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Boeing (BA): 787 Could Burn About $20 Bln Over Next 3 Years

 February 29, 2012 01:26 PM

Boeing (NYSE:BA) is banking big hopes on 787 and, a recent research shows that 787 could burn up to $20 billion in cash over the next three years.

In the third quarter, Boeing revealed its 787 accounting quantity at 1,100 aircraft, including firm orders for 879 airplanes. This implies that if these 879 firm orders turn into deliveries, the company needs to sell 279 more planes to cover its development cost. At that point, the company can start booking Dreamliner orders at a profit.

In the fourth quarter of last year, the company guided its 787-related inventory build to $4 billion during 2012 while also commenting that it expects capitalized 787 deferred production costs to top out around $20 billion in early 2015, up from $11 billion now.

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Boeing uses a practice known as program accounting to determine average profitability, which helps to avoid posting a loss on early output due to high start up expenses.

"Our updated learning curve analysis indicates that Boeing continues to assume much faster learning on 787 than it was able to achieve on 777 despite having less control of production this time and multiple production lines," UBS analyst David Strauss wrote in a note to clients.

The aerospace learning process is typically expressed according to Wright's model, which asserts that the cumulative average production cost will decrease by a constant percentage each time the production quantity is doubled. Applying Wright's model to 777, Strauss estimate that Boeing learned at a rate of just under 16 percent, implying that the cumulative average unit cost over the first 100 units was nearly 16 percent lower than over the first 50 units.

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Boeing expects its deferred production cost balance to begin burning off in early 2015, once its 787 production rate stabilizes at 10 plans per month. This would require Boeing's 787 unit production cost to fall below its average program accounting cost by then.

Program accounting is a method of accounting for the costs of certain products manufactured for delivery under production type contracts where profitability is realized over multiple contracts and years. Under program accounting, inventoriable production costs, program tooling costs and warranty costs are accumulated and charged to revenue by program instead of by individual units or contracts.

Strauss expects Boeing's unit cost need to drop over $100 million in 2015 from current $250 million with its cumulative average cost dropping by 24 percent with each doubling in production.

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