787 Break Even for Dummies

My previous two posts on Boeing 787 break even (original and further discussion) were generally well received, as far as the insight they provided on the matter and the way they treated the different variables at play.

From the feedback, I understand they were quite dense regarding the amount of information they conveyed and not so easy to grasp for the general public.

In this post I will try to apply the old adage “A picture is worth a thousand words” and show everything which was mentioned in the previous posts in just four graphics.

Forget the 787. Any new commercial aircraft program shows a similar cash flow profile, with initial cash outlays to cover the long the development period, a ramp-up of production and a learning curve effect once the series production advances.

Cash flow profile of a typical commercial aircraft program.

Take the case of the 787. The discussions made in the previous posts and the influence of the different variables are summarized in the different boxes of the next graphic.

787 cash flow profile?

What is critical in a commercial aerospace program as an investment project? The long development period makes it difficult for the positive cash flows at the second half of the life cycle of the aircraft to compensate the initial cash outlays spent in R&D, capital investment and production of the first units. Why is that difficult? Due to the time value of money: A positive dollar of the tenth year will only compensate 39 cents of the first year (at a discount rate of 10%)…

787 cash flow profile affected by the time value of money.

Let’s get back to the “accounting block”, what was going to happen around 2015, and whether the 787 would make profits for Boeing. In the yearly accounting, revenues are not discounted, thus the above discussion doesn’t apply. As soon as production costs plus amortization of initial investments are balanced by revenues, the 787 will make a profit for Boeing.

787 accounting block, profits...

After having shared all these plays with numbers and hopefully having shed some light over the issue, it is important to remind that these are just models and that what will finally happen will only depend on Boeing’s engineers, shop floor workers and sales teams.

“Not everything that counts can be counted, and not everything that can be counted counts.”

(Sign hanging in Einstein’s office at Princeton)

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20 Comments

Filed under Aerospace & Defence

20 responses to “787 Break Even for Dummies

  1. Observer

    Can you please provide A400M for dummies? It seems you should better qualified for that??

  2. I do not write about the A400M due to my situation as an Airbus Military employee. Nevertheless, I invite you to use the same methodology exposed here to analyze the A400M case and see what are the results you reach. If you do so, I would be very interested in seeing them and would be thankful if you would share them with us.

    • Javier H

      For the A440M the model would need major modification, some of the inputs would be quite different. First: given the acquisitions are not commercial, the downpayments structure can widely vary from customer to customer…during the development period, they are just massive injections of money from the launching governments. Second, the concept of the project as an investment is hardly applicable, the entire development money is enjoyed at zero financing cost, so the time value of money is not too meaninful. Third, ramp up plans are probably way more modest since a military airlifter can never have a backlog volume as the 787 or any successful commercial airplane; with one thing and other payback period tends to infinity…simply too different animal

      • You’re completely right, Javier. The cash flow analysis would have very different assumptions.

        I only disagree with the statement “the concept of the project as an investment is hardly applicable, the entire development money is enjoyed at zero financing cost, so the time value of money is not too meaninful”, for the company the program is an investment project as any other. It is an investment with its risks. Even if it receives payments during development it needs to advance cash and may not recover everything and thus time value of money is still meaningful.

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  4. Uwe

    “Observer” by definition is an information sink ;-)

    Thank you very much for your expose on 787 break even.

  5. Pulguitel

    Interesting and applicable to any development A/C.
    But a question comes to my mind…. how can we count the public fundings, subsidies, etc? Because my feeling is that most tof these projects are not profitable without them. The sales to make them profitable without government’s help is so huge that they are unrealistic!

    • Thanks :-)

      Public funding: it would change the discount rate (e.g. 12%), making it lower as the public institution would require a lower interest than a commercial bank or private investors (through stock market) when repaying debt (http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital). With a lower discount rate, future positive cash flows wouldn’t be affected by a very low discount facor and the project could have a positive net present value easier.

      Subsidies: if we talk about direct subsidies, they could be treated as cash inflows at the beginning of the project and thus offsetting negative cash outflows ocurring at the beginning, making it easier again to have a positive net present value.

      Certainly, if an investment project of the size of an aircraft that wouldn’t receive more than 180 orders and the development costs weren’t paid for more or less at the same time of development but had to be recovered only when the deliveries started (like in the case of 787, about 7 years later) it would be an economical suicide.

  6. Uwe

    @Pulguitel
    your conclusive jumps bring you over an abyss.
    A400M is a portmanteau contract over developing a plane and
    building 180 ( originally more ) specimen.

    787 project is offering a plane to be developed and built
    and selling this future plane to various takers in various amounts
    at bargained prices.

  7. Marcus

    2034. Hm. By that reasoning, the A380 will break even on the 25th-of-NEVER and the A400M has zero chance either.

    Very convenient you cant comment on those two programs due to your work etc etc. Sorry, but your numbers are full of shit, a bit like you and the morons that link to your stupid ‘Anal’ysis.

    Suppose you will edit this comment as well, wont you, you facist?

    • hardwaremister

      Oh well, this only shows your true colours, as well as Javier’s integrity.

      Anyway, fantastic analysis Javier!

      • I’m glad that you liked it! Thanks for your comment!

      • hardwaremister

        @Javier; my pleasure.
        By the way, in any way I try to account for the discount factor, this “static %” seems too much of a simplistic approach to account for inflation over a period of time. How the debt is accrued onto the project and how the interest over the wa ir of it is discounted over the currency depreciation baseline, can deviate any learning rate assumption wildly.

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  11. Are Product Support revenues included in your revenue projections? They can be as much as 50% of the total life cycle revenues of an aircraft program, with profit margins that are 2x that of the product sale….Product Support, if not included misses a key part of the overall business model

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