The 787 financial crisis

By Tim Raetzloff | Mar 06, 2013

The Boeing 787 is reaching a crisis. I don’t mean whether to continue to use flammable lithium ion batteries or not. I mean financially.

Last year Boeing reported in an SEC (Securities and Exchange Commission) filing that the profit margin for the 787 program (if all early costs are accounted over the first 1,100 787s produced) is in “the low single digits.”

Lets guess that means the profit margin for the 787 program is less than 3 percent. The nominal sale price of each 787 is supposed to be about $225 million.

But, we know that Boeing (and AirBus) give large discounts from the list prices. Evidence from Air India’s near-bankruptcy indicates that Boeing actually sells each 787 for a little more than $100 million.

From this information we may infer that the “profit,” as measured by Boeing’s arcane accounting methods, on each 787 is about $3 million, very low by aircraft standards, and very low for any industry.

Reuters has reported that the grounding of the 787 is costing All Nippon Airways (ANA) $1.1 million a day.

ANA was the launch customer for the 787 and has, so far, taken delivery of 17 of the total of 50 787s that have been delivered.

The “profit” to Boeing, by the arcane accounting method used by Boeing, on those 17 planes is a little more than $50 million. In about 50 days ANA will have lost $50 million.

ANA has said publicly that they will demand compensation from Boeing for the loss. From the day the 787s were grounded, Jan. 16 to March 7 is 50 days.

We may assume that all airlines that have grounded 787s will demand compensation similar to ANA.

By March 7 the profit on the first 50 787s that have been delivered will have disappeared. And not only the first 50, but also the next 50, which are complete or nearly complete.

Every day after March 7, those planes are not profitable, but become losses on the books, at the rate of about $6 million a day for the total.

By March 7, roughly 0.1 percent of the small profit that Boeing expected by 2022 for the 787 will have disappeared.

And every day afterward until the 787s are again flying, Boeing will lose 0.2 percent of the total expected profit of the 787.

This number does not include additional expenses involved in solving the problem of the smoking batteries or in re-engineering the electrical system of the 787.

That cost will eat away further at profit.

Boeing cash flow is also affected. Each delivered 787 is worth $40-50 million in cash flow. There have been no deliveries since Jan. 7, reducing Boeing cash flow by $250 to 300 million each month.

AirBus skillfully painted the FAA, and Boeing, into a corner on Feb. 15. Air Bus will not use the dangerous lithium ion batteries on its new A350XWB.

The official reason is that AirBus does not want to run into schedule delays if the FAA requires removal of lithium ion batteries. But an unofficial strategic reason for AirBus is that it may force the FAA to remove lithium ion batteries from the 787.

The reason wouldn’t necessarily be scientific, but, rather, appearance.

FAA was chummy with Boeing at the press conference in Boston after the first battery fire and during the entire certification process of the 787. Now FAA must appear to actually regulate.

It may not matter if a safe way to use lithium ion is found; what may matter is how it appears to the flying public and to air safety regulators in other countries.

Japan grounded 787s before the FAA did. Reports from Japan indicate that the Japan Transportation Safety Board may not necessarily follow the FAA this time.

The 787 has not yet been approved to fly in China. According to Matt Cawby’s Paine Field blog, representatives of the Civil Aviation Administration of China were on a 787-test flight two days after the Logan fire.

That was the day of a fuel leak on a 787; the Chinese did not take the second scheduled 787 flight. They flew home to China without approving the 787 for use in China.

It is possible that the FAA may approve 787s return to flight status, and foreign regulators may not.

Our own National Transportation Safety Board expressed disapproval of the cozy relationship between Boeing and the FAA.

All of this leaves Boeing in a situation where the 787 becomes a drag on Boeing profits, not the money-printing machine so foolishly envisioned by Boeing management only a few years ago.

Tim Raetzloff, who operates Abarim Business Computers at Five Corners in Edmonds, evaluates Puget Sound business activity in his regular column in the Beacon. In the interests of full disclosure he says, “Neither I nor Abarim have any interest in or conflict with any company mentioned in this column.”

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