Tag Archives: list price

Boeing 787 recurring costs vs. recurring income

Few days ago I was discussing with some commenters on the blog of aviation analyst Scott Hamilton (Leeham News and Comment) about the recurring costs Boeing may be experiencing in the 787 program at the moment.

I used in the discussion the analysis I had made of the learning curve Boeing has experienced in the last 2 years according to cost reductions reported by its CFO, Greg Smith. See a post I wrote about it here. The result I reached is that lately they achieved a 87%. With information disclosed last year, the figure I arrived for 2013 was ~84%, see the post here. However, in the calculation to obtain the learning curve experience the actual costs are not needed, it is sufficient to know cost reductions achieved (reported) between given units.

However, when in 2011 I wrote a series of posts (1) about Boeing 787 break even, I did try to estimate what the cost of the first production units were using published information at the time. At that time it was disclosed that Boeing had about 18bn$ of work in process (WIP) and a number of aircraft in different stages of production. Reported average costs ranged from 250m$ to 400m$. I made some simple assumptions and arrived at an average cost of 310m$ for the first ~60 units.

The next step is to accommodate those average costs into a learning curve profile. The steeper the curve (75%) the more expensive the first unit would have been. Since in 2013 the calculated curve was a 84%, I obtain that the first must have been around 650m$ (2). From then on, I apply the mentioned 84% through end 2013. Then I switch to a 87% curve (slower learning) following the reported figures from Greg Smith.

This discussion so far gives an idea of how to estimate the recurring costs. At the end of 2014 this figure is estimated around 180m$.

In order to know by when Boeing will turn the production of 787s into something profitable, we first need to know by when the recurring costs will be lower than the recurring income. The latter is estimated from the information about prices (published by Boeing here) and discounts applied (estimated in other blog posts, see the last update for 2014).

Boeing list price for the 787-8 in 2014 was 218.3M$.

These list prices are, however, increased almost on a yearly basis by Boeing. Sometimes very steeply (+11.4% in 2010, from 2008) and other times more moderately (+2.4% in 2013 vs. 2012). Going into the future I assumed this increase to be constant and about equal to 2014′ increase, 3%.

On the other hand, Boeing applies some discounts to its customers. These are never disclosed. Some are reported by some sources. What I do is to try to estimate an average discount from reported information. See a detailed calculation here. The latest figure that I arrived at was about 47%. Going into the future I assumed this discount to remain constant. You can see here the recent evolution of discounted 787-8 prices.

With all these ingredients, the only thing left is to plot together the recurring costs and recurring income:

787 recurring cost vs. recurring income evolution.

787 recurring cost vs. recurring income evolution.

As you can see recurring costs may be lower than recurring income at the end of 2019.

This will truly depend on the learning curve achieved, the number of units produced (3) and the pricing power Boeing manages to have. If the learning is steeper, the date will be sooner. If the ramp up is higher, the date will be sooner. If the discounts are lower or the list prices increased more, the date will be sooner. In any other case, either 2019 or beyond.

(1) See the complete series here: “Will Boeing 787 ever break-even?“, “More on Boeing 787 break even” and “787 Break Even for Dummies“.

(2) We will never know that figure. I wonder whether this is even known or registered (if not deleted and forgotten) within Boeing.

(3) For the numbers of units built I based the model in reported information that the ramp up to 12 aircraft per month is expected for 2016. I assumed that in 2015 they are at somewhere between 10 and 12 aircraft per month.

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Boeing list prices increases vs. discounts increases (update for 2014)

In a previous post I updated the estimate of what is the average discount Boeing applies when selling its commercial airplanes using 2014 data of list prices, deliveries and reported revenues. The figure I came up with was a 47% discount. I included the following graphic showing the discount evolution:

Boeing Average Discount Evolution, through 2014.

Boeing Average Discount Evolution, through 2014.

Last year, seeing the increasing trend of average discount together with knowing the fact that Boeing regularly increases list prices triggered the following question: Have Boeing airplane discounted prices increased, decreased or stayed constant in the recent years? I set out to answer this question using the estimated average discount of each year (1) from the graphic above.

The Boeing list prices (LP) (2) can be found here. I have been recording those prices for years and thus have a table with the evolution of list prices for each model year by year. The following step is to apply the average discount estimated for each year to then-year list prices, to get the estimated discounted prices (EDP) (2) per model. Thus, a table can be built for the last 6 years.

You can find below the result for the best-selling aircraft during previous years: 737-800, 737-900ER, 777-300ER and 787-8. Together these 4 models amounted to over 640 deliveries in 2014 or 89% of the total 723 airplanes Boeing delivered in 2014.

Boeing List and discount Prices evolution table, 2008-2014.

Boeing List and discount Prices evolution table, 2008-2014.

In the table above I included in black figures what have been Boeing list prices of these models in the past years (as reported in their website) while I marked in blue the figures which are estimated, using as a departure point the calculated averages discounts per year (also included in blue in the table). I included as well the list prices year-on-year change as a % of the previous year list prices, per model.

The average list price increase included at the bottom line is computed with the information of all Boeing models (19 in 2008 and 20 in 2014, though different ones (e.g. last year addition of 777-8X and 777-9X), a total of 26 different models along this period), not only the 4 included in this table.

You may see in the table above that after not increasing prices in 2009, Boeing has steadily increased them in 2010 (6.3%), 2011 (4.7%), 2012 (6.7%), 2013 (1.9%) and 2014 (3.1%). However, if you take a look at the blue figures in the same table you will notice that prices of 2014 are between 2010 and 2011 price levels for all 4 models! That is, the widely announced yearly list prices increase has been yearly offset by a discreet (not-announced) increase in the discounts applied to the sales of airplanes. Thus, the pricing power of Boeing has remained barely constant during the last 5 years. You may see it better in the graphic below:

Boeing List & discount Prices evolution graphic vs. inflation in USA (through 2014).

Boeing List & discount Prices evolution graphic vs. inflation in USA (through 2014).

The graphic shows the price evolution for each of the 4 airplane models selected, taking as a reference their list and estimated discounted prices in 2008 (indicated as 100%) and also the evolution of inflation in the USA (3) in purple, to reflect the evolution of real prices (i.e. accounting for inflation). List prices are shown with straight lines, versus dashed lines used for estimated prices. Each pair of prices for each aircraft is presented in the same color for easier identification. Some comments to the graphic:

  • Through continuous increases, 2014 list prices were between 21% (737 and 777) and 31% (for the 787) higher than in 2008.
  • However, due to increasing discounts from 38% in 2008 to 47% in 2014, the increase in list prices is almost entirely offset (especially for 737 and 777, just 4% above 2008 levels).
  • 2014 discounted prices are below 2011 discounted prices for all models except 787.
  • If compare the evolution of prices vs. the US inflation (general prices in 2014 being 10% higher than in 2008), we see that:
    • Boeing actually lost pricing power in both the 737 and 777, which are cheaper in real (inflation-adjusted) discounted terms in 2014 than they were in 2008 (about 6% cheaper).
    • Only the 787 has been able to keep up the pace of discount escalation and inflation.

(1) There is no way to know the real price and discount that Boeing applies in each sale, as it will depend from customer to customer (American Airlines -AMR- or Fedex) and from model to model (737-800 or 787-8). There where competition is tougher, discounts will be higher. However, the estimates I have made are an average of all Boeing aircraft sold in a given year.

(2) Both list prices (LP) and estimated discounted prices (EDP) are expressed in then-year dollars.

(3) US inflation series since 2008: -0.4% (2009), 1.6% (2010), 3.2% (2011), 2.1% (2012), 1.5% (2013) and 1.6% (2014).

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Boeing real prices (accounting for inflation) after discount

In a previous post I compared for some Boeing airplanes (737-800, 737-900ER, 777-300ER and 787-8) what had been the evolution from 2008 to 2013 of the published list prices against the estimated discounted prices. In that post, I arrived to the following conclusions:

[…] the pricing power of Boeing had remained barely constant during the last 5 years.

  • Through continuous increases, 2013 list prices were between 18% (737 and 777) and 27% (for the 787) higher than in 2008.
  • However, due to increasing discounts from 38% in 2008 to 47% in 2013, the increase in list prices is almost entirely offset.
  • 2013 discounted prices are below 2010 discounted prices for all models.
  • 2013 discounted prices are almost back at 2008 levels for the 737 and 777, only the 787 seems to have stayed at 2010 levels.

I, then, received one interesting comment from a reader, ikkeman, pointing at the fact that if the estimated discounted prices are expressed in then-year dollars (1), if real prices had not increased since 2010, that meant that they had indeed decreased.

See below the graphic I included in the a previous post updated adding the data of US inflation after 2008. [The series is: -0.4% (2009), 1.6% (2010), 3.2% (2011), 2.1% (2012) and 1.5% (2013)]

Boeing List & discount Prices evolution graphic vs. inflation in USA,

Boeing List & discount Prices evolution graphic vs. inflation in USA.

With the information of the inflation (purple line) the following 2 conclusions apply:

  • 787 real price (accounting for inflation) after discount has simply kept up with inflation rate since 2008.
  • 737 and 777 real prices after discounts, however, have lost ground with respect to inflation since 2008. On average they have lost about 8.5% in total or about 1.6% per year.

(1) That is the case as estimated discounted prices have been estimated year by year from the financial reports and list prices of the year, thus, using then-year US dollars.

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What is the price of an A380?

Yesterday, it appeared in Flight International website, an article in which the price of an A380 was unveiled. Generally, aircraft real prices are never disclosed, that is why that was news. What it is normally published is the list prices for the different aircraft (here you may see Boeing’s list).

The article disclosed the price for an A380 acquired by Nimrod Capital LLC, which is to lease it to Emirates. The price: 234m$. Since the list price for the A380 is 375m$, that means it was purchased with a 38% discount, as the article says.

For obvious reasons, I will not comment on Airbus prices (*). Here, I just wanted to mention that, using a quite detailed approach, some time ago, I calculated which were Boeing’s discounts. I explained everything in a post.

I used the number of aircraft delivered per year, the net orders per year, all for a period of three consecutive years, and matched the list prices versus the revenues recognised in the yearly income statement published by the company in each of those years… I figured out which was the discount that minimized errors for the period of three years. Guess what was the result I came up with: 38% for the period 2007-2009 and 39% for the period 2008-2010.

(*) Disclaimer: I have never worked in anything related to aircraft pricing, sales or marketing in Airbus. Thus, I have no insider clue about its prices.

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Boeing commercial aircraft discounts (update for 2010)

Boeing released 2010 results last Wednesday. The company reported revenues in excess of 64bn$, 462 commercial deliveries and 530 net orders for its commercial aircraft. All these were widely reported by the media.

Last year I wrote in one post what was my estimation of Boeing discounts. In this post I wanted to update, if necessary, the figure I calculated for the average discount Boeing applies in its commercial aircraft in relation to the published list prices.

Most of the necessary information can be found in its website. Boeing list prices can be found here. With these list prices, the updated average list price per kg is now ~1,750$ (find the post I wrote last year about this).

The number of gross and net orders (after cancellations) year by year can be found here. Last year deliveries can be found here.

As in the post of last year:

  • I needed to make one assumption: new orders come with a 3% down payment in the year of the booking, while the remaining cost I assumed that was paid on the year of delivery (for simplicity I didn’t consider more intermediate revenue recognition milestones linked to payments, the 3% figure was taken from the AIAA paper “A Hierarchical Aircraft Life Cycle Cost Analysis Model” by William J. Marx et al.).
  • I also needed to estimate the figure Boeing Commercial Aviation Services revenues: the figure I have used is 2.5bn$ [1].

Having put all the figures together, the calculation is immediate. Boeing Commercial Aircraft revenues are the sum of:

  • the discounted prices times the delivered aircraft in the year,
  • less the down payment of the current year delivered aircraft, as the down payment was included in previous years results,
  • plus the down payment of current year net orders,
  • plus services revenues.

The discount figure that minimized errors last year was 38%. Using this figure, the error obtained this year in relation to Boeing Commercial Aircraft reported revenues is 2.8%. A little higher discount would reduce the error; the best estimate is now 39% (being the errors in revenues of: 1.3% for 2010, 1.45% for 2009, 1.7% for 2008 and 1.02% for 2007).

Thus, the updated discount for Boeing commercial aircraft is 39% (!). The price of Boeing aircraft per kg after the discount is then ~1,070$.

***

[1] The error in the estimate of the services revenues is negligible when calculating the magnitude of the discounts: an error of 1bn$ up or down in the figure used affects the error in the estimate of the discount in only 3%; or another way to see it: an error of 1bn$ up or down in the figure used for services would impact the discount value in just 2% to obtain the same error, e.g. 36% instead of 38%.

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Commercial aircraft market size after discounts (update)

In an older post I already made an analysis of the aircraft discounts related to the published list prices (by the way, Boeing just raised its list prices 5.2% a couple of days ago). In that case, I used the revenues and deliveries of Boeing in the previous 3 years (38% discount was the result!).

Using that information, now that the latest market forecasts both from Airbus (Global Market Forecast) and Boeing (Current Market Outlook) are available, we can say that the real market size in the next 20 years will be in the order of 2,100bn$ (average of both forecasts in 2010 dollars).

Flow of airplanes

Another very interesting feature that Airbus published in last year’s GMF (it is not yet in this year’s publication) and Boeing used for this year’s CMO is a graphic showing the dynamics of aircraft. In it you may understand how from today’s fleet, adding new deliveries, retiring old aircraft, converting some from passenger to freight transport they arrive to the forecasted fleet in 2029.

I include below both graphics.

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Airbus vs. Boeing, comparison of market forecasts

Airbus announced on Monday its latest Global Market Forecast (PDF, 4.6MB) for the 20-year period 2010-2029. Media has already highlighted the main points: ~26,000 new aircraft will be delivered with a market value of ~3,200bn$.

Some months ago, Boeing published its equivalent study, the Current Market Outlook (PDF, 8.2MB) for the same period.

It is interesting to compare the two of them. In that way we can see how each other treat competitors’ products (mainly A380) and how they try to shape the market and send messages to it (point-to-point & hub-spoke).

However, it is not easy to compare the studies as they use slightly different segmentations, disclose in different ways the value of aircraft for the segments (list prices) and is not always clear how to discount freighter aircraft from global figures. I dig for some time into those numbers and arrived to the following table:

Comparison of Airbus GMF and Boeing CMO 2010-2029.

Some comments on the comparison:

  • Boeing sees demand for 13% more aircraft with a 10% more value.
  • However, this higher demand is not applicable to all segments: Boeing sees ~60% less A380s or equivalent being delivered over the next 20 years, while 18% more single aisle (A320s) and 12% more twin aisle (A330/A350s).
  • Boeing plays down A380 potential, but sees a very similar number of RPKs (“revenue passenger kilometer”), that is, the number of paying passenger by the distance they are transported. Airbus forecasts for 2029 12.03 RPKs while Boeing forecasts 12.60 (in trillion).
  • The difference of less than 5% in RPKs means that out of the 13% difference in aircraft deliveries over 8% comes from the different business model each company is trying to push.
  • Finally, we can see that Boeing uses again higher average prices for smaller aircraft and a lower reference price for A380s.

Enjoy the two documents, differences apart, they gave a very good piece of information and insight about the market.

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