

The initial block size will be discussed at entry into service, and we’ll — we’re going through that. James and his team are going
through that right now, as we speak.

There is very strong demand for this airplane. And so, the real story here is we got the airplane right, despite some of the ramp-up difficulties that we’ve gone through, which have added significant cost, as you know, as we’ve worked through it.

Now, obviously, whatever production quantity we decide on, it will be the result of the process we use always when we introduce new airplanes. The profitability will not be high at the beginning, and it’s — I think, however, there is significant — as there has been on every new airplane we’ve ever built, there are significant opportunities to increase the profitability of it, and we are focused on it.

They relate to a series of productivity and factory efforts and working with our suppliers, and it relates to model mix pricing, model introduction down the line. We’re looking at a new model or two as alternatives beyond where we are now, to be discussed later. But these are the levers we tend to pull, and I think it will be aided by the fact that this is an incredibly productive machine for our customers. The quantum leap in productivity that these customers will be able to get with these airplanes are going to make the pricing environment, once this plane is in service proving itself, more robust and easier to sustain. So pricing will also strengthen.

So, it’s hard for me to give you exactly the timing of all this. But every airplane program we’ve ever had goes through this transition.

Reading into McNerney’s statement, one of the two new models would almost certainly be the 300+ seat 787-10, but what of the second new model? The 787-3 is no longer offered by Boeing and hasn’t shown any signs of life for nearly a half-decade. Perhaps a 787 freighter? What about the mythical medium-haul 787 the company was exploring in 2008?
But most notably, McNerney did not discuss the 787-8 directly, only to say the company has added “significant cost” to the program. Boeing holds 603 of the 835 orders for the current -8 and the balance are for the 787-9, which is targeted for delivery in 2013, but is now expected to make up half of the 787 deliveries over time through conversions and new orders.
The breakeven point for the 787 program – still unknown – is estimated by Steven Udvar-Hazy to be around 1,500 aircraft. For the sake of historical comparison, the 747 is only nearing that target after more than four decades, while the 777 will likely cross that threshold around two decades after its 1995 entry into service as output accelerates to 100 a year. 
Assuming the production ramp up achieves its ambitions, the 787 will come to cross 1,500 deliveries in a time period far closer to the 777 than the 747.
I’m currently in search of 777/767 historical data regarding what level of new order/conversion activity has taken place over their respective design lives. The trend anecdotally points to later, larger models in the 767-300ER and 777-300ER as being better sellers, but did customers get there by abandoning smaller models or by adding to their overall order books?
If the answer is the latter, then the already low priced 787-8s, are going to remain and challenge that break even point in the face of McNerney’s “added significant cost”. Model mix may be the path to profitability, but with 603 787-8s in between here and there, it may be a long road whose destination could follow a painful journey.

This post was originally published to the internet between 2007 and 2012. Links, images, and embedded media from that era may no longer function as intended.

This post originally appeared at Flightglobal.com from 2007 to 2012.

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