Daily Archives: November 3, 2011

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)


Filed under Aerospace & Defence