A familiar and at times unsettling rhythm of crisis management has gripped the 787 programme since it entered production. A major issue – say, a fastener shortage, a side-of-body redesign, a systems reliability breakdown, a production bottleneck – emerges, seizes global headlines and then… subsides. The 787 orderbook, meanwhile, might contract slightly, but mostly it continues to grow through the crisis to where it peaks today at over 1,100 aircraft.

Fastener shortages and structural redesigns are now happily in the programme's past. Production bottlenecks seem to be averted and the wave of reliability complaints appears to have ebbed.

While the programme faces no urgent crisis, there is a new problem to confront: cost control.

In the first quarter, Boeing reported that the first 255 787s delivered so far generated deferred losses totaling $30.9 billion, including tooling costs. Two years ago, Boeing had forecast that deferred costs would peak by the end of last year. At the end of the first quarter, Boeing finance chief Greg Smith extended the timeline to the end of this year.

But now Boeing expects deferred costs to continue rising well into 2016, says Larry Loftis, general manager of the 787 programme.

In a recent interview, Loftis predicted that deferred costs would not begin to decline until after Boeing raises the production rate to 12 aircraft per month, which is scheduled to happen next year.

"We expect our deferred [costs] to grow at about the same rate as we did in the first quarter for next two quarters or so," Loftis says. "As we get at the end of the year, we believe we'll start seeing the growth rate start to come down. [It will] still grow a little bit. We expect to see deferred 'peak-out' and start coming down and start getting burned off a little bit after we get to 12 airplanes a month because then you do get the productivity [boost]."

The new timeline means Boeing anticipates adding at least another $2-3 billion in deferred costs to the 787 accounting block of 1,300 aircraft.

By deferring the costs, Boeing is employing a widely accepted accounting policy for highly capitalised industries. It allows Boeing to record an operating profit on each aircraft delivery even though the unit costs exceed the revenues. Those extra costs are recovered by deliveries of later aircraft, which are expected to cost much less to build. Boeing amortises the current $30 billion deferred cost total over a production run of 1,300 aircraft, including nearly 200 787s that have yet to be ordered.

"As we get out to the follow-on blocks toward the end of the decade you start seeing much more favorable performance from productivity gains," Loftis says.

Boeing must "burn down" the deferred cost total before the 787 programme can be truly profitable. Failing to do so could require the company to report a forward loss on the programme, but Loftis is confident that will never be necessary.

"I don't expect to report a forward loss, by no means," he says.


The 787 is leaving its 'teething' phase, according to Boeing, as the airframer looks towards the launch of the -10, which was announced at Paris 2013


If the 787's track record continues, the deferred production costs challenge will eventually join the long list of challenges already overcome.

It was only two years ago that the global 787 was returning to service following a four-month grounding. Boeing had solved the flawed battery installation that led to the grounding but still confronted widespread reliability glitches. These so-called teething issues stretched beyond the normal period for a newly introduced suite of technologies.

But Boeing officials believe the bulk of the reliability problems are behind them, and the teething phase of the 787 programme's history will soon pass into memory.

"We still have a lot of fixes and enhancements that we have in the pipeline," Loftis says. By the end of the year, he adds, the programme will finally transition a "normal, sustaining-type mode" for servicing the fleet. The crucial measure of aircraft reliability – fleet dispatch rate – is creeping towards 99%, with about half of fleet operators already above that threshold.

The reliability has been steadily improving while production operations have stabilised, Loftis says. Although production costs remain high, most of the bottlenecks have been stamped out. the latest problem to pop out of the supply chain – late shipments of premium seating by Zodiac Aerospace – is expected to fully resolved by the end of the second quarter.

Otherwise, the stability on the assembly line has kept Boeing's plan to raise mostly output of 787s by 20% next year on track, Loftis says.

"We're on track, and I feel very good about achieving the 12 airplanes per month on our schedule," he says.

The transition to the 12-per-month rate involves more orchestration than may be obvious. Three assembly lines now account for all 10 monthly deliveries, including four from the main line in Everett, three more from an adjacent "temporary surge line" and the last three from Charleston, South Carolina. As Boeing raises the production rate, the company is also closing the surge line and increasing the main line in Everett to a rate of seven per month, Loftis says. Meanwhile, the assembly line at Charleston will increase output to five aircraft per month, but will initially build aircraft even faster as the main line in Everett catches up.

The Charleston factory is "going to build four or five airplanes that they weren't planning a year ago or two years ago", he says.

The next step is to raise the production rate again to 14 per month by the end of the decade. Boeing is already producing 787s at a faster rate than any widebody in the company's history. Achieving the 12-per-month rate required relatively little capital investment, as the company and the supply chain mainly relied on increasing flow times through existing tools and facilities, Loftis says. The next increase in rate also will drive more productivity improvements, but Rate 14 "will require more capital", Loftis says.

"We look at what we call operational equipment efficiency. Simply put, if you have 24h, how many hours of the day is it actually producing?" says Loftis. "Let's say 85% of the time you're producing, you don't want to go much past that because you don't have surge capability if something happens. If you're already at 85%, then you might need to go buy another machine. In some places, we have the capacity in place because we knew these rates were coming and we're learning more and more. In other places, we didn't have equipment and we put those in."

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Source: Cirium Dashboard