Back in late March, Boeing (NYSE:BA) delivered its first 787-10: the biggest version of its popular 787 Dreamliner family of widebody aircraft. The 787-10 carries a higher price tag than its two smaller siblings, so it is expected to quickly become the most profitable model within the Dreamliner family.
Up until now, Boeing's bottom line hasn't benefited much from the introduction of the 787-10. But with 787-10 production set to ramp up quickly starting this quarter, Boeing is on track to get a nice earnings and cash-flow boost from its newest and largest Dreamliner variant.
The 787-10 should be extremely profitable
The 787-10 was designed as a straightforward stretch of the 787-9. The two models have 95% commonality between them, which makes for very efficient production. It also means the incremental cost of building a 787-10 rather than a 787-9 is quite modest. Nevertheless, the 787-10 currently carries a list price that is $44.2 million higher than that of the 787-9.
As always, there's some "learning" involved in bringing a new model like the 787-10 into the production process. Thus, the first handful of 787-10s produced may not have been especially lucrative for Boeing. However, in the long run, the 787-10 should be significantly more profitable than the 787-9, which is already quite profitable.
The production mix is about to shift
While Boeing delivered the first 787-10 in March and another five in the second quarter of 2018, it didn't deliver a single 787-10 last quarter. The 787-9 has accounted for more than 85% of Boeing's Dreamliner deliveries year to date. Most of the other deliveries have been the less-profitable 787-8 model.
The 787-9 remains the best-selling Dreamliner model and will continue to account for the bulk of deliveries for the foreseeable future. That said, the 787-10 has also found plenty of takers. As of the end of September, it accounted for just over 25% of Boeing's 787 family backlog. Furthermore, Emirates committed to buy 40 787-10s late last year. After that deal is finalized, the 787-10 will account for nearly 30% of the Dreamliner backlog.
Dreamliner production is already shifting toward a higher mix of the 787-10. For example, United Continental is set to receive its first three 787-10s in the fourth quarter. Etihad Airways will also receive several 787-10s this quarter.
In total, there should be more 787-10 deliveries in Q4 than there were in the first three quarters of 2018 combined. And by 2019, it looks like the 787-10 will account for about a quarter of Boeing's Dreamliner output.
Dreamliner profit and cash flow are taking off
Boeing's third-quarter earnings report showed that the cash profitability of 787 production improved sequentially. Each quarter, Boeing reports the "deferred production cost" for the 787 family -- which roughly approximates the cash losses on production up until now -- and that deferred production balance is starting to decline at an accelerated rate. (In other words, Boeing is earning more cash profit on current deliveries to offset the accumulated losses.)
The impending mix shift toward the 787-10 will help Boeing shrink its deferred production balance even faster. However, it's not the only factor working in the company's favor. Boeing is also on track to increase the Dreamliner production rate from 12 per month to 14 per month next year. The higher production rate will further reduce Boeing's unit cost for the 787.
The combination of normal productivity improvements, a higher production rate, and a growing proportion of 787-10s in the Dreamliner delivery mix should lift Boeing's cash profit from the 787 family by well over $1 billion year over year in 2019. Further gains are likely in store for 2020. This will help Boeing continue to deliver steady free cash flow growth in the years ahead.
Boeing's program accounting policies mean the growing cash profitability of 787 production won't show up in its earnings per share right away. But over time, the success of the 787 family will have an equally dramatic impact on Boeing's EPS.