6 ms·

Will 787 program ever show an overall profit? Analysts grow more skeptical

53 points by jerven 11y ago

bryanlarsen 11y ago
tldr: will it show a profit? No. Does it matter? No, it's a sunk cost.
seansmccullough 11y ago
I'm paywalled.
- seansmccullough 11y ago
  http://webcache.googleusercontent.com/search?q=cache:http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/ http://webcache.googleusercontent.com/search?q=cache:http://...
JacobAldridge 11y ago
With the development of space travel / tourism technologies, and the holy grail of Sydney->London in 2 hours continuing to be sought (directly or indirectly) by Virgin Galactica, Space X etc, there's a good chance Boeing and Airbus will go the way of so many car manufacturers. If they struggle this long to warrant the 787 investment, how hard will it be (and what impact will it have on share prices, noting they currently view most of the 787 investment as sunk cost) to make the next step-change in the industry? Especially if by then there may not be a 30 year window to pay for it. They're not going anywhere soon, so maybe it won't happen until the back end of my life. But I imagine people thinking with nostalgia about companies like Boeing and watching movies on 12 hour flights that were only intermediate legs, in the same way we talk about car brands and childhood experiences - bucket seats, no air-conditioning, driving down the highway towards the beach for summer.
- arnold_palmur 11y ago
  Except that Boeing is also heavily (and increasingly) involved with commercial space as well, e.g. satellite building, launch vehicles and human spaceflight vehicles.
- notahacker 11y ago
  The struggle to recoup the investment in comparatively minor innovations in the 787 is a pretty good indication of why 2 hour commercial flights to Sydney are likely to remain a pipe dream.
  - ubernostrum 11y ago
    Yeah, the thing limiting supersonic/hypersonic/etc. passenger travel is not the technology, it's the economics. There just aren't enough passengers willing to pay the extremely high fares to make fast inter-continental service work. Also the precedent of Concorde is not particularly encouraging: building a supersonic airliner required sacrifices of cabin space and comfort which didn't align well with the preferences of the passengers wealthy enough to afford the fare, so given the choice between paying 5x the subsonic fare for quick but cramped, or 2x-3x for subsonic but luxurious, those passengers chose subsonic. The amount of discomfort that seems inevitable for the sub-orbital trajectories (i.e., you get to know what it feels like to be an astronaut during launch, shaking, g-forces and all) that seem unavoidable for fast halfway-around-the-world-in-a-couple-hours service probably would sink it economically as anything but an occasional jaunt for rich tourists who want to say they rode it.
    - lotharbot 11y ago
      An additional issue with supersonic is it doesn't save you time waiting in line at the airport or driving to and from. So the net comparison isn't 3.5 hours vs 7 hours of flight time (Concorde vs 747, New York to London); it's more like 6.5 hours vs 10 hours of total cab + airport + flight time. Either way, you're probably tired from the trip and won't be particularly productive, so why not pay less money for a more comfortable seat in a bigger, slower jet? (While I never flew Concorde, I did babysit one in a museum. There isn't a single seat that isn't cramped -- even in the cockpit.)
notatoad 11y ago
>wikipedia: The airliner's maiden flight took place on December 15, 2009, and completed flight testing in mid-2011. >this article: Almost a dozen years after the jet was launched, however, the prospect of the 787 ever making an overall profit for Boeing remains doubtful it actually entered service almost exactly four years ago, i'm not sure where they get 12 years from. It seems a little early to be saying it never will reach a profit.
- Riegerb 11y ago
  In the commercial airplane world 'launching' an airplane just means it can be sold to customers, not that the airplane is done. Boeing adheres to a 'gated' design process, where one of the earlier gates is the 'launch' of the aircraft and the last is entry into service. The airplane is designed far enough to close the business case and then can be 'launched'.
- ubernostrum 11y ago
  "Launch" of an airliner program does not refer to the first airframe going into service; it refers to the point where the manufacturer officially announces the program to airlines and begins taking orders. Typically the actual aircraft is years from being assembled and flying when that occurs (for example, Boeing launched the 777X program in 2013, and currently plans for the first actual 777X aircraft to enter service in 2020).
chollida1 11y ago
Aircraft sales is a really weird industry. It's gone the way of the AAA video game in the sense that its so expensive to build one now that there are only a select few companies that can do so. And going forward companies will go for iteration rather than new designs as each new design is almost a literal bet the company proposition. Just look at the 32 billion the article asserts that Boeing has already spent on the dream liner!! There was a great article that gets posted here every now and then called something like why can't we fly any faster and it turns out the answer is that consumer's don't want to pay for it. I think something similar is happening with air craft design in the sense that we're seeing less improvement because no one, in terms of passengers, wants to pay for the cost involved to really inovate. As to a comment about space travel/tourism eating Boeing's lunch, I think that's a pretty uniformed comment. How many private company has more space flight knowledge, patents, or design experience than Boeing? There aren't many and I don't think there will be that many due to the costs involved. I mean Boeing has spent 32 Billion on the dream liner, what is Space X's valuation? If I had to guess, the future of air craft design is increased partnership, not more companies.
- navls 11y ago
  So you're saying the next big thing is indie aircraft?
  - dogma1138 11y ago
    That literally will not fly, at least not in the commercial space.
    - dredmorbius 11y ago
      Perhaps not in commercial space, but given liability structures in private and small aircraft, the situation for quite some decades has been that innovative design has largely emerged in kit aircraft. I recall discussion of this when John Denver died in the crash of his experimental airplane in 1997.
      - 11y ago
rogerbinns 11y ago
They didn't give an overall picture as to how this happens. Airliner programmes run at a loss initially, because there were the development costs, the costs for equipment and methods to build the plane, and that it takes way longer to build the plane since that one hasn't been built before. However as more and more are built, the whole process gets more and more efficient making each one cheaper (aka the learning curve). It is generally measured by comparing the costs on unit N with those of 2N, and for airliners is around 75-85% (eg unit 200 should cost 75-85% of unit 100). Javier has two excellents posts - a more detailed explanation and how it happens in aerospace, and then deriving the 787 curve based on public information: http://theblogbyjavier.com/2014/03/03/learning-curves/ http://theblogbyjavier.com/2014/03/03/learning-curves/ http://theblogbyjavier.com/tag/learning-curve/ http://theblogbyjavier.com/tag/learning-curve/ The manufacturers also give steep discounts on the first few planes off the assembly line, as they are less likely to meet the promised specs, probably overweight, and more prone to teething issues. Consequently the most expensive ones to make get lower revenues too. But then the manufacturer expects to make it up in volume over time. The 787 programme has all the above applying, but also was done differently. In the late 90s McDonnell Douglas was bought by Boeing. The inside joke is that McDonnell actually bought Boeing, using Boeing's own money. Some of the senior management at Boeing for commercial aircraft was also taken over by McDonnell people. McDonnell was well known for financial engineering, somewhat as a side effect of not having much money, They decided that the 787 would be revolutionary on many fronts at the same time. That includes extensive use of composites, all electric architecture (current planes use a lot of hydraulics and bleed air), new engines, and advanced systems. They also farmed out much of the design and manufacturing work (far more than normal for previous airliner programmes). In theory that meant spreading of the risk, and that Boeing would slap the planes together, collect the money and get rich. The optimism meant pricing them really cheap which led to a huge number of orders, as airlines couldn't say no to such a bargain and specs. In practise Boeing hadn't discovered new magic, risks hurt everyone, individual manufacturers had problems, different partners had different priorities, things didn't run as cohesively as expected, Boeing had to spend lots of money rectifying issues including buying some suppliers, assembly was problematic and the list goes on. The consequence is that the overall expenditures and initial far too low pricing, combined with the actual learning curve means they are unlikely to ever make an overall profit.
us0r 11y ago
Al Jazeera documentary on the 787 I found interesting: https://www.youtube.com/watch?v=rvkEpstd9os https://www.youtube.com/watch?v=rvkEpstd9os
jpatokal 11y ago
The same question is being asked about the Airbus A380, and the A350 is also way over budget and behind schedule. I suspect it's a matter of time until a Chinese manufacturer ramps up and stomps all over the current airplane market with cheap yet perfectly serviceable planes. Anecdote: A few years back, I flew on a Xian MA60, a perfectly serviceable commuter turboprop that's technically a descendant of the venerable Soviet Antonov An-24 but in practice competes agains the ATR-42. A small detail that weirded me out is how the garish livery on the seats inside looks exactly like the one used in Chinese buses... which have also essentially obliterated Western companies' bus sales in large swathes of Asia. http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Exterior.JPG http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao... http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Interior.JPG http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao... The MA60's current customer list is a wacky but wide collection of obscure outfits (Air Burundi, Lao Airlines, Boliviana...): https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary So what's the market going to look like when planes like the 737 clone Comac C919 start ramping up? https://en.wikipedia.org/wiki/Comac_C919 https://en.wikipedia.org/wiki/Comac_C919
- christoph 11y ago
  Hopefully a bit less accident prone... https://en.wikipedia.org/wiki/Xian_MA60#Accidents_and_incidents https://en.wikipedia.org/wiki/Xian_MA60#Accidents_and_incide... Not sure of it's current state, but it was denied UK & US certification on the basis of technical flaws last I heard.
  - ams6110 11y ago
    To be fair, most of those accidents seem to be pilot error of one sort or another, perhaps more a critique of airline competency in that part of the world, rather than the aircraft itself.
    - yread 11y ago
      Well on other planes a pilot error causing a hard landing usually doesn't end up with the wings falling off. Extended list of accidents and incidents: http://www.avherald.com/h?search_term=ma60&opt=0&dosearch=1&search.x=0&search.y=0 http://www.avherald.com/h?search_term=ma60&opt=0&dosearch=1&...
frozenport 11y ago
Can we consider it R&D?
skybrian 11y ago
A big unknown is how long it will be before they have to design a replacement for the 787. What are the error bars on that? It's not something analysts (or anyone) can easily predict. Given the enormous design costs and how close a 787 is to optimal efficiency, perhaps they will be selling them as long as the 737?
dkarapetyan 11y ago
So what? Boeing isn't going anywhere. Why are these business people trying to figure out when and how Boeing is going to make a profit. At this point Boeing is basically a government institution. It doesn't need to run like a business so applying business principles to it makes no sense.
- detaro 11y ago
  "Not going anywhere" != "a good investment", and the second part is something "these business people" probably care a lot about.
  - dkarapetyan 11y ago
    Sounds like a self-inflicted mental anguish to me then.
bbanyc 11y ago
I've heard a theory that commercial aviation as a whole has always been unprofitable. Look at how many airlines have gone bankrupt since deregulation in the US and the removal of flag-carrier subsidies in Europe. Boeing and Airbus are both indirectly subsidized by their respective governments, with each claiming the other's subsidies are somehow unfair.
- sien 11y ago
  The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. — Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.
  - bbanyc 11y ago
    This says as much about capitalism as it does about aviation.
Shivetya 11y ago
I figure it as more of an investment in technology to benefit future designs. So while that one model may not show a profit lessons learned can be applied going forward.
Animats 11y ago
Historically, in the 20th century, Boeing's only profitable planes were the 727 and the 747. See "21st Century Jet", which is about the 777. (The book, not the PBS special.)

53 points by jerven 11y ago

bryanlarsen 11y ago

tldr: will it show a profit? No. Does it matter? No, it's a sunk cost.

seansmccullough 11y ago

I'm paywalled.

seansmccullough 11y ago
http://webcache.googleusercontent.com/search?q=cache:http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/ http://webcache.googleusercontent.com/search?q=cache:http://...

JacobAldridge 11y ago

With the development of space travel / tourism technologies, and the holy grail of Sydney->London in 2 hours continuing to be sought (directly or indirectly) by Virgin Galactica, Space X etc, there's a good chance Boeing and Airbus will go the way of so many car manufacturers. If they struggle this long to warrant the 787 investment, how hard will it be (and what impact will it have on share prices, noting they currently view most of the 787 investment as sunk cost) to make the next step-change in the industry? Especially if by then there may not be a 30 year window to pay for it. They're not going anywhere soon, so maybe it won't happen until the back end of my life. But I imagine people thinking with nostalgia about companies like Boeing and watching movies on 12 hour flights that were only intermediate legs, in the same way we talk about car brands and childhood experiences - bucket seats, no air-conditioning, driving down the highway towards the beach for summer.

arnold_palmur 11y ago
Except that Boeing is also heavily (and increasingly) involved with commercial space as well, e.g. satellite building, launch vehicles and human spaceflight vehicles.
notahacker 11y ago
The struggle to recoup the investment in comparatively minor innovations in the 787 is a pretty good indication of why 2 hour commercial flights to Sydney are likely to remain a pipe dream.
- ubernostrum 11y ago
  Yeah, the thing limiting supersonic/hypersonic/etc. passenger travel is not the technology, it's the economics. There just aren't enough passengers willing to pay the extremely high fares to make fast inter-continental service work. Also the precedent of Concorde is not particularly encouraging: building a supersonic airliner required sacrifices of cabin space and comfort which didn't align well with the preferences of the passengers wealthy enough to afford the fare, so given the choice between paying 5x the subsonic fare for quick but cramped, or 2x-3x for subsonic but luxurious, those passengers chose subsonic. The amount of discomfort that seems inevitable for the sub-orbital trajectories (i.e., you get to know what it feels like to be an astronaut during launch, shaking, g-forces and all) that seem unavoidable for fast halfway-around-the-world-in-a-couple-hours service probably would sink it economically as anything but an occasional jaunt for rich tourists who want to say they rode it.
  - lotharbot 11y ago
    An additional issue with supersonic is it doesn't save you time waiting in line at the airport or driving to and from. So the net comparison isn't 3.5 hours vs 7 hours of flight time (Concorde vs 747, New York to London); it's more like 6.5 hours vs 10 hours of total cab + airport + flight time. Either way, you're probably tired from the trip and won't be particularly productive, so why not pay less money for a more comfortable seat in a bigger, slower jet? (While I never flew Concorde, I did babysit one in a museum. There isn't a single seat that isn't cramped -- even in the cockpit.)

notatoad 11y ago

>wikipedia: The airliner's maiden flight took place on December 15, 2009, and completed flight testing in mid-2011. >this article: Almost a dozen years after the jet was launched, however, the prospect of the 787 ever making an overall profit for Boeing remains doubtful it actually entered service almost exactly four years ago, i'm not sure where they get 12 years from. It seems a little early to be saying it never will reach a profit.

Riegerb 11y ago
In the commercial airplane world 'launching' an airplane just means it can be sold to customers, not that the airplane is done. Boeing adheres to a 'gated' design process, where one of the earlier gates is the 'launch' of the aircraft and the last is entry into service. The airplane is designed far enough to close the business case and then can be 'launched'.
ubernostrum 11y ago
"Launch" of an airliner program does not refer to the first airframe going into service; it refers to the point where the manufacturer officially announces the program to airlines and begins taking orders. Typically the actual aircraft is years from being assembled and flying when that occurs (for example, Boeing launched the 777X program in 2013, and currently plans for the first actual 777X aircraft to enter service in 2020).

chollida1 11y ago

Aircraft sales is a really weird industry. It's gone the way of the AAA video game in the sense that its so expensive to build one now that there are only a select few companies that can do so. And going forward companies will go for iteration rather than new designs as each new design is almost a literal bet the company proposition. Just look at the 32 billion the article asserts that Boeing has already spent on the dream liner!! There was a great article that gets posted here every now and then called something like why can't we fly any faster and it turns out the answer is that consumer's don't want to pay for it. I think something similar is happening with air craft design in the sense that we're seeing less improvement because no one, in terms of passengers, wants to pay for the cost involved to really inovate. As to a comment about space travel/tourism eating Boeing's lunch, I think that's a pretty uniformed comment. How many private company has more space flight knowledge, patents, or design experience than Boeing? There aren't many and I don't think there will be that many due to the costs involved. I mean Boeing has spent 32 Billion on the dream liner, what is Space X's valuation? If I had to guess, the future of air craft design is increased partnership, not more companies.

navls 11y ago
So you're saying the next big thing is indie aircraft?
- dogma1138 11y ago
  That literally will not fly, at least not in the commercial space.
  - dredmorbius 11y ago
    Perhaps not in commercial space, but given liability structures in private and small aircraft, the situation for quite some decades has been that innovative design has largely emerged in kit aircraft. I recall discussion of this when John Denver died in the crash of his experimental airplane in 1997.
    - 11y ago

rogerbinns 11y ago

They didn't give an overall picture as to how this happens. Airliner programmes run at a loss initially, because there were the development costs, the costs for equipment and methods to build the plane, and that it takes way longer to build the plane since that one hasn't been built before. However as more and more are built, the whole process gets more and more efficient making each one cheaper (aka the learning curve). It is generally measured by comparing the costs on unit N with those of 2N, and for airliners is around 75-85% (eg unit 200 should cost 75-85% of unit 100). Javier has two excellents posts - a more detailed explanation and how it happens in aerospace, and then deriving the 787 curve based on public information: http://theblogbyjavier.com/2014/03/03/learning-curves/ http://theblogbyjavier.com/2014/03/03/learning-curves/ http://theblogbyjavier.com/tag/learning-curve/ http://theblogbyjavier.com/tag/learning-curve/ The manufacturers also give steep discounts on the first few planes off the assembly line, as they are less likely to meet the promised specs, probably overweight, and more prone to teething issues. Consequently the most expensive ones to make get lower revenues too. But then the manufacturer expects to make it up in volume over time. The 787 programme has all the above applying, but also was done differently. In the late 90s McDonnell Douglas was bought by Boeing. The inside joke is that McDonnell actually bought Boeing, using Boeing's own money. Some of the senior management at Boeing for commercial aircraft was also taken over by McDonnell people. McDonnell was well known for financial engineering, somewhat as a side effect of not having much money, They decided that the 787 would be revolutionary on many fronts at the same time. That includes extensive use of composites, all electric architecture (current planes use a lot of hydraulics and bleed air), new engines, and advanced systems. They also farmed out much of the design and manufacturing work (far more than normal for previous airliner programmes). In theory that meant spreading of the risk, and that Boeing would slap the planes together, collect the money and get rich. The optimism meant pricing them really cheap which led to a huge number of orders, as airlines couldn't say no to such a bargain and specs. In practise Boeing hadn't discovered new magic, risks hurt everyone, individual manufacturers had problems, different partners had different priorities, things didn't run as cohesively as expected, Boeing had to spend lots of money rectifying issues including buying some suppliers, assembly was problematic and the list goes on. The consequence is that the overall expenditures and initial far too low pricing, combined with the actual learning curve means they are unlikely to ever make an overall profit.

us0r 11y ago

Al Jazeera documentary on the 787 I found interesting: https://www.youtube.com/watch?v=rvkEpstd9os https://www.youtube.com/watch?v=rvkEpstd9os

jpatokal 11y ago

The same question is being asked about the Airbus A380, and the A350 is also way over budget and behind schedule. I suspect it's a matter of time until a Chinese manufacturer ramps up and stomps all over the current airplane market with cheap yet perfectly serviceable planes. Anecdote: A few years back, I flew on a Xian MA60, a perfectly serviceable commuter turboprop that's technically a descendant of the venerable Soviet Antonov An-24 but in practice competes agains the ATR-42. A small detail that weirded me out is how the garish livery on the seats inside looks exactly like the one used in Chinese buses... which have also essentially obliterated Western companies' bus sales in large swathes of Asia. http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Exterior.JPG http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao... http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Interior.JPG http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao... The MA60's current customer list is a wacky but wide collection of obscure outfits (Air Burundi, Lao Airlines, Boliviana...): https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary So what's the market going to look like when planes like the 737 clone Comac C919 start ramping up? https://en.wikipedia.org/wiki/Comac_C919 https://en.wikipedia.org/wiki/Comac_C919

christoph 11y ago
Hopefully a bit less accident prone... https://en.wikipedia.org/wiki/Xian_MA60#Accidents_and_incidents https://en.wikipedia.org/wiki/Xian_MA60#Accidents_and_incide... Not sure of it's current state, but it was denied UK & US certification on the basis of technical flaws last I heard.
- ams6110 11y ago
  To be fair, most of those accidents seem to be pilot error of one sort or another, perhaps more a critique of airline competency in that part of the world, rather than the aircraft itself.
  - yread 11y ago
    Well on other planes a pilot error causing a hard landing usually doesn't end up with the wings falling off. Extended list of accidents and incidents: http://www.avherald.com/h?search_term=ma60&opt=0&dosearch=1&search.x=0&search.y=0 http://www.avherald.com/h?search_term=ma60&opt=0&dosearch=1&...

frozenport 11y ago

Can we consider it R&D?

skybrian 11y ago

A big unknown is how long it will be before they have to design a replacement for the 787. What are the error bars on that? It's not something analysts (or anyone) can easily predict. Given the enormous design costs and how close a 787 is to optimal efficiency, perhaps they will be selling them as long as the 737?

dkarapetyan 11y ago

So what? Boeing isn't going anywhere. Why are these business people trying to figure out when and how Boeing is going to make a profit. At this point Boeing is basically a government institution. It doesn't need to run like a business so applying business principles to it makes no sense.

detaro 11y ago
"Not going anywhere" != "a good investment", and the second part is something "these business people" probably care a lot about.
- dkarapetyan 11y ago
  Sounds like a self-inflicted mental anguish to me then.

bbanyc 11y ago

I've heard a theory that commercial aviation as a whole has always been unprofitable. Look at how many airlines have gone bankrupt since deregulation in the US and the removal of flag-carrier subsidies in Europe. Boeing and Airbus are both indirectly subsidized by their respective governments, with each claiming the other's subsidies are somehow unfair.

sien 11y ago
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. — Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.
- bbanyc 11y ago
  This says as much about capitalism as it does about aviation.

Shivetya 11y ago

I figure it as more of an investment in technology to benefit future designs. So while that one model may not show a profit lessons learned can be applied going forward.

Animats 11y ago

Historically, in the 20th century, Boeing's only profitable planes were the 727 and the 747. See "21st Century Jet", which is about the 777. (The book, not the PBS special.)