Boeing CEO floats mystery fourth 787 to bolster program profitability

Boeing 787 Dreamliner N787BA ZA001

On Wednesday’s Boeing earnings call, CEO Jim McNerney was asked about the near, middle and long term prospects for achieving profitability on the 787. McNerney answer did not provide much in the way of clarity on the program’s profitability, instead saying those details – including the accounting block size – would be available at first delivery.
Rather, McNerney answered with the following quote, outlining the ingredients to profitability  suggesting a combination of productivity and lean manufacturing, a more varied mix of 787 models, reducing the shipset cost with suppliers, improved pricing with increased demand and introduced the idea of even adding “a new model or two” to the product offering.
The initial block size will be discussed at entry into service, and we’ll — we’re going through that. James and his team are goingthrough that right now, as we speak.

There is very strong demand for this airplane. And so, the real story here is we got the airplane right, despite some of the ramp-up difficulties that we’ve gone through, which have added significant cost, as you know, as we’ve worked through it.

Now, obviously, whatever production quantity we decide on, it will be the result of the process we use always when we introduce new airplanes. The profitability will not be high at the beginning, and it’s — I think, however, there is significant — as there has been on every new airplane we’ve ever built, there are significant opportunities to increase the profitability of it, and we are focused on it.

They relate to a series of productivity and factory efforts and working with our suppliers, and it relates to model mix pricing, model introduction down the line. We’re looking at a new model or two as alternatives beyond where we are now, to be discussed later. But these are the levers we tend to pull, and I think it will be aided by the fact that this is an incredibly productive machine for our customers. The quantum leap in productivity that these customers will be able to get with these airplanes are going to make the pricing environment, once this plane is in service proving itself, more robust and easier to sustain. So pricing will also strengthen.

So, it’s hard for me to give you exactly the timing of all this. But every airplane program we’ve ever had goes through this transition.

Reading into McNerney’s statement, one of the two new models would almost certainly be the 300+ seat 787-10, but what of the second new model? The 787-3 is no longer offered by Boeing and hasn’t shown any signs of life for nearly a half-decade. Perhaps a 787 freighter? What about the mythical medium-haul 787 the company was exploring in 2008?
But most notably, McNerney did not discuss the 787-8 directly, only to say the company has added “significant cost” to the program. Boeing holds 603 of the 835 orders for the current -8 and the balance are for the 787-9, which is targeted for delivery in 2013, but is now expected to make up half of the 787 deliveries over time through conversions and new orders.
The breakeven point for the 787 program – still unknown – is estimated by Steven Udvar-Hazy to be around 1,500 aircraft. For the sake of historical comparison, the 747 is only nearing that target after more than four decades, while the 777 will likely cross that threshold around two decades after its 1995 entry into service as output accelerates to 100 a year. 
Assuming the production ramp up achieves its ambitions, the 787 will come to cross 1,500 deliveries in a time period far closer to the 777 than the 747.
I’m currently in search of 777/767 historical data regarding what level of new order/conversion activity has taken place over their respective design lives. The trend anecdotally points to later, larger models in the 767-300ER and 777-300ER as being better sellers, but did customers get there by abandoning smaller models or by adding to their overall order books?
If the answer is the latter, then the already low priced 787-8s, are going to remain and challenge that break even point in the face of McNerney’s “added significant cost”. Model mix may be the path to profitability, but with 603 787-8s in between here and there, it may be a long road whose destination could follow a painful journey.

17 Responses to Boeing CEO floats mystery fourth 787 to bolster program profitability

  1. none April 29, 2011 at 6:06 pm #

    the aviation blogging exists as long as there are Boeing fans and Airbus fans who just fight for their pride than the reality.

    I have never seen a blogging pricing either Boeing or Airbus for their successful models.

    Blogging is all exaggaration or making it interesting for the readers. Nothing more.

    If what you all comment on Airbus and Boeing as aviation experts holds true, Both the companies would seize to exist by now.

    It is all up to the readers to accept what is true and what is not.

  2. alloycowboy April 29, 2011 at 6:08 pm #

    Jon,

    I am just wondering how Boeing avoids the boom bust cycle of airplane development? After they saturate the market new 787′s where will their orders come from?

  3. w44th April 29, 2011 at 9:34 pm #

    Boeing has a 50+ year history of new models supplanting then replacing old ones, all with a fairly short coexistence period.

    This is very simplfied, but here goes:
    - The “organ-pipe” turbojet 707-100′s, 300′s and Conway 400′s all yielded to the fanjet -300B’s.
    - The short-body 727-100′s were soon replaced by stretched 727-200′s.
    - There were only thirty 737-100′s; the six-foot longer -200′s were replaced in time by the -300/-400/-500 then again by the 737NG’s of today.
    - 747-100′s gave way to more capable -200′s [the -300's were a variant of the -200]. Then came the much more advanced -400′s.
    - The 757 was the exception; almost all were -200′s; comparatively few were the stretched -300′s.
    - As for the 767, the original -200′s and non-ETOPS -300′s gave way to the HGW -300ER’s. Once that happened very few HGW -200ER’s were built [let's try to forget the 767-400ER].
    - The original “A” and “B” market 777-200′s plus the original 777-300′s gave way to the HGW 777-200ER, which in turn is being replaced by the 777-300ER and the ultra-long-range 777-200LR

    Ten or 15 years from now the 787 will probably be a very different and more capable airplane. One can only hope that by then Boeing will have regained its reputation.

  4. Gary from Sydney (Oz) April 30, 2011 at 7:42 am #

    With considerable deference to w44th s/he seems to have overlooked the Boeing 720. A “short” range domestic model of the 787 (think NY/LAX or Sydney/Perth) would take considerable presssure of the upper end of the Boeing 797 (737 replacement) capacity. Twin aisles would speed the turnaround and, by cutting out some fuel tanks, Boeing could lighten the aircraft and protect the 787-8. As it is Qantas flies 747-400s on Sydney Perth but I think I would prefer a 787-3 (at least in economy).

    Gary G

  5. Bob April 30, 2011 at 8:17 am #

    @none

    You make a very valid point there and it can also be applied to other kinds of media and to press releases. Also in can be aplied to statements of ceo’s, friends, partners and children.
    Thank you very much for adding this valuable lifelesson to this blog! Keep up the good work.
    Yours truly,
    Bon

  6. Aero Observer April 30, 2011 at 10:32 am #

    Jon, thank you for sharing McNerney’s rambling comment. He seemed to throw everything including the kitchen sink at the cost problem. As I read it I am inclined to think that McNerney is either lying or incompetent or most probably, both.

    Initial block size – As others have discussed in the comments, the size of the block is material information. McNerney continues to hide this information (and the losses) from Boeing’s shareholders.

    Strong demand – (we’ll make it up in volume) Strong demand cannot overcome the increased costs

    “Now, obviously, whatever production quantity we decide on, it will be the result of the process we use always when we introduce new airplanes.

    In the past (777, 737NG) the production quantities have been around 400 airplanes. If they follow the process they always do then it should be around 400. My guess is that they will not follow this process.

    McNerney alludes to productivity improvement

    Every indicator shows that productivity is not improving. Inventory unit costs (inventory divided by airplanes in production) are actually going up over time.

    McNerney alludes to new programs and ghost airplanes that will somehow be designed and built to enable cost reduction on the program.
    - Building new airplanes does not eliminate the costs incurred on the 787-8 most of these costs are already sunk at Boeing and the suppliers.
    - With new tooling, design, and ramp up, there is no evidence that these new programs will be developed for less cost than the existing programs

    McNerney insults every previous Boeing CEO when he says “every airplane program has gone through this transition”. No other airplane program has ever gone through what Jim has done with 787.
    - 4 years late
    - 10s of billions of dollars over budget
    - CEOs and CFOs that continue to lie instead of lead

  7. Scentsy April 30, 2011 at 10:47 am #

    Well, at this point the 787 program is in need of positive and productive attention from BOE especially in light of these most recent releases. It isn’t even Boeing bashing anymore just more information on the increasing frustration backed by facts. The industry needs this aircraft and Boeing needs it to succeed. Maybe a flight test crew needs to go roll Dreamliner #1 over Lake Washington…well maybe not! Rock on BOE!

  8. Guru Josh April 30, 2011 at 4:01 pm #

    “Where we are now” = 787-8
    “A new model or two beyond where we are now” = 787-9 and 787-10
    “Mythical medium-haul 787″ = Any 787 built before Trent 1000 Package C and GEnx-1B PIP2 become available (~2013)

  9. Dave April 30, 2011 at 5:27 pm #

    A comment about a possible 787 model. To me, as a layperson (I am an engineer, just not in aviation), there seems to be a real need to, over time, replace a lot of 757, 767, and MD-80s (and the others in that series) out there. The 787-8 seems to be too much airplane for what most US domestic routes need. Common sense here, it takes more airplane to fly longer range. Bigger fuel tanks, bigger wings, and more structure to hold it together. The 787-3 seemed, to me, to be a perfect plane for a lot of US carriers. Why fly around with thousands of extra pounds in a 787-8 (needed to make the 7000+ mile range) if they’re not needed to fly 2000-3000 mile (at a maximum) routes?

    Is the idea to expand the 737 replacement into that area? Still seems like there is some space there in the matrix for a reduced-capacity 787 for domestic routes. Or, in the interest of interchangeability, would US carriers get the 787-8 and then be able to use it for domestic AND transatlantic routes?

  10. krasy April 30, 2011 at 11:46 pm #

    The experiences gained by Boeing regarding the one-process composite monocoque fuselage makes Boeing the sole owner of the know-how. If the fuselage of future new planes (including the upcoming elliptical one) adapt this technology, the cost of developement surely should be shared by each one of the future planes.

  11. H April 30, 2011 at 11:53 pm #

    Jon, I think you have mixed the idea of model (as in a idea process of completing a task) with that of another aircraft type. This means the quote has been taking out of context, from creating a new way of dealing, handling and working with suppliers (economically and physically) to their is going to be a new aircraft type.

  12. tom May 1, 2011 at 4:41 am #

    Jon,

    interesting points – the break even points!
    This a key figure of a each business plan – before one invest a cent! But that’s nothing a CEO, CFO, or a chairman of the board of Boeing has to look for?
    Even if the 787(-8) project will not be very profitable for Boeing it will at least prevent that customer might buy non-Boeing products…

    Why was there “no” interest for the 787-3?
    The wing was too heavy (too much fuel capacity), the fusalage too light (not enough cycles) and there were no appropriate engines? Or aren’t there not enough profitable city-pairs for that type of a/c?

  13. fitz May 2, 2011 at 8:50 am #

    I say this may turn out to be the 797 or a narrow body 787, which will replace the 757. anyways, they are hinting at a new aircraft, and we may all be in for a surprise! or even a 787-11 (?)

  14. Lee May 2, 2011 at 3:18 pm #

    Is “break-even,” the power-point when the yawns start, relevant at all in a 2011 economy? Fifteen hundred frames, fifteen years .. take a wild guess at what an airplane will even cost (in dollars, we hope) by then.

  15. greg schulz May 2, 2011 at 3:32 pm #

    Steven Udvar-Hazy mentions 1,500 a/c as about the break-even point, then the above post goes on to compare how long it took the 777 and 747 to hit similar marks. Are we comparing apples to oranages here? What I mean is how many orders were on the books for the 747 before first customer delivery? How many 777 were on order before first customer delivery? Simple math shows that assuming no major changes in terms of cancelations, the 787 is already at the half way point in terms of orders before first customer delivery has occured.

    Then the question should become can Boeing stimulate momentum in the program with customers after the A/C goes into service and then how long will it take to get to the 1,500 a/c order mark. Thus comparing 747 and 777 and 787 breakeven points and time/decades to reach for break even is like comparing Boeing to Airbus, something to talk about.

    Cheers gs

  16. J. Sanders May 4, 2011 at 4:57 am #

    With the death of bin Laden air travel can now at least sigh a relief. But this relief should not be taken for granted and lower our guards. The threat is always there and our precautions and alert level should always be maintained.

    J. Sanders
    http://prototypingchina.com

  17. Larry May 7, 2011 at 3:06 pm #

    Originally the -9 was going to have a larger wing than the -8.
    One option would be to move in the other direction and design an all new optimized smaller wing. Several lengths of variants could use this wing with a lighter landing gear as well. The 757-300 has a relatively small wing with good economy.
    All things being equal, is lower empty weight preferable to range? In the case of the 330-300 versus the 772ER, lower weight is winning.