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Boeing stock price tumbles on fraud report

Boeing’s stock price is flirting with setting a one-day decline record on 11 February after a morning news report linked the company to a fraud investigation.

The Bloomberg news report cited anonymous sources saying the US Securities and Exchange Commission is investigating Boeing’s programme accounting methods on the 787 and 747-8.

Boeing executives “typically do not comment on media inquiries of this nature”, a spokesman says.

By mid-afternoon, Boeing’s stock price was trading around 7-9% lower and around $105-$106 each.

If the stock doesn’t stay above $106 per share by evening, Boeing could record the worst one-day drop of market capitalisation in the company’s 100-year history.

The 11 February decline comes only two weeks after an 8.7% stock price swoon when Boeing announced lower than expected guidance for revenues and deliveries this year.

Boeing’s stock has lost around one-third of its value since reaching a historic peak on 21 February last year at $158.31.

Boeing uses a standard programme accounting method to book revenues and costs on major commercial aircraft development programmes. The 787 programme has an accounting block spread over a production run of 1,300 aircraft. Boeing estimates costs and revenues over the entire block, and assigns an average operating margin for each aircraft that rolls out the factory.

This means that aircraft delivered early in the production run show up on Boeing’s balance sheet with a profit, even though each costs significantly more to build than Boeing’s sale price. On the other hand, aircraft delivered late in the production run should be assembled more profitably than Boeing’s balance sheet would indicate, as the supply chain learns how to build the 787 faster and cheaper.

But the 787 programme has not followed the usual pattern of Boeing’s historic development programmes. The first 370 787s delivered to date have cost Boeing nearly $30 billion more to produce than the sale price. By contrast, the 777 developed an inflation-adjusted $3 billion in production losses before the programme turned profitable.

Boeing expects actual 787 production costs to break-even on a unit basis later this year, meaning the sale price roughly matches the amount it takes to build each aircraft.

By that point, however, Boeing will have about 700 aircraft remaining in the accounting block. To recover the $30 billion already spent, Boeing must build each of the next 700 787s for an average cost of about $91 million, says Richard Aboulafia, vice-president of analysis for the Teal Group.

“Unless I’m doing my numbers wrong with my back-of-the-envelope math something’s got to change,” says Aboulafia, speaking on 10 February at the Pacific Northwest Aerospace Alliance. “This has made what should have been a fantastic peace of greatness a far more complicated one for Boeing, and the implications of this moving forward we don’t know.”

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